What does Square plus Starbucks mean for US payments?

Square and Starbucks just announced their intent to form a partnership for the purpose of improving or 'revolutionizing' in-store payments around the approximately 1,700 retail stores and 5,000 points of presence in the USA. Square has had phenomenal success growing their merchant base to 2 million users in just over 2 years, which when taken in the context of around 8 million merchants across the US shows their rapid capture of market share. Starbucks, on the other hand, already has one of, if not THE most successful in-store mobile payment program in the US today. The deal also sees Starbucks investing $25m in Square.

Last year Starbucks processed more than 26 million mobile payments via the Starbucks Card App, which also resulted in more than $820 million being committed or deposited onto Starbucks Cards. No bank in the US, or the world, that I know of can claim to have had nearly $1 billion in deposits made on a mobile-only payments platform. Ironic that the biggest and best in mobile payments today in the US has nothing to do with either the major banks or the card networks isn't it?

Starbucks has the most successful mobile payment deployment in the US to-date

The 20 million mobile payments made at Starbucks stores in fiscal 2011—plus another six million by December’s end—were fueled by our hugely popular Starbucks Card Apps for the Android™ and iPhone,® once again reflecting our ability to respond to the constantly changing marketplace in ways that strengthen our connections with customers - 2011 Starbucks Annual Report

This alliance has been characterized by the media as variously the approaching death nell for cash, or the acceleration of mobile wallet adoption:

Cash moved one small step nearer to its deathbed with the announcement on Wednesday that Square, the mobile payments start-up, would form a partnership with the Starbucks Coffee Company - NY Times, August 8th, 2012

Mobile payments service provider, Square, got a $25 million investment from Starbucks (SBUX) — valuing the start-up at $3.25 billion — that could mark the beginning of the end of cash - Forbes Tech, August 8th, 2012

Today’s announced partnership between the west coast innovators Square and Starbucks represents a significant milestone in the advancement of mobile payment and digital wallets - Forbes, August 8th, 2012

Others are not so sure...

Starbucks is one of the biggest retailers yet to embrace the "digital wallet," and tech blogs are gleefully heralding the death of cash. But such pronouncements may be premature. The digital wallet still faces several hurdles, and it starts with the consumer - US News, August 8th, 2012

But my take is a little different...

The issue for the banking industry at large here is that both Starbucks and Square have demonstrated that payments can be made much simpler through the use of mobile, and without any of the fraud issues currently plaguing mag-stripe in particular, but cards in general. Secondly, the question of whether 'mobile' payments are mainstream really must be dismissed as a smoke screen for lagging adoption when 25% of Starbucks consumers and 25% of US merchants have flocked to mobile-enabled payments in the last 2 years, and adoption is rapidly increasing.

From a pure usability perspective swiping your credit card on a Square reader is analogous to a typical POS (Point-of-Sale) terminal and as such Square merchants have quickly adapted. Pay with Square is also easy, but relies on you being able to communicate your name as your unique identifier. Square polls your phone to check if you are in the same physical geography as the merchant, and if you are it displays your Square profile photo on the merchant's register, so that when you give your name the merchant can verify it's you and process the payment. No swipe or interaction required. The only challenge is that in a noisy Starbucks with 10 people standing in line behind you trying to communicate your name might be a challenge. Using NFC tap to initiate the payment as an alternative, would certainly speed up this process and allow for some user authentication of the payment also.

The real issue for Amex, Visa, Discover and Mastercard right now is that the 'cardless' movement is rapidly accelerating and customers are flocking to these new technologies. The issue is not the death of cash - but the death of plastic. In a much simpler, better informed payments interaction, plastic just looks dumb, insecure and outmoded.

Those working hard to disrupt payments are not the incumbents, but new players like Starbucks and Square. Like photos, books, video, music and many other industries that have fallen fowl to disruptive behavioral shift over the last few years, there is always a false sense of security of how secure the incumbents 'platform' or market is. This is the case with payments. Many have said that security, regulation and such prevents exactly this sort of disruption in banking. I would argue that once customers are no longer using plastic that your days as a valued provider of a 'card' whether physical or digital, is surely numbered.

This is not the end of cash as much as it is the end of three decades of card-based payment behavior. The shift to the phone as the primary payment device has started, and it's happening much faster than you think.