A Groundbreaking Square Deal at Starbucks?

The death of cash has been prophesied for long enough that one can easily tire of hearing about the latest and greatest electronic-payments innovation that will once and for all seal the fate of paper-and-coin currency. But with yesterday's announcement by Starbucks  (Nasdaq: SBUX  ) , the process has taken a significant step forward: one that potentially signals the death of not just cash and credit cards, but also sets the coffee slinger up for even more revenue growth, profits, and expansion.

Where your name is as good as gold
The retail-coffee giant has just announced it will partner with Square to process payments at participating stores beginning this fall. Since last year, people have been able to make payments using their smartphones at Starbucks using the company's own mobile-payments app, but now customers will be able to pay with Square's smartphone app Pay With Square.

At the beginning of the rollout, customers will still need to show Starbucks cashiers a barcode on their smartphones to process the transaction, but eventually customers won't even have to pull their phones out of their pockets to make a payment; all they'll have to do is say their names. That's what will make Pay With Square so unique.

I'm a coffee lover, not a test pilot
Square was founded in 2009 and is one of many companies both large and small trying to gain traction in the fast-growing mobile-payments sector. Square's competitors include Google (Nasdaq: GOOG  ) , Microsoft (Nasdaq: MSFT  ) , Sprint Nextel (NYSE: S  ) , and eBay's (Nasdaq: EBAY  ) PayPal.

None of these companies, however, has yet made significant headway in mobile payments, maybe because cash and traditional credit cards are proven, convenient, and relatively safe. Paying with a smartphone, particularly the way Starbucks and Square want to go about it, is spanking new, and who wants to go out on a limb with their money when all they're trying to do is buy a latte?

That's what makes Starbucks' partnership with Square so revolutionary. Starbucks has almost 18,000 locations in 60 countries, with 7,000 here in the U.S. alone. This deal will give Square instant national, and maybe someday international, retail presence. Out of that, the technology and the company will have the opportunity to prove themselves to consumers.

More green for the green mermaid
So what's in it for Starbucks? For one thing, Starbucks is now an investor in Square. As part of this deal, Starbucks will invest $25 million in the startup. CEO Howard Schultz will also be joining Square's board. So, with a significant amount of money invested in the company and Schultz helping to guide the company, there's a lot in it for the green siren.

Square charges 2.75% on every transaction, but that's all the merchant has to pay. So whether the merchant is taking a Visa payment, a MasterCard payment, or even an American Express payment, it's that one flat fee, with no merchant account to set up.

In short, this Starbucks deal should theoretically give Square unrivaled market exposure and boost it into the lead in mobile payments, creating a virtuous circle whereby other retailers jump on board with Square -- all of which, given this new deal, will nicely benefit the coffee giant. And according to Starbucks, more than two-thirds of the country's 27 million small businesses don't currently accept credit or debit cards because of the fees, a cumbersome application process, and extensive credit checks. Square lets merchants big or small accept credit and debit cards.

For the more philosophical angle on how the deal is a good one for Starbucks, here's what Schultz himself had to say: "Both Starbucks and Square take a similar approach when building products and running our businesses, and together we can bring the best possible payment experience to Starbucks customers."

World domination
As more and more consumers turn to their smartphones to conduct more and more of their lives, and get used to leaving their wallets at home, the Starbucks-Square partnership is bound to flourish. And Starbucks is already on the march across the planet, with a booming business in China and a growing one in India. Learn about three more U.S. companies also on their way to conquering the world in this Motley Fool special free report: "3 American Companies Set to Dominate the World." Download your copy right now.

Fool contributor John Grgurich is a regular contributor to The Motley Fool, and to Starbucks, but he holds no positions in the latte slinger. Follow John's dispatches from the front lines of capitalism on Twitter, @TMFGrgurich.

The Motley Fool owns shares of Starbucks, MasterCard, Microsoft, and Google and has created a bear call spread position in American Express. Motley Fool newsletter services have recommended buying shares of eBay, Starbucks, Visa, Google, and Microsoft,  writing covered calls on Starbucks, creating a bull call spread position in , and creating a write covered strangle position in American Express. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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