So much for the dog days of summer!
The Starbucks/Square wallet news turned an unusually hot summer (both temperatures and payments news) into a real scorcher. EVERYONE in the payments industry is buzzing over the news and speculating about its implications to themselves and to the industry. As you all know by now, there are two pieces to this announcement: Square as acquirer/processor and Square as merchant/wallet. Here’s my take on the news.
On the Square as processor front, Square will now process all of Starbucks debit/credit transactions. That’s a pretty nice account to get. (It was listed as a First Data marquee client – so you know it had to be big.) But more relevant to the ecosystem, longer term, is the role that Square has taken on in doing this. No one seemed really concerned about Square in that role when the merchants they were going after were small guys. Starbucks is anything but that. This is just one more piece of evidence that ISOs may soon be on the endangered species list since Square has taken on that role (and more). Taking the ISO layer out of the ecosystem can also make the economics better all the way around, well, so long as you aren’t an ISO.
There’s also a lot of talk about whether Square negotiated its rates for Starbucks and how that might make them upside down. I don’t know for sure, but I would give you three guesses and the first two don’t count, especially since Howard Schultz, in an interview, said that “lower interchange” was part of the benefit of using Square. But, who really cares if they did? This deal wasn’t about making money on transaction fees; it was about something much bigger.
That brings me to point number two.
Sure, the Starbucks deal gave Square access to customers. No duh. But, it gave them access to customers who LIKE using a mobile app to pay for stuff there and have been trained to do it. Square didn’t just partner with any old merchant, it partnered with the merchant who has the distinction of having the largest mobile payments network going anywhere. And millions and millions of active mobile wallet users processing (they say) 1 million transactions a week now There may be lots of digital wallets all over the place but no one, outside of Starbucks, has amassed the number of active mobile wallet users that they have. No one.
And, Square needed BIG merchants to really matter. Signing up the Karen’s Krazy Cupcakes got them only so far, and is pretty expensive to do (just ask Groupon). Those merchants also tend to turn over a lot too, don’t produce big volume, and are just riskier (just ask Square who reportedly has big problems with fraud). Square was able to ignite its business by tapping into an unmet need – small merchants who needed card acceptance – but needed (and always wanted) large merchants to scale. We found out two days ago who was numero uno on that list.
But I still think there is even a bigger point.
Think about this. There is a Starbucks just about everywhere in the US not to mention London, Beijing, and even Paris. That makes them a pretty interesting “anchor” hub geographically for the recruitment of many other merchants to build out their network. Think about how easy it will be to knock on the doors of the merchants at the Copley and Prudential malls in Boston, which has a couple of Starbucks, and recruit them to sign on to Square (POS) by having lots of customers running around with Pay WIth Square wallets. The conversation goes something like so, here’s our nice POS register, that allows you to eliminate payment friction and create a really great customer experience using a very cool new digital wallet that will allow customers to shop in your store without needing to carry a leather one. I would also imagine that there will be some sort of conversation about incentives to juice adoption and make customers sticky. It’s the proverbial payments two-fer — and could enable Square the network to scale in a more efficient and methodical fashion. Being able to create that sort of geographic concentration of merchants and consumers is a brilliant stroke.
Now, who’s to know whether what I have just laid out is even on their radar screen or whether this is how they have thought about how to leverage this merchant relationship (and free advice, if they haven’t). But, in spite of all of the goodness that I have just described, there are still lots of things that have to fall into place to actually have that part of their ignition strategy to happen.
Like getting consumers to change their behavior. Today, the Starbucks app isn’t just about payments, it is about making the stored value product much more usable (a product that has benefitted greatly ever since the mobile app came into being), as well as being able to track rewards. Arguably, the Square solution is targeting those who pay today with credit and debit cards, so one might say that those Starbucks customers who wanted the Starbucks app because they use the stored value card and cared about rewards have already downloaded the Starbucks app and may be motivated by something different. It will be interesting to see how Starbucks, the mobile app, coexists with Pay With Square, the wallet that enables payment at Starbucks. And, unlike the Starbucks app that is JUST ABOUT STARBUCKS, the Pay With Square wallet seems a little less interesting if all consumers can do is use it at Starbucks, in spite of its cool facial recognition features. In spite of Starbucks’s great success with mobile payments, consumers aren’t falling all over themselves downloading mobile payments apps and certainly aren’t asking for it at their favorite merchants – yet. There will have to be some goodies and bells and whistles associated with getting consumers to believe that it is hip to be Square at Starbucks. (Because at least today, it certainly wont be about the robustness of the Square merchant network.) So, the jury remains sequestered.
On the merchant side, boy o boy, it’s a tough slog to get merchants to invest in mobile – the big ones in particular. Up until now, they’ve all been sort of hanging back, watching the wallet warriors battle it out. But, the Square announcement, the baby step by Google into the cloud-based arena last week and PayPal’s POS ambitions, is making this whole conversation a whole lot more interesting. When all the conversation was about was arguing over NFC, it was sort of a no-brainer to hang back, since, well we all know that storyline by now. But, now that there are so many interesting variations on the cloud- based theme, there is starting to be a little more pressure to pay attention to what’s going on. Merchants are all probably now leaning into the conversation about wallets a little bit more instead of running away from it.
So, where does this all leave things in the digital wallet space? Well, a few thoughts. This is a big signal by Square (who always said they wanted to be a network) that they are quite serious about it. They want to be PayPal. And perhaps more! It’s clear as day now. And, they have a lot, lot, lot, lot, lot of money to pursue that ambition and fund merchants and incent consumers.
PayPal should be concerned. For now, Visa and MasterCard and American Express and Discover ride the wave of Square’s success. That is until Square decides to flip its customers to ACH-based transactions when they become a bona-fide PayPal competitor (and figure out how to manage that risk). I saw a few people quoted in the media who said that this announcement is the rising tide that floats all mobile payments boats. I guess we’ll see. I can think of at least three players who should start building Noah’s Ark, like yesterday. Any thoughts on who might be the first to line up two-by-two????