Square and Starbucks Lead Transition to Mobile Payments

This post first appeared in the San Jose Mercury News
by Larry Magid

John’s Café in Palo Alto and Starbucks have two things in common. They both serve coffee and food and they let you pay for it via your cell phone.

And soon, they’ll be using the same payment system. John’s was an early adapter of Square, and Starbucks is about to adopt it big time. Square is the mobile payment service that lets just about any merchant accept credit or debit cards by attaching a free square-shaped credit card reader to an iPhone, iPad or Android device. But just as Netflix started by making it easier to rent DVDs with the goal of replacing plastic discs with downloadable movies, San Francisco-based Square is helping lead the transition away from plastic money by enabling merchants to allow customers to pay via smartphone, completely eliminating the need to swipe a credit card.

Starbucks was an early adopter of mobile payments with its own proprietary smartphone app that displays a bar code on your phone that can be read by a scanner at most Starbucks locations. In addition to letting you pay for your java, the app provides details — including nutritional information — on all Starbucks products and, using GPS and other location services, helps you find nearby stores.

But following the lead of John’s Café and other typically small and local merchants, housands of Starbucks stores will soon start accepting payments via Square’s mobile app. The coffee giant also made a $25 million investment in Square and its CEO, Howard Schultz, will join Square’s board of directors. In addition to accepting the mobile app, Starbucks will use Square to process all of its credit and debit payments, which is likely to contribute significantly to Square’s revenue.

What’s interesting about Square is that it’s disrupting the typically bank-dominated credit companies on two fronts. It’s making it easier and cheaper for small businesses to accept plastic while at the same time helping to transition consumers and businesses away from plastic toward mobile payment systems.

Many years ago, I started a training company that wanted to accept credit cards but the process was daunting and expensive. We first had to fill out a long application and go through our own credit approval process and pay hefty fees to accept credit card payments.

Square makes it easy and cheap. Anyone — even individuals — can set up a merchant account in a matter of minutes and immediately start accepting credit cards. When you establish your account, Square will mail you a free card reader that plugs into the headphone jack of an iOS (iPhone, iPad or iPod Touch) or Android device.

When a customer hands you a card, you swipe it through the reader and get immediate approval through your phone. The cost to the merchant is 2.75 percent with no monthly fees, set up costs or transaction fees, which means it’s practical even for very small purchases like a $1 piece of fruit, where a transaction fee would eat up a pretty big chunk of the merchant’s profit. If you manually type in a customer’s credit card (where there is a higher chance of fraud), the merchant pays 3.5 percent plus a 15-cent transaction fee. The money is deposited into your checking account the next business day.

Square has allowed merchants of all sizes to accept credit cards and makes it possible to transact business from virtually anywhere, including places where there are no outlets or phone lines. The merchant does need either a cellular or a Wi-Fi connection, which means they can even use an iPod Touch or a Wi-Fi only iPad or Android tablet.

Square also offers an iPad app that turns that popular tablet into an intelligent cash register. At John’s Café, for example, the iPad displays the menu, including pictures of the items. The person at the counter punches in the customer’s order and the customer approves the sale and has an option of adding a tip. Customers can pay with cash, a credit card or the app. If they use a credit card, they sign the screen.

Although Starbucks will initially require you to wave your device with the Square app running in front of one of its scanners, at John’s Café and other places, the App communicates with the store via the phone’s data channel, so you don’t even have to take the phone out of your pocket to initiate the process. The merchant sees you’re in the store and can even see your picture to validate your identity.

The merchant also has the option of offering promotions, which might just work out well for John and me both. I really enjoyed my panini and if I buy four more, I get $2 off my next order. But if I’m going to eat that many paninis, it would be nice if Square also offered me a discount at a local gym.