Checkouts Go Digital 

Starbucks leads way in embracing mobile payments

Three million smartphone users have paid for their coffee with the Starbucks Card Mobile app.

Retailers over the years have created smartphone apps to help shoppers find stores, research products and look up reviews. Now merchants are readying for a new app trend that is expected to take the industry by storm: Paying for in-store purchases via mobile devices.

Seattle-based Starbucks is leading the way by allowing customers to check out with select handheld devices, from the Blackberry to the iPhone and iPod Touch.

The retailer ran a successful pilot program in Seattle, Northern California and New York in September 2009. In January of this year, it introduced a national mobile payment program to its 6,800 U.S. company-operated locations and more than 1,000 of its stores within Target. The move was part of an effort to expand on its digital media strategy, as well as its wildly successful pre-paid Starbucks Card program. 

“Starbucks customers told us they wanted a faster, more convenient way to pay for their Starbucks purchases,” said Brady Brewer, VP of Starbucks Card and Loyalty. “Our Starbucks Card Mobile App provides them with an easy way to make purchases and manage their Starbucks Card accounts with their mobile phone.”

To pay via a mobile device, smartphone users must first download the Starbucks Card Mobile app, which links to their Starbucks card account. Similar to how a gift card would be handed over at checkout, customers show the cashier a bar code that resides within the app. After the bar code is swiped with a scanner, the transaction is complete and the app is updated in real time with a new remaining balance. 

In the first 30 days of the launch, more than 1 million mobile payments were made with the new method, and a whopping 3 million active users to date have paid for their coffee drinks and other items with the app. Starbucks chairman and CEO Howard Schultz announced at a shareholders meeting that the company has the largest mobile payment network in the United States. 

According to Richard Crone, CEO and founder of San Carlos, Calif.-based Crone Consulting LLC, most new payment types start with merchant acceptance, and mobile payment will be no exception.

“Big retailers are the sleeping giant in the mobile payments race, and there’s so much potential for growth,” Crone said. “For example, the average household has over five unused gift cards, totaling about $100. Since people rarely leave home without their phone. The Starbucks Card Mobile app is so convenient for customers. Plus, people are already using smartphones in stores, so it’s a natural progression to use them to make purchases.”

Starbucks customers loaded more than $1.5 billion on Starbucks Cards in 2010, up 21% over 2009, and according to the company, this success was driven in part by the My Starbucks Rewards program, which provides benefits to customers who pay with a registered Starbucks Card at participating stores. 

Another coffee chain is also testing a mobile payment solution. Denver, Colo.-based Dazbog Coffee — which sells gourmet specialty coffee drinks — recently launched similar technology in 16 of its 28 locations in six states: Arizona, California, Colorado, Maryland, Texas and Wyoming.

“Since the technology is still so new, getting customers to understand how easy it is to use on phones has been a challenge,” said Leo Yuffa, CEO of Dazbog. “But overall, consumers seem ready for it. Once they understand how simple it is, they love the convenience.” 

In addition, Minneapolis-based Target Corp. offers a mobile app for uploading gift cards onto mobile devices that can be used in its 1,755 U.S.-based stores. 

To avoid paying costly fees on new hardware, more retailers are looking at these software-based mobile payment methods. In order for customers to tap smartphones themselves at checkout (and not use apps), mobile providers first have to install contactless chips in the hardware of devices, and this can be as pricey as $100 to $200 for each register.

“The technology is also charged at higher card-not-present interchange rates for transactions,” Crone said. 

Starbucks seamlessly implemented the program because it already used bar code readers in stores, so the program could build off of its existing hardware. Software that doesn’t require bar code scanners will debut later this year. 

“Embracing mobile payments should be on every retailer’s radar, but it shouldn’t be rushed,” Crone said. “Merchants should take time to select the best solution for their needs.”

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