Starbucks and payments: Everything you need to know

  • July 27 2018, 12:16pm EDT
From its beginnings as a standalone Starbucks Card app, the Starbucks mobile experience was always a bit different from what other companies tried to do. While the major tech firms and banks were trying to develop a one-size-fits-all mobile wallet to dominate the market, Starbucks focused on the needs of its coffee-guzzling customers. And things heated up fast.

This item is compiled from reporting by PaymentsSource writers including John Adams, Kate Fitzgerald, David Heun and Michael Moeser. Click the links in each item to read more.

The first Starbucks app

It all began in 2009 with a standalone iPhone payment app developed by mFoundry, accepted in just 16 stores. That version used QR codes instead of the bar code in use today, and it worked only on iPhones (though mFoundry also developed for Blackberry and Windows Mobile handsets).

At the time, the next step seemed to be moving to NFC for a more seamless contactless payment experience, but that technology wouldn't come to the iPhone until the iPhone 6 launched in 2014, and even then Apple limited it to its own Apple Pay wallet.

Starbucks eventually took development in-house and combined the payment app with its primary Starbucks app.

Teaming up with Target, going from 16 stores to 1,000

To take its app nationwide in 2010, Starbucks adapted its mobile payment system to work with scanners already in place at the Target stores that house many of its coffee shops. Suddenly, customers could use the Starbucks app in 1,000 more stores.

It was the simplicity of the Target bar code scanners that allowed for such a rapid expansion of this deployment, and the Starbucks app still uses that bar code format to this day.

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First iPhone, then … BlackBerry?

Even early on, Starbucks saw value in taking a different approach to mobile payments.

Many banks and vendors brought their apps to Android after launching on iPhone, but Starbucks instead picked BlackBerry as its second platform in 2010. Starbucks reasoned that many Blackberry-toting office workers would use its app to buy their morning coffee.

That didn't mean there was no demand for an Android version. In fact, there was so much demand that a former Starbucks shift supervisor named Stewart Gately developed his own unofficial Android Starbucks app called the Starbucks Card Widget in late 2010. He changed the name to My Coffee Card after receiving a cease-and-desist letter from Starbucks.

Combining its apps to go big on loyalty

Starbucks linked its loyalty program to its payment app in 2010, a move that is still paying off. Former Starbucks CEO Howard Schultz once described the relationship between Starbucks' payment and loyalty programs as essential to increasing store traffic: "We know that increased Starbucks Card sales drives My Starbucks Rewards membership and, in turn, traffic in our stores."

The card is also the funding mechanism for payments made through the Starbucks mobile app.

From Starbucks to startup

When Starbucks combined its payment capabilities with its main app and took development in-house, what became of the people who worked on the original app?

They created their own company, CardFree, which counts Starbucks rival Dunkin' Donuts among its main customers.

CardFree CEO Jon Squire led the development of the mobile Starbucks Card when he was at mFoundry, the vendor Starbucks used early on. Squire was also a top executive at CorFire, where he helped establish a similar mobile payments app for Dunkin' Donuts.

Other former Starbucks employees who joined CardFree were Chuck Davidson, Scott Schwan and Sen Wen.

"The team here is a lot of fun, we are all from similar places," said Davidson, who is now CardFree's head of customer engagement.

Part of the reason Davidson and his peers joined CardFree was to apply their skills to a wider range of merchants, he said.

However, "Working together as a team was the biggest driver," Davidson said. "We have history and we are all passionate about" the work.

Dunkin’ recently extended its relationship with CardFree by signing a multiyear deal to secure a perpetual license to the software used to build and operate its mobile ordering and payment platform for Dunkin’ Donuts U.S.

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A short-lived relationship with Square

Starbucks made a $25 million investment in the mobile card acceptance company Square in mid-2012. At the same time, Schultz joined Square's board and Starbucks began using Square to process its payments.

However, the relationship went only so far. Starbucks never used Square's hardware to accept payments, and in October 2013, Schultz stepped down from Square's board. In 2015, the two cut ties and Starbucks moved its processing to JPMorgan Chase.

It took until 2017 for Square to recover from the breakup. Starbucks accounted for only a trickle of Square’s net revenue of $451.9 million for the quarter ended Dec. 31, 2016.

Security becomes an issue

Starbucks has had a bumpy road to success. Early on, a customer stretched the card app's security to open up access to his account, allowing any internet user to add and spend funds.

Later, a researcher found an issue in the app's iPhone version that might expose a user's password to a hacker. Starbucks took action in both instances.

A CEO's shifting role

Former CEO Howard Schultz announced in 2014 that he would be redefining his role as the company's boss. Instead of handling the company's day-to-day operations, he would focus on tapping the coffee giant's true potential as a mobile payments company.

In 2018, he would step down for good.

For a company that has long posted mobile wallet usage numbers that far exceed what dedicated mobile wallet providers can boast, Schultz's departure is a major event — perhaps on par with Steve Jobs passing the torch at Apple.

One of Schultz's key moves as CEO after returning from an eight-year hiatus in 2008 was introducing a loyalty program. The Starbucks card app would follow a year later, but the company has long held that the app's success was made possible only by the immense popularity of its loyalty and gift card programs.

Schultz championed the mobile payments program from its launch through this year, as U.S. membership in its loyalty program rose to nearly 15 million, driving 37% of all U.S. sales.

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Big momentum hits a wall

Starbucks has reported an impressive number of in-store sales in the U.S. coming through its mobile app, a figure that has climbed quarter after quarter since the 2009 introduction of the Starbucks Card app — until July 2017, when it reached 30% and plateaued.

It is seeing some momentum from mobile ordering, which accounts for 13% of all Starbucks transactions, as of July 1, 2018.

Can prepaid pick up where mobile left off?

Retailers in the quick-service food and beverage industry have tried to emulate Starbucks' popular mobile app and mobile order-ahead technologies, but Starbucks itself appears to be leaning toward generating more sales through plastic cards.

It wasn't an entirely unexpected move, considering Starbucks has been talking about launching a Chase Visa prepaid card for its customers since early 2016, but the coffee giant's announcement this June that it would add the plastic card to its loyalty program may be the answer to generating sales while its mobile app tries to pick up its pace.

The mobile app's popularity was joined at the hip with Starbucks gift cards and loyalty points — a formula that has traditionally been known to work well at other retailers through plastic cards.

If Starbucks is looking to jump-start some of its mobile channels, the possibility of doing it through plastic card options first makes some sense. Ultimately, a co-branded prepaid card with Chase allows customers to earn "Stars" based on all types of transactions and can be redeemed for future coffee — putting it solidly within the company's strategy.

The prepaid product was announced nearly four months after the companies launched a co-branded credit card for Starbucks customers, representing the first new products with Chase Merchant Services since the companies agreed in early 2016 that the Chase Pay mobile wallet would be part of the Starbucks app when Chase Pay rolled out.

Taking cash off the menu

In January, Starbucks began testing a policy in which it will not accept cash at a store in Seattle, supporting only plastic or mobile payments. While many stores are eager to push consumers to digital payments, it's rare to ban cash outright. Another example is Shake Shack, which introduced a cashless location in New York last year as part of its effort to introduce its mobile app into its standard ordering process.

If there is a retailer that could successfully pull off a cashless store, it would be Starbucks, which serves a mobile-friendly demographic from a Seattle headquarters that aids its tech-savvy brand.

But these efforts don't always work out. At least, they didn't for Shake Shack.

“Some of the things we’ve clearly seen is that our guests do often want to pay with cash,” Randy Garutti, Shake Shack's chief executive, said on its May 3 earnings conference call. “In the first rollout at Astor Place, we did not accept cash at all. And there are people who have told us very clearly ‘We want to pay with cash,’ ” he said.