Lessons from Starbucks’ success in mobile payments

Amazingly, Starbucks has become the first U.S. chain to give mobile payments a real push toward the mainstream in the U.S.: Its year-old payment app has supported more than 26 million transactions, leading CEO Howard Schultz to claim the company is seeing a “seismic change” in consumer behavior at its stores. Retailers, developers and others looking to cash in on mobile payments should take a close look at Starbucks’ initiative to see what its success means — and what it doesn’t — for the future of the space.

More than just a payment app

Starbucks has not disclosed much more information regarding uptake, saying only that “millions” of users have downloaded the app. But it also said users loaded $500 million onto prepaid cards (both mobile and plastic) in December alone, a year-over-year increase of 23 percent — evidence that mobile is driving part of that spending. The app, which is available for iPhone and Android, is simple enough: Users preload their accounts via a credit card and pay by having their phones scanned inside the store. But the app is integrated with Starbucks’ wildly successful loyalty program, which rewards users with incentives like free drinks based on how much they spend. Users can check their balances and track their rewards on their phones. The app includes a store locator that enables users to search for nearby locations based on amenities, and it encourages caffeine hounds to share their location or beverage of choice through Facebook and Twitter.

Those features provide consumers with much more value than simply completing a cash transaction, creating an incentive to reach for their phones rather than their wallets. And the system provides benefits to Starbucks, too: In addition to creating customer stickiness (and garnering glowing headlines), it is accelerating transaction times and enabling same-store sales (SSS) growth because lines are shorter, Schultz has claimed. And it is worth noting that Starbucks has seen this traction without investing in the NFC technology that is widely viewed as crucial to the success of mobile payments in the coming years. Starbucks may eventually embrace NFC aggressively — it tinkered with the technology in a Christmastime campaign in China — but a lack of enabled handsets in the U.S. will prevent any such mobile payments systems from gaining substantial traction for at least the next several months.

Perhaps most impressive, though, is the fact that Starbucks users like the mobile payment app so much they are willing to jump through some hoops to use it. Users must download the app in the first place, and rather than automatically linking to an existing credit card account it requires users to load their Starbucks accounts to make mobile payments. New users are asked to create an account by entering their names, email addresses, street addresses and other information. All of those things make for a more difficult payment model for consumers; its success indicates that Starbucks’ users truly love the app.

Why Starbucks’ success can’t be easily replicated

But it is dangerous to read too much into Starbucks’ success or to think it could be replicated by many other players. The foundation for Starbucks’ program is its branded, stand-alone app, and users certainly won’t want to fire up individual apps for every business they visit regularly. Most retailers, then, will have to ally themselves with mobile apps, payments systems and technologies that support multiple vendors. Retailers eager to jump into the market quickly should consider PayPal, which — like Starbucks — operates a payments system that doesn’t require NFC. Those who aren’t champing at the bit should monitor the progress of Google Wallet and the carrier-backed Isis initiative, both of which lean heavily on NFC. And every retailer considering mobile payments should also keep track of a wide range of initiatives from credit card companies, social networks and others.

Starbucks in particular already had a strong loyalty program before it launched mobile payments, providing fertile soil for the high-tech offering. And its customer demographics are surely the sweet spot for mobile payments: young and middle-aged professionals with enough disposable income to regularly pay several dollars for a cup of joe.

Players looking to tap mobile payments will justifiably find plenty of encouragement in Starbucks’ successful initiative, and the company’s strategy of integrating incentives and other features with a payments system is one that should be embraced by every vendor in the space. But very few players can match Starbucks’ brand recognition or its customer demographics. Everybody else will have to find the best partners and the most appropriate payments systems to meet their objectives.

Question of the week

Which other nationwide chains are well positioned to gain quick traction in mobile payments?
Relevant Analyst
Colin Gibbs

Colin Gibbs

Mobile Curator Gigaom Network

Do you want to speak with Colin Gibbs about this topic?

Learn More
You must be logged in to post a comment.
14 Comments Subscribers to comment
  1. Universal Money Management using Phones.
    Please see the in the link below, presentation and notes on Money Through Mobile (MTM) for financial inclusion of general mass in the lower economic and social strata in developing countries.
    Link: http://wp.me/p1ZsI2-4g

  2. I primarily focus on the U.S., Abraham, but there’s no question that mobile can be even more important in emerging markets when it comes to finance. Thanks very much for the link — there’s a ton of information here, and I’m looking forward to reading it in depth.

Explore Related Topics

Latest Research

Latest Webinars

Want to conduct your own Webinar?
Learn More

Learn about our services or Contact us: Email / 800-906-8098