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Whole Foods Takes a Page Out of Starbucks' Playbook

Whole Foods (NASDAQ: WFM  ) followed in Starbucks'  (NASDAQ: SBUX  ) footsteps this week, after the company announced a new partnership with Square, a digital payments processor. Square first entered the public spotlight in 2012 when it inked a deal with Starbucks and rolled out its Square mobile payments system in 7,000 Starbucks locations throughout the United States. Starbucks also invested a cool $25 million in Square at the time. Now, Whole Foods wants in on the action.

Source: Square.

With traditional credit card companies like MasterCard and Visa gradually raising transaction fees, it makes sense that retailers are turning to alternative payments services. Not only does Square make shopping more convenient for customers, but it also helps retailers boost sales. Consider this: As payments become easier and faster to execute, a customer is less likely to notice how much they've spent on a specific purchase.

A promising partnership for both parties
Unlike Square's arrangement with Starbucks, Whole Foods' customers won't be able to use Square to make purchases at the main checkout. Instead, shoppers will be able to pay at food venues within select Whole Foods locations using Square Stand and Square Register. You could, for example, buy a sandwich at a Whole Foods deli counter or purchase something from their juice bar or beer and wine bars using Square.

"Whole Foods Market and Square share a focus on supporting local sellers and creating amazing shopping experiences," explained Jack Dorsey, co-founder and CEO of Square. This deal comes at an important time for the mobile payments company, as Square is reportedly hoping to go public as soon as this year, according to The Wall Street Journal. Moreover, having an additional national brand on its client list will lend another layer of credibility to Square as it sets up an initial public offering.

Nevertheless, Square faces tough competition from eBay's (NASDAQ: EBAY  ) Paypal. eBay's payments business currently dominates the digital commerce space. In fact, Paypal surpassed $20 billion in mobile transaction volume in 2013. Paypal's mobile service charges sellers a 2.7% transaction fee per swipe, whereas Square takes a 2.75% fee from each transaction. 

Source: Square.

For Whole Foods, this partnership creates an opportunity for the healthy grocery chain in the burgeoning mobile payments industry, which is set to exceed $90 billion by 2017, according to Forrester Research. Seven Whole Foods venues are currently running Square Stand, with more stores coming online in the months ahead. The company said that several of its locations will serve as "lab stores" where Whole Foods and Square can test new innovations, though Whole Foods hasn't given a set number of locations that will offer the service.

Last year, Whole Foods pulled in $12.9 billion in annual sales, up 10% from the year-ago period. Ultimately, collaborating with Whole Foods will allow Square to reach more customers and expand its payments services.

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Tamara Rutter

I've been an analytical writer for The Motley Fool since 2011. I cover the sectors of Consumer Goods, Technology, and Industrials. Connect with me on Twitter using the handle, @TamaraRutter -- I'd love to hear from you!

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