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Jack Dorsey: Today Starbucks Signed up for Square (squareup.com)
435 points by mynameisraj on Aug 8, 2012 | hide | past | web | favorite | 188 comments

This announcement makes me happy, for Square and Jack Dorsey as a young business leader. I love everything about the business idea, execution, design and tone of the overall strategy.

Noteworthy points from the press release

  The partnership terms include:
  - Customers will be able to use Pay with Square, Square’s payer application,
  from participating company operated U.S. Starbucks stores later this fall, and 
  find nearby Starbucks locations within Square Directory;

  -Square will process Starbucks U.S. credit and debit card transactions, which 
  will significantly expand Square’s scale and accelerate the benefits to businesses 
  on the Square platform, especially small businesses, while reducing Starbucks 
  payment processing costs;

  - Using Square Directory, Starbucks customers will be able to discover local 
  Square businesses -- from specialty retailers to crafts businesses -- from 
  within a variety of Starbucks digital platforms, including the Starbucks 
  Digital Network and eventually the Starbucks mobile payment application;

  - Starbucks will invest $25 million in Square as part of the company’s Series D 
  financing round;

  - Starbucks chairman, president and ceo Howard Schultz will join Square’s 
  Board of Directors.

"Square will process Starbucks U.S. credit and debit card transactions":

Wikipedia says that Starbucks has $11.7 billion in revenue every year. I would assume that a majority of that revenue is through a card. I am not familiar with Square's revenue but I feel that this will at least double their transactions. Am I correct?

Here in Europe (Germany) i have never seen anyone buying a coffee with a credit card. Maybe debit card, but that also is rare, its mostly cash for these small transactions. Most coffee shops dont even take any cards at all, even here in germany!

Norway: Cards for everything. There's no cost associated. Plus your bank card is also your ID. Chip & PIN.

Same in NZ. I buy 1.50 lolly purchases from the dairy on my EFTPOS card. (No transaction cost).

if by 'Here in Europe' you mean 'here in Germany' then yeah, in Germany cards are unpopular among small business, but here in Poland they are quite common. There is often a minimum ammount in private grocery stores, but you can pay in every corporate store or cafe like Coffeeheaven and Starbucks.

Cards are likewise unpopular in Greece. You can usually use them pretty much everywhere, but almost nobody does.

In the US, cards dominate

In Canada (at least in southern BC) almost everyone uses their credit or debit card for almost everything. Cashiers assume it and if you hand them cash they'll often have to back out of the transaction they already set up on the debit machine and sometimes even say "you're the first person to pay with cash today". It doesn't matter if you're buying a TV for $2000 or coffee for $2.

I'm living in Germany for the summer and am surprised at how little people use cards here compared to the in the states. I love being able to use a debit/credit card so that everything I buy is logged. That means I can see everything (automatically tagged) using Mint. It also decreases the hassel of carrying as much cash around and going to the ATM as often.

On a tangent, it seems like people here have more of a negative view on credit cards - as if they assume you only use one if you can't actually pay. As long as you pay off your bill each month there is no real downside for the customer.

Here in France, people use debit/credit cards to buy EVERYTHING.

Some merchants discourage this by insisting on a 15 euro minimum charge. But by and large cards are used more often than cash. In restaurants it is common to split the payment of the meal and have each person contribute via a card.

It's been that way for years, although the frequency of card use is not as overwhelming as in the US.

At the supermarket, if I buy a bottle of water (0,18) I pay with a credit card. The majority of people do the same thing.

Caveat: many people, especially free-lancers, are paid in cash to avoid paying taxes on part of their income. Those people pay cash for everything. The give-away is the use of big bills (50, 100 euro bills) for small purchases.

Here in the Netherlands people are encouraged to use debit cards even for small amounts. Sometimes even with a small discount. The largest supermarket chain has way more "pin only" cashiers than pin and cash. It's cheaper and saver to process.

Yeah, but on the other hand it's hard to find a place where you can pay by credit card, even the large super market chains don't accept them. Although almost no one here uses them because are debit card system works very well.

I see a lot of talk in this discussion about debit cards. I currently have only a debit card through my bank with my checking account, however, always run it as a visa and NEVER run it as a debit card. A lot of times, for small purchases, I don't have to sign, so it's quicker then running it as debit since I'd have to enter my pin. I don't know why I never run it as debit. Something about entering my pin in line at a store with people around?

Here you always have to use your pin with credit cards too afaik!

Spent a summer in Paris. Still chastened by a Monoprix cashier not being able to take my card for whatever reason, and a woman in line behind me telling me it's "not like America."

Also enjoyed the spectacle of tobacconists not knowing to swipe my less-secure magnetic strip, looking for my smart card chip.

In the US charging a minimum for card transactions is usually a violation of your contract with Visa/Mastercard, and possibly a violation of the law in 10 states [1]. Are there similar contracts or laws in France?

[1] http://usa.visa.com/personal/using_visa/checkout_fees/

That's about checkout fees, not minimum charge amounts. Minimum charge amounts used to be forbidden by basically every merchant agreement, but thanks to Dodd-Frank and a lot of retailer lobbying, such contact terms are now illegal. Card issuers must allow a restriction on charge amounts (no more than $10 IIRC) if the retailer so desires.

You're right. I meant to include Visa's complaint form, https://usa.visa.com/checkoutfees/contact.jsp which mentions the right for US retailers to set minimums up to $10.

It is worth noting minimums can not be set for debit card transactions.

Lots of small vendors have a minimum anyway, and Visa does nothing about it as far as I can see.

Here in Sweden you're not allowed to charge any sort of additional surcharge, but you are allowed to simply refuse accepting payment with Visa/Mastercard for purchases under a certain amount.

I wonder whose lobbying dollars we have to thank for this law.

Hmmm... I have been to France probably over ten times, I've never noticed this.

Switzerland... Usually cash. Sometimes Debit Card / Maestro (for larger purchases or if you don't have money on hand). People usually withdraw money from the ATM to pay for their purchases.

The idea probably is: It's easier and simpler to withdraw 200 bucks once and pay in cash at the different stores instead of having to enter the card and PIN every time you purchase something.

That's not true. As a former cashier, I can say that cards are about the same speed as cash for small purchases, and much faster for large ones.

In the UK it's very common to pay with cards. It's even more cashless than the US or Canada, I feel.

I normally don't use a card for less than £5 though.

Belgium, probably nobody uses his credit card to buy coffee. We only use our credit card when we have absolutely no other option :)

In Pittsburgh, 90% of the businesses that take Square are coffee shops for whatever reason

Using Square is easy and has low fixed costs. iPad for under $400, iPad stand for $100, and you don't have to fuck with complicated 1990s credit card processors.

No doubt, it's just odd it's all coffee shops and not other small businesses like Pizza, books stores, etc...

agreed - the few coffee shops i frequent in Chattanooga are Square users.

as well as my haircut place, a few sandwich shops, and a drink spot.

I feel like the Starbucks is catching up with their more efficiently operating 'local' competition. But its still a great move.

The first place I ever used Square was a Pittsburgh coffee shop.

"I would assume that a majority of that revenue is through a card."

Really? I almost never use a card for café type purchases. Maybe if I were buying a meal, but for a coffee or two I'm 99% likely to use cash.

(Note: mine is an Australia-centric view, perhaps things really are very different in the USA?)

Yes. The vast majority of payments I see in Starbucks in the US are via credit cards (or debit cards). With modern PoS systems, paying via card is faster and more convenient than cash, not to mention other benefits (rewards on cards, being able to better track spending)

I used to work at Starbucks (albeit going on 5 years ago) and although I don't have the exact statistics or a perfect memory, it was not a "vast majority". If I had to guess, I'd say probably something like 2/3. Maybe the ratio increases if you count Starbucks gift cards.

Either way you look at it, Square's transaction volume surges with this deal. Good on both parties.

2/3 is kind of a vast majority; it means twice as many people are paying with cards than not.

My wife actually thinks it is rude to pay with cash or check when people are waiting behind you in line. Cards are the fastest way to pay, you don't even have to sign for purchases under a certain amount.

You don't enter a PIN? That process easily makes it take longer than cash.

No PINs for credit cards in the US.

We don't need to enter the PIN for most of the credit cards or debit cards in India, but we do have to sign it. Although it's just a formality. Usually when we split the bill, one of us signs all the receipts. :)

Now that being said, we get an SMS on every transaction, and for online transfers, we have two factor authentication using the mobile phone. We can call the bank any time to report a stolen card and would be covered for a fair amount of money depending on the account, as long as you report it within 24 hours as I remember.

Not for coffee-sized amounts at major coffee chains, no.

Debit cards require a pin, but credit card transactions less than some amount(I think it is $10) don't require anything other than the swipe.

Many debit cards can be processed as credit cards and then don't require a pin. My bank actually encourages using the debit card as a credit card by offering more points per purchase when you do it.

What? Perhaps if you have down syndrome, but otherwise takes around 5 seconds. Swipe card, enter 4 digit pin, press enter. Faster than it would take the cashier to type in the amount you just gave him, much less make change.

Down Syndrome? Really?

In any case, plenty of people do struggle with it- the old especially. But that's not the biggest factor. With a swipe everything is done by one person- the cashier. PIN entry requires a back and forth between customer and cashier, and I've seen plenty of cashiers not notice that the PIN entry has gone through, etc.

To add to this, often cafes enforce a minimum transaction size, such as $10, to use card. This means usually you only use card it you are grabbing lunch as well.

I've read before[0] that it is actually a violation of a stores terms with Visa to enforce minimum transaction sizes. Those stores could potentially be reported to Visa and have sanctions placed on them (like an increased transaction rate). Interestingly, a merchant is allowed to offer a discount to people who pay by cash but they can't charge more for people paying by credit card.

[0] - http://www.msnbc.msn.com/id/11697094/ns/business-consumer_ne...

After the credit card reform act went through in 2010, the card companies now allow for a $10 minimum.


Yeah it is annoying really. Especially for anywhere where it is common to buy things under $10. I think in the end most businesses would be better off just taking the fee hit as they would likely see increased business.

Starbucks don't.


How does SB gets smaller fees through Square than negotiating directly with card providers?

How do card providers allow Square to sell their services cheaper than themselves?

And Square, you sure have a nice business, but the magnetic stripe is very insecure.

Businesses don't get to negotiate with Visa and Mastercard. They negotiate with banks. And banks negotiate with large volume customers. That's why McDonald's can afford to take credit for a $1 ice cream cone without losing 33% of it to the card company.

Square has a lot of options in the way they process transactions, and they have a very high volume (now more so than ever)

...right, so why cant starbucks negotiate with banks, much like mcdonalds does?

because the parent is wrong, McDs doesn't negotiate with the banks either. they negotiate with a payment gateway provider. which is what Square is.

I'm guessing that they are going to try and get significantly lower fraud rates from pay with square (since it's a photo verification and not an insecure card strip) which can help push down rates.

They can afford to break even on the conventional credit card side of the business if they can make their margins on Pay with Square.

But they are taking over all CC processing. Only a very small percentage of transactions will be made through the Square app.

Will have an impact also in terms of economies of scale. Their transaction fees _should_ go down as they process a larger number of transactions. Makes the partnership much more strategic, and it makes sense why Starbucks also invested - might have been part of the package.

I'm having a hard time seeing how Starbucks has higher processing costs than Square. I think that Starbucks will continue to pay their low costs and be able to use Square as their platform. No reason Square couldn't process Starbucks transactions, too without needing to change their merchant accounts.

Sorry, should have clarified. I meant the transaction fees that Square pays.

That seems like a reasonable assumption.

A lot of posters are forgetting that significant portion of Starbucks revenue isn't from beverages at the till. Starbucks sells a lot of coffee related goods and processes a lot of revenue for gift cards and their mobile payment app which they've had for quite a while (Apple recognized in iOS6 Cards).

I'm very curious if Square is going to handle all transactions that aren't at the physical point of sale. My gut feeling is that a big chunk of credit and debit revenue is for gift cards and gift card refills and that could impact your estimate.

Your first stated assumption is correct, but do not assume that all of Starbucks credit card transactions are processed through Square. Thus, the second assumption is not linear.

This sounds like a huge coup for Square. And a little surprising that they could actually (or already) provide card processing at a better rate than Starbucks could negotiate on its own.

" - Starbucks will invest $25 million in Square as part of the company’s Series D financing round;"

Wait, what? Is this Starbucks buying a slice of the decision making process to ensure things are generally in their favor?

Sure. Companies often invest in other companies. Google Ventures is an example of this. Microsoft invested in Facebook then promptly integrated connect into Bing, Xbox Live and Outlook.com (with probably more to come).

Starbucks can benefit from the Square deal, invest in them, and help promote them all at the same time. Actually pretty brilliant.

Quick clarification on Google Ventures: Microsoft in Facebook or Starbuck in Square are those companies acting as "strategic" investors. Google Ventures is different in that it's a venture investor: it tries to be completely separate from Google proper and doesn't necessarily come with any close business relationship between the investments and Google. People can argue over whether it can actually achieve this separation, but it's run in a completely different way from ordinary corporate VC (which is usually managed by business development inside the parent company).

It occurs to me that, with Square as a partner, Starbucks stands to gain a lot from the partnership. If you think that most of their transactions are in small amounts (under $7 generally), and most of those transactions are done by credit card (I'm making a presumption about affluent individuals' purchase patterns), is it possible they're trying to turn the price they'd normally pay for transactions into investment capital? They were pushing those Starbucks refill cards like crazy a while back..

It’s also currently hard (impossible?) to add a tip to Starbucks credit card orders. (I assume this is done to minimize time spent on each customer.)

Square makes it ridiculously easy.

Also, this is a big win for Jim McKelvey.

(disclosure: I am a WashU student and Cultivation Capital intern)

While I'm happy for Square, I'm saddened that Starbucks gets special treatment. Why is Starbucks (a well known brand) getting a personal post written by Jack, when Square's "goal" is to promote and help small businesses?

Maybe a more subtle way of informing the world about this partnership was better.

  > Why is Starbucks (a well known brand) getting a personal post written by Jack, when Square's "goal" is to promote and help small businesses?
Maybe the 25 million Starbucks invested in Square?

Meant to up vote on mobile and hit down instead, sorry. Someone balance it for me?

They want to be loud because having Starbucks on board both as a customer and investor is a strong vote of confidence for Square. They want prospective customers and existing customers to know that.

Right - And as a potential customer, I now think: "Oh, square has Starbucks' processing, they probably won't go out of business under me, so I can have one less worry".

It's not a zero sum game. As more mainstream consumers learn about and start using Square, it will undoubtedly give a great boost to small businesses using Square as well.

Square just finished a round of venture funding, but by getting Starbucks as a long-term client means they have a consistent revenue against which they can secure credit, i.e. the owners do not need to further dilute their shares to obtain funding if they can prove to banks that they have income, thus making it easier to secure a loan.

Here's what's in it for Starbucks: Square's cheaper.

Square loses money on transactions below $6. The reason is for the sake of simplicity they waive the per-transaction fee that Visa/Mastercard charges them and just charge a flat percentage of 2.75%. But even though this is a relatively high percentage, it's not enough to recoup the cost of the per-transaction fee at low transaction sizes.

Take a $2 coffee charged to a Visa credit card. Visa charges Square 1.76% + 6 cents, or 9.5 cents. But at 2.75% Square only collects 5.5 cents.

So even if Starbucks was already paying wholesale Visa/Mastercard rates, they'll save 4 cents or more a cup thanks to Square's "simplicity subsidy".

Now multiply that by a few billion cups. Starbucks saves millions, and Square is happy to pay it to drive their growth into the stratosphere.

Source: http://feefighters.com/blog/can-square-make-money-with-its-n...

"We'll lose money on every transaction, but make it up on volume!"

I'm going to optimistically assume that Square have run the numbers and this deal is worth the price though. As a marketing exercise alone it could be worth a fortune if it ends up putting Square's branding in every Starbucks.

> As a marketing exercise alone it could be worth a fortune if it ends up putting Square's branding in every Starbucks.

Very much so. People who see a Square dongle at the farmers' market will now go "oh, I saw that at Starbucks", not "that guy might steal my credit card with that".

Starbucks won't be using any Square dongles. I'd imagine there will be a small sticker at their normal POS. src: http://www.splatf.com/2012/08/starbucks-square-payments/

Whether it's a dongle or a logo, the benefit is still essentially the same - recognition of it as a payment brand on par with Visa/Mastercard.

I would point out that it's unlikely SB's received the same financial terms offered to Mom and Pop vendors who sign up via the website.

Absolutely. This has got to be a huge partnership and I'm sure everything is going to be custom/branded. I'm anxious to see how Starbucks handles this. Will they use iPad kiosks that the user can interact with? Part of the Starbucks experience is being able to custom order a half-caf splash-of-cinnamon dolce latte with soy. Having a nifty UI to deliver that experience + an easy way to pay might be a good strategy. Will this tie in with their own Starbucks app so that I can order on my walk to Sbux, auto pay, and then walk out without waiting in line?

Maybe, but they wouldn't need to for the deal to be attractive. Square's regular rate is already below wholesale processing for small transactions.

The largest retailers though can negotiate less than wholesale. But you raise a point. What attracted SB's to the deal? Lower transaction fees or incremental sales due to a simplified paying process? It can be both but it's probably not 50/50. I suspect one was the driver and the other gravy.

The largest retailers can negotiate the processing (merchant acquiring fees), but not the interchange. Components of CC fees are interchange (which goes to card issuing banks), processing (which goes to the merchant's bank), and association fees (which is how visa/mc/etc make their money). Interchange & association fees are fixed, processing is the most negotiable. That said, any >$1B retailer is paying too much if they pay more than a penny/transaction in processing, so there's not much room for improvement because there are real costs in that activity.

I think there are two big reasons why they would do this: 1. Investment They will likely make a multiple of the $25M when Square IPO's. The best possible evidence of Square's traction is what Starbucks just provided. Smart investment 2. Focus on core competency World class payment processing is not a significant source of competitive advantage for Starbucks, but it is for Square. This deal allows Square to worry about payment acceptance & processing efficiency, and Starbucks to focus on product/service. Michael Porter would be proud of this deal.

What I mean is Square is below interchange for the typical Starbucks purchase. They subsidize them. That's probably an 8 figure value for Starbucks, annually.

But I don't mean to imply that's the only factor. I agree about the investment.

Moreover there's the customer experience of paying with Square. It's nice and you don't have to set up a Starbucks card and put money on it. You just pay. It delights customers and may move lines faster, but perhaps most significantly, it lets Starbucks track loyalty. The business value of that is tremendous.

Starbucks basically just upgraded their app in a big way. Remember they were the earliest pioneers of "pay with your iPhone" with ther Starbucks app.

It doesn't hurt that Square is associated with small scale "craft" businesses either. Starbucks is trying to revitalize their brand right now.

I'm sure part of it deals with space as well. Their registers take up a large portion of their counters. Also with a portable register they could move down the line much faster (akin to the order-takers who walk down the line at in-n-out.)

> Visa charges Square 1.76% + 6 cents

Last I checked, Square had not published the transaction fee they negotiated with Visa.

Interchange is a fixed non-negotiable set of rates, published by Visa & Mastercard. See http://usa.visa.com/merchants/operations/interchange_rates.h...

I think more than any other benefit, Square has been validated by a premier American chain. It will be a much easier sell to other large chains. The big money for Square is in having these large customers with multiple POS deployments, where overhead will be small compared to revenues, at least relative to single shop customers.

It will also put their product in front of end customers, many for the first time. I for one have heard/read about Square since they first started shipping readers, but had not actually seen the product in action till last weekend (live in Silicon Valley).

Yeah, with this announcement square's sales pitch has effectively become "well, starbucks uses it..."

enterprises run on "some other big company uses it".

This is a major coup for Square. I've said it before, I'll say it again: I look forward to the IPO. Square has value.

Can someone explain me what it means for customers? As far as NYC goes, each Starbucks accepts Visa, Master Card, Discovery and American Express (the card that plenty businesses hate). So what is the benefit for the customers?

One cool feature about the Square mobile app is you can set up geofenced "tabs" that automatically get opened if you get close enough to an establishment.

So you keep your phone in your pocket, walk into Starbucks and order a drink as you do every morning. You tell them "put it on John's tab." You get a receipt in your email immediately thereafter, and never have to pull out your phone or wallet.

Question: Yesterday I saw you in Starbucks and heard you say "put it on John's tab". Today I see you are 2 behind me in the queue. What stops me from strolling up to the counter, big grin and saying... Put it on John's tab please?

Wouldn't the proximity of your phone mean they would take the payment from you even though you haven't authorized it?

I'm pretty sure that a picture of the customer appears on the cashier's iPad app/register.


So we're relying on the cashier to care deeply enough to do this validation.

Remember the phase when credit cards were being issued with a picture of the card holders face on the front? And all the stories about the card with a picture of a petite Indian female being used by a large white male to ring up purchases?

I like the concept of Square, and I'd like for this to work. But the cashier being a face-recognition gateway seems like a horrible idea.

Yep, you can't enable the tab feature without first taking a photo of yourself with the app.

In that case, the cashier can easily charge you without your consent. Of course, you get the confirmation mail and can cancel the transaction but this is inconvenient.

Making payments too easy makes it easier on the bad guys as well.

Yes, but the kinds of purchases this is used for is usually < $10. It's not really worth anyone's time to follow someone around to get a free coffee.

Also, what if there are more than a few people with that name there? John is a very common name.

Starbucks isn't supporting the geofencing: http://www.splatf.com/2012/08/starbucks-square-payments/

The cashier is just going to look at me totally lost. Even in Silicon Valley, maybe one in 100 customers is going to use Square.

I don't see the value for Starbucks customers either.

Tons of small businesses in San Francisco use Pay With Square already, and they don't have the rigorous employee training procedures that Starbucks has.

I use Pay With Square all the time—at tiny bakeries, big coffee shops, and restaurants. No one will look at you lost.

It's convenient because I don't need my wallet, I don't need to sign a receipt, and I don't need to do anything other than order and walk away.

It's a humanizing experience actually. Try it once or twice. My mind was blown the first time I paid with my name using Square, and since then I have explicitly sought out coffee shops which have it, because of the quality of the experience.

Why would they look at you lost? If Starbucks is implementing this they will have to train their staff in how to use it and paying by saying your name is one of the best features of the product. It will be great for Starbucks as I assume it is a much quicker way to checkout than processing a credit card and, at least where I'm from, Starbucks always has long lines.

Doesn't this now or won't it eventually dismiss with the credit card portion all together thus making the margin available to Square?

Right now it just settles the charge to whatever credit card you have on file with Square.

Maybe eventually Square will let you link it to a bank account or prepaid account and they'll keep the spread.

I always look at my receipt upon purchase, even for a $7 latte and scone. This may require a leap of faith beyond most people's comfort zone, at least initially. But very promising.

Once square has linked your credit card is linked with your phone number and email, every time you make a transaction with that card, you get a text message/email receipt.

I suspect you're typical-mind-fallacying.

I don't know how the app works (it might already do some of this), but it would be nice if it would vibrate when you get charged and perhaps allow configuring it for a list of default purchases such that it vibrates twice if it is for a different than usual amount so you don't have to look at it.

The app has receipts and notifies you of stuff happening.

Is there any information available on how this works with iPhone? Does the app have to be running in order for the geo-fencing to work? Thankful for any information on this.

I don’t work for Square so I can’t talk about their specific implementation, but here’s how it should work:

When a “tab” is set up, the app can register with iOS to receive notifications when a user enters the geofenced region. As usual, the app will be suspended when you close it (i.e. not running), but when iOS detects you’ve entered the region, it’ll move the app into the background so it can run temporarily. In the case of Square, they might get a better GPS fix on you and tell their servers that you’re actually really close to where you have a tab open.

> "[. . . ] American Express (the card that plenty businesses hate) [ . . . ]"

This is divergent, but I feel compelled to defend Amex here on the basis of quality of leads and consumer ethics, with the main contention being a higher processing fee for Amex relative to Visa and Mastercard.

# Quality of leads

"Amex cards account for approximately 24% of the total dollar volume of credit card transactions in the US, the highest of any card issuer" [1].

In general, merchants absorb credit card fees because they allow consumers to make purchases in more spur-of-the-moment situations. For example:

* "I want this $4 coffee, but I don't have cash. Without a credit card, the purchase would not occur."

* "I want this $1000 refrigerator, but I lack the cash to pay for it all at once. A credit card allows me to purchase it now and deal with the implications later as I pay for it over time."

* "I want this $1000 refrigerator, but I don't normally carry that much cash on me, so making this impulse decision is enabled by my credit card."

* "I want to buy a $400 lunch for our client, but I can't have direct access to my company's money."

American Express may charge a higher percentage per transaction, but Amex users in general spend 2x-4x per transaction relative to other credit-based cards [2], thus in the end justifying their higher fee per transaction overall in the business that credit cards generate. This is due to both the demographics of consumers using Amex and the higher percentage of businesses using Amex. Thus, the lattermost two situations above are ostensibly inflated for Amex, therefore justifying a higher percentage fee.

For smaller retailers, they may see that only 10% of their customers use Amex, but they may neglect to factor in the whole buying process of "I lose ~20% of revenue if I refuse Amex, because Amex users spend double per month, so the 50% upcharge over Visa/Mastercard is justified." Starbucks understands this, which is why they do not refuse an Amex for a $1 cookie - they understand that the guy purchasing $30 of coffee for the business meeting is likely doing so on a company Amex.

So, while a retailer may be angered by the occasional Amex user who brings tighter margins, in the overall scope of things the quality of lead is sufficiently higher for Amex users to justify a higher percentage fee.

Note: Here I use "quality" for a lead to represent frequency of purchase, per-purchase volume, and credit reliability.

# Consumer Ethics

I personally use an Amex charge card for my day-to-day transactions because of the revenue breakdown of Amex verus the other major cardholders.

"Visa and MasterCard get about 20% of their revenues from merchant fees. American Express gets 65% of its revenues from merchant fees, because it relies less on interest payments (most American Express card holders don't carry a balance)." [3]

This is an opportunity for me to 'vote' with my pocket book, and I think that the yearly cost of an Amex justifies the service. A fradulent transaction is easy to erase because American Express profits from me as a happy and successful consumer. Furthermore, with a charge card, I cannot dig myself into a pit of debt - if I cannot pay my transactions one month, I cannot continue charging the following month, thus hurting both me and American Express. The business model is profitable when I balance my finances and maintain good finances, whereas the other major card companies profit mainly when I start to fall into a pit of debt. I feel that this revenue model thus benefits me as a consumer, rather than intentionally setting me up for failure.



As an entrepreneur building my own businesses, I accept Amex because I value the free market decisions of my consumers to use Amex, and in the overall scope of transactions, their educated decision behooves both of us.


[1] http://en.wikipedia.org/wiki/American_Express


[3] http://seekingalpha.com/article/20331-guide-to-credit-cards-...

>"Visa and MasterCard get about 20% of their revenues from merchant fees. American Express gets 65% of its revenues from merchant fees, because it relies less on interest payments (most American Express card holders don't carry a balance)." [3]

Real citation needed. That Seekingalpha link is very wrong. Visa and MasterCard probably derive 100% of their revenues though merchant fees and similar. They neither lend money nor collect interest from consumers. The usurious interest rates and fees that you are trying to "vote" against are coming from the banks that issue the cards. Visa And mastercard profit by encouraging use of their card networks for every purchase. They don't care about your "pit of debt."

I'm not sure how paying an annual fee to Amex and forcing merchants to process your expensive card is helping anyone other than further enriching Amex, which in addition to being a payment network, is also operating as a bank as far as extending loans to and collecting interest from its "cardmembers." If Amex's other value added services such as rewards, return protection or whatever make it worthwhile, for your business to pay the membership and merchant fees then so be it.

My personal "vote with my dollars" strategy is to use cash for transactions where a credit card does not add value to my user experience and not to unnecessarily punish businesses with small purchases on credit. I use a Visa card because it is accepted most everywhere. I do use a "rewards" card so I do carry some guilt for any extra merchant fees that may incur.

  - Pay for gas at the pump: credit.
  - Pay for online goods: credit.
  - Pay for an expensive item with not enough cash in pocket: credit
  - Pay for a $2 coffee: cash
  - Pay for a round of beers at the pub (where a credit card will add an extra round trip for the bartender to get back to me): cash
  - Pay for anything at a local restaurant: cash
  - At McDonalds and somewhoe don't even have $2 in my pocket: credit


While I agree with some of your points here, you are ignoring that an Amex user does not have a second card based method of purchase.

I would assume that most Amex users always have another method of payment, considering how likely they are to run into a situation where Amex is not accepted.

With this logic, the business will only lose revenue from customers whose only form of payment is Amex - I think this would be a small subset.

Some disjointed thoughts:

* If a consumer favors their Amex over their other cards, then they favor retailers who accept Amex. Thus the higher fee is justified with more repeat business.

* My mother's company has one line of credit: her Amex. If her Amex is refused, she has to pay with her personal credit or debit card, then go through the rigmarole of a personal refund. In corporate America, Amex is the standard due to its ease of internal accounting and external reputation. With the former, the better reporting of transaction information justifies its use in the accounting department. With the latter . . .

* Amex has established itself sufficiently as a luxury brand,

e.g. if you take your client out to lunch, it could be out-of-place to pay with anything but an Amex.

Furthermore, if your business does not accept Amex, it alienates luxury-seeking consumers

e.g. if a Michelin-starred restaurant refused an Amex card, it would experience a more precipitous drop in return rate than if a neighborhood diner refused Amex.

* "the business will only lose revenue from customers whose only form of payment is Amex" -> This is true on a per-transaction basis, but I defined "quality" to include repeat business and, per my first above point about business, restricting consumers could discourage repeat business.

I'm an Amex user who has a second card in my wallet, but I avoid giving business to stores that don't take Amex. I feel like it's a sign that they don't understand me, and don't want my business.

"Amex cards account for approximately 24% of the total dollar volume of credit card transactions in the US"

Personally I use amex for all large transactions because they give me a cut (I think around 0.5% cash equivalent?) in air miles, but don't usually bother with it for small transactions because I don't want to risk it being turned down, or take the piss with small merchants who might suffer from the processing fees.

Perhaps this kind of behaviour explains their bigger cash volume, rather than their customers necessarily being bigger spenders in total across all the cards available to them.

I always lead with my Amex, even if I know the place doesn't take it. Merchants need that kind of feedback from their customers. If they won't take Amex, I've got other cards, but I always prefer to use either my Amex or my Discover (another card with spotty acceptance).

So Amex only offer their cards to rich people (who are better at managing their balances, and spend more money), and then uses the fact that their customers are rich as leverage to charge merchants more? And you see this as a positive?

Hang on, is it good to help poor people hang themselves with credit card debt now? I didn't get the memo.

They don't have to be rich.

* The fact that they pay an annual fee (even with Zync) means that they have "skin in the game" - if they use the card more, the fee is diluted on a per-purchase basis.

* "customers are rich" - it's not necessarily that customers are rich, but that they spend more per month. This more specifically applies to business customers. For example, my carpentry business could use Amex as the company card, and while I could spend a lot of money per month buying carpet to install, it doesn't mean that I am rich.

* Higher income can disproportionately correlate to dispensable income, and credit cards are more likely to be used on dispensable income (e.g. restaurants) rather than more core needs (e.g. rent)

* " Various sociological statistics suggest the severity of wealth inequality 'with the top 10% possessing 80% of all financial assets [and] the bottom 90% holding only 20% of all financial wealth.'" [1] -> Even if Amex just offers their cards to rich people, it's an objectively viable business model that in itself justifies the higher transactional fee.


[1] http://en.wikipedia.org/wiki/Wealth_inequality_in_the_United...

Amex does have a few cards without an annual fee... at least the Blue series do not, and possibly others. Blue cards are more like a credit card than a charge card, though.

Either I missed a post somewhere but I don't think any has answered your question... I'm also wondering what the benefit for customers will be....


Smart phone based wallet, a la Google Wallet.

Holy grey-on-grey readability disaster, Batman!

And shouldn't 140 characters have been enough?

Skeuomorphism can be horrible if it's not done properly!

Actually, horrible is pretty much the default.

Designers in the house! I literally could not absorb the content of the 'letter' because the design hurt my eyes so.

All the cool kids are talking about skeuomorphic design lately.

It's a technical-sounding word that makes the speaker look smart when they are complaining about design.

Couple of years back, it was all about "modernism".

Modern ain't what it used to be.

how's that skeumorphic?

It's made to look like a physical letter.

Except nobody writes in grey ink on low-grade grey paper.

You forgot about dot-matrix printers in "draft" mode.

... on 75% post-consumer recycled paper.

I was thinking about the old continuous tractor-feed paper, some kinds are really thin, almost slightly translucent, for that extra subtle low-contrast retro design! ;-)

The initial advantage Square had was “green fields” Most of their customers didn’t accept Credit Cards so they did not have incumbency issues. That’s what makes this win impressive. However, it also highlights just what Square has to go through to win a very large account. SB’s had to agree to tear out and replace their existing POS system. That’s a big risk, headache and cost and customers will use that leverage (and genuine pain) to drive hard bargains.

Also worth noting is that SB’s mentions processing costs will be cheaper. It’s hard for me to imagine that SB was overpaying with their last vendor so I worry about the economics on this deal. Maybe it’s the anchor tenant though that allows for additional enterprise deals to follow so is worth it. I can imagine other large retail organizations that had any interest were on the sidelines saying "It's one thing to service 10,000 food trucks but come on!" They'll stand up and listen now with this.

Wow, huge deal for Square. I'm very curious what the terms of the deal are: presumably Starbucks isn't willing to pay much more than what their current processing fees are (maybe a tiny bit more for the premium of being able to use Pay with Square?), so Square must be losing a decent chunk of change in exchange for the huge marketing and growth this gets them.

"Starbucks isn't willing to pay much more than what their current processing fees"

Let us not forget that there may be a dichotomy in processing fees of credit cards at Starbucks between register-based transactions and digital/mobile-based Starbucks card reloads. Square doesn't have to beat the former to be competitive - only the latter, because it seems that Square will be on track to replace the current smartphone scanners at Starbucks registers.

Let us also not ignore that this is Starbucks offloading liability - when dealing with payments on a massive scale, one has to deal with a variety of frauds that may occur. With the current Starbucks card reloads before the point of sale, they may be starting to encounter fraud based on the volume of sales they encounter. However, Square has essentially specialized in managing this type of fraud. Hence, the Square partnership could simply be an acknowledgement that the Starbucks card payment system has become mainstream enough that it justifies a dedicated security division, whether it be internal or external, and that Starbucks opted for external Square.

They mentioned the investment as part of a series D financing. I'm assuming any tradeoff in per/transaction costs is going to be more than made up in the scale and regular usage that Square is going to get from this partnership.

I have heard that Pay With Square causes people to spend more money.

Anecdotal, but at a sandwich shop the other day, I tipped $1 when the cashier handed the iPad to me. Not sure if I would have done the same when signing a regular receipt.

Starbucks is very good at staying on the cutting edge. They were one of the first to offer FourSquare specials, iTunes credits, and they seem to partner with just about any semi-relevant startup out there.

Losing a decent chunk of change? How can they lose something they wouldn't otherwise have had at all? It's only normal to assume that they have special terms for Starbucks, but it doesn't mean they're losing anything.

Unless you mean that Square is providing the service at a loss to Starbucks?

Yes, I would guess they are providing this service at a (slight) loss to Starbucks.

With billions in revenue per year, Starbucks has direct advantageous deals with credit card companies that probably follow them no matter what transaction system they use including Square. In other words, they are likely to pay less than the standard Square fees.

Interesting. Starbucks is obviously not going to use the error-prone dongles. I suspect Square will provide some sort of custom "Pay With Square" solution, perhaps tied into Starbucks' existing point-of-sale system. Any way you look at it, it's a huge deal for Square, Starbucks is absolutely the best venue for Square and likely the key building block to really push out a new checkout experience such as "Pay With Square".

Pay with square app doesn't use the dongle at all.

The note talks about processing all Starbucks cc txns.

I am assuming at the volume in question they'll just retrofit whatever software to use the card readers Starbucks currently uses. They're pretty well built.

"... I am pleased and proud to announce that today Starbucks signed up for Square ..."

Starbucks has a history of taking risks with startups ~ https://en.wikipedia.org/wiki/Kozmo.com

However, here I feel that Square enhances the Starbucks core value of creating an intimate coffee experience.

# With Square:

"I am Jack and I would like [. . . ]"

(clicks name with face on screen to charge; receipt emailed automatically) "Ok, Jack, your total was [. . .] and here it is"

# Current Method:

"I would like [. . .]"

"Ok, your total comes to [. . .]"

[exchanges credit card]

"Would you like your receipt?"

"No, thanks"

"What name would you like on the order?" (while holding credit card with name on it - hence this step is meant to increase intimacy)


"Ok, here is your drink"


The Square system makes transactions shorter and simpler, and it humanizes the experience

Is this yet another middle man to suck fees out of the system? I have not kept up with Square but despise the though of yet another fee leech that is compiling a list of my purchases to sell to annoying advertising companies.


> yet another fee leech that is compiling a list of my purchases to sell to annoying advertising companies.

Square's business model is transactional. It's not advertising based!

Read closer.

"compiling a list of my purchases" Visa, Amex, Discover, Mastercard... All do this and are transactional.

"to sell to annoying advertising companies" And this.

I signed up for square about a month and a half ago. I ordered my little device at the same time and it still has not showed up at my door step. To me, they have been a lousy service so far sadly.

Awesome news for square. I am very eager to see how this changes the natures of: 1) The Starbucks App - will square replace it outright or will there be an option to use starbucks or square? 2) Paying with a card at starbucks - same registers or new registers with square dongles? Hopefully its a better dongle if so...

PS - Anyone noticed how they seemed to be stepping around the idea of those local businesses being other coffee shops? Craft businesses in the Press Release...like craft coffee shops?

Android Starbucks app "card" payment was just rolled out to Canada and the UK last month - I doubt it'll go anywhere for a while for these locales. It might be interesting to see if any payment technology roll-outs beyond US/UK/Canada go with Starbucks-powered stuff or Square stuff. I'm guessing Starbucks for now.

I really do not see the benefit of this deal. Square - sure, another bunch of retailers. Starbux, not so much. NFC will take over and then square is out. can someone explain?

Square works on any phone with GPS, which is not true of NFC.

And Square, Inc. is making a brilliant "Trojan Horse" series of business moves to bootstrap adoption in both users and vendors. They get vendors using the Square app by providing plastic processing, they get users using the app by providing convenient tabs... as smartphones become ubiquitous, they don't have many limits to growth.

NFC on the other hand... Who is going to be the jockey that rides NFC in the race? Google? What will Google be able to offer to vendors that Square doesn't? I can't think of a single benefit of NFC over Pay With Square from the vendor's point of view. And Google will never pound the pavement the way Square is. They just have too many other fronts to fight on.

NFC hasn't taken over yet. Pay with Square offers something pretty close feature-wise, and is establishing residence in the market. Once NFC works well, Square can adopt it and rule.

There is also the chance that Square (and similar geolocation- and photo- based heuristics) will make NFC superfluous. Why NFC when a human-to-human word or gesture is faster, more natural, and just as reliable?

Because eventually they will want to get rid of as many humans as they can in your caffe latte experience. Or more prosaicly so that you can order a snack from a snack machine too.

If automated vending machines are the remaining hope for NFC, that's pretty weak.

A geofenced app -- if not Square, then Apple Passbook or others -- could prompt me on my own device's screen: "The vending machine here requests $1.50 to dispense your Snickers. Press 'pay $1.50' or 'cancel'."

The soft-interface device screen is much more flexible than the NFC-tap/wave-in-the-right-place gesture. Your own device screen will be better for doing things like:

• pre-authorizing a purchase before buying a tank of gas

• requesting an emailed receipt

• offering immediate feedback (or adding a tip)

• avoiding possible confusion/chargebacks about amounts paid.

That could mean 'app-style' payments have not just usability benefits, but also cost and legal benefits over 'NFC-style'.

Geofencing is a good hack, but it's still a hack:

- constant location polling is a battery drain

- GPS reliability/speed degrades quite a bit indoors (are you at Starbucks or the shop next door? What happens when another Mr. Gojomo next door orders coffee and the cashier is rushed and doesn't notice the different face?). WiFi isn't much help here either if you're in a large urban area.

You can still do all you listed starting with a NFC handshake instead of playing with GPS. Geofencing is helpful for getting payments onto existing phones (not to downplay Sq's achievement here), but NFC or another more localized technology will be necessary to make payments more reliable.

"NFC will take over"

Care to evidence that assumption just a little bit?

One thing about NFC is that it does not require an active data connection, whereas Square does. That may not seem important, but for those of us who live in the middle of nowhere, it's relevant. I'm not sure that it's relevant enough to change wide-scale adoption patterns, but in my small town, there are multiple locations in CDMA black-holes that are PayPass enabled, thus accept Google Wallet. Every single Mobile station, and nearly every other big-chain gas station is already set up for NFC.

According to the Square App, I have to drive 11 miles away to find the nearest accepted location.

Ultimately, I think both will operate in parallel for quite some time until Apple decides to release something and takes over the world of payments overnight. :)

Jack's signature is "@jack"? Nice.

So does this mean that Starbucks will use the same Square interface that we layfolk use? I find it impractical that they use this, and not something that integrates with their existing systems, but then that would mean that Square has opened up some sort of API to them? When will the rest of us get to see something like this, if so?

I really hope square improves their reader. Practically every time I've used this system, as a customer, it seems to take a couple of tries before it actually recognizes the card. This may be okay for lower volume businesses, but for starbucks I could see this backing up lines.

They also charge more if you have to key in the card manually (2.75% per scan vs 3.5% + 0.15 USD per manual entry).

this is because it's processed as a card-present vs card-not-present transaction. different fee (& risk) brackets.

Once Starbucks are on the Square system, might that be the perfect opportunity for Square to flip a switch and ask customers for their bank details?

If Square could do a GoCardless with all those consumers that use Square, both Square and merchants could benefit massively...

Does this save money for Starbucks over their own branded card? Due to the rewards available, I'd assume many of their highest volume customers are using it, and would be unlikely to switch to Square unless those rewards were transferable.

Is this just for Starbucks US stores or is it for all of North America?

If it's just for US stores then the title should probably be amended. Being a Canadian, I've never seen a merchant using a square device.

It's a great validation of developing and iterating the business initially with the small 'mom & pop' business to the point where traction allows you capture the really massive customers.

This entry is duplicated First entry is in http://news.ycombinator.com/item?id=4353817

The announcement aside (line 1 of 20), this "letter" is some poor PR spew. Jack, if you're listening, you need a personal letter stylist. Letters are like jeans that people read.

Can someone explain this to a layman who "only" uses credit cards at the moment? How is whatever this is going to make my checkout at Starbucks quicker or more convenient than a card or a $5?

Although there do seem like there are benefits for "laymen" -- paying for something by simply saying your name sounds interesting -- this isn't really directed towards you. Generally, you would likely still use your credit card with it, so your experience wouldn't be much different (positively or negatively).

It's beneficial for business owners who save money by using Square and use various incentives and analytics that come with.

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