What's Missing in the Starbucks-Square Mobile Wallet Deal? A Lot

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Starbucks' $25 million investment in Square says a lot about the mobile payment provider's appeal to larger merchants — but the coffee chain's decision to leave out some of Square's technology also speaks volumes. 

Starbucks' investment is certainly a major vote of confidence in Square's abilities, but the agreement focuses almost entirely on Square's consumer-facing mobile wallet, Pay with Square, instead of the systems Square developed for merchant use.

In recent months, Square has aggressively added features to boost its appeal to larger merchants. The centerpiece of this effort is the Register app, which Square claims has "all the features you need … at your counter."

Apparently, Starbucks disagrees.

"I would be hesitant to think such a large company as Starbucks would use such limited technology," says David Kaminsky, technology analyst for emerging payments with Mercator Advisory Group. "You have to remember that Square designed its reader to be very simple, something they could provide to small merchants for free."

A Starbucks Corp. representative was not available for comment, but its media relations team confirmed via e-mail that the company would not be using Square's mobile card readers nor Square's Register system as a replacement for its own terminals.

Starbucks is also not scrapping its homegrown mobile wallet, though it is adding some Square technology to the app to allow Square to handle payment processing, Starbucks stated. Starbucks' smartphone app allows users to load a closed-loop payment card and use those funds to buy items at the point of sale.

The initial experience of paying for Starbucks coffee with Square will be similar to using the Starbucks mobile payment application, Starbucks says. Customers will open a Starbucks tab within the Square application, which creates a two-dimensional barcode on a smartphone screen. Starbucks scans that code at the point of sale.

Customers need only to download the Pay with Square application and set up an account on their Apple Inc. iPhone or Google Inc. Android device. Starbucks plans to add a directory feature to its app to let consumers locate other merchants that use Square.

"When Starbucks builds the Square Directory into their apps and in-store Digital Network, it gives Square new visibility, driving more customers to opt-in to Square," Square CEO Jack Dorsey wrote in a letter posted to his company's website. (Square, of San Francisco, did not make an executive available for an interview.)

In 2010, Starbucks also added eBay Inc.'s PayPal as a funding method for its app. 

Square's most well-known product is a small plastic card reader that connects to the headphone port of a smartphone or tablet. Square has many rivals, including Intuit Inc., which in June integrated its GoPayment mobile card reader with its QuickBooks Point of Sale 2013 software. Observers say this software is more capable than Square's Register, but it is also more expensive. QuickBooks Point of Sale 2013 starts at $1,100, whereas Square's app is free. 

As part of its agreement with Square, Howard Schultz, Starbucks' chairman, president and CEO, will join Square's board.

Even if Starbucks has no use for the Square card reader or Register app as-is, Starbucks may influence future iterations of those products, says industry analyst Todd Ablowitz, president of Centennial, Colo.-based Double Diamond Group, LLC.

"Starbucks could adopt the Square technology and just modify it to meet their needs in a new store setting," Ablowitz says. "If they ever have a need to walk around [and sell coffee in a mobile setting], they could plug in the use of the card reader as well."

Even though Starbucks is picking and choosing which elements of Square's technology it uses, this is a "big shot in the arm for mobile payments overall" because of the size of the rollout, he says. "A number of other verticals could turn over [to mobile pay] quickly."

Ablowitz says he has been impressed with Square since Dorsey introduced the company and its concept three years ago.

From the start, naysayers criticized Square's technology, its knowledge of the payments industry and its business model. But with Starbucks adding its support, "now what can the naysayer say?" Ablowitz asks.

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