Starbucks Corp.’s recent announcement that its consumers would be able to pay for coffee with their smartphones in U.S. coffee shops wasn’t in itself a revolutionary innovation for the payment industry. However, it has the potential to push forward m-commerce in the U.S. like no program before it has since this effort is being led by the major national retailer, Starbucks, and is now the country’s largest single mobile program.

How the Starbucks program works

The announcement from the coffee company behemoth in January that customers won’t have to fumble for their wallets to pay for their latte is an expansion of a limited trial that started in September 2009 in 16 stores on the West Coast and later expanded in April 2010 to about 1,000 locations within Target Corp. It is now available in all 6,800 U.S. company-operated stores and 1,000 Target locations. The mobile payments system piggybacks Starbucks’ recent success with reloadable gift cards. The company estimates that one in five transactions is currently made with a Starbucks Cards. Users added more than $1.5 billion on the cards last year, a 21 percent increase over 2009, driven in part by the My Starbucks Rewards program that provides benefits to customers who pay with a registered Starbucks Card at participating stores. The program continues to experience rapid growth. In its most recent quarter customers put $700 million on pre-paid cards, up 39% from the year-earlier period. Starbucks hopes the mobile payment feature will give customers yet another reason to use their Starbucks Card for payment.

Starbucks anticipates mobile payment will be a draw for customers looking to experience the speed, ease and convenience of paying with their mobile phone. The mobile phone application also can act as a loyalty card, further enhancing the perceptions of value and encouraging impulse buying. The company also believes that its customer base carries their mobile phones more often than a wallet or purse and sees this program as an opportunity to build stronger brand loyalty with these particular consumers. Starbucks estimates that more than a third of its U.S. consumers use smartphones. Between iPhone and BlackBerry phone users, the Starbucks app can reach 71% of its smart phone-using customers, the coffee company says.

To use mobile payment, customers download the free Starbucks Card Mobile App for select BlackBerry smartphones, iPhone or iPod touch mobile devices. Customers pay with their smartphone by holding their mobile device in front of a scanner on the countertop and scan the Starbucks Card Mobile App’s on-screen barcode to make a purchase. The app can be loaded with funds from the user’s PayPal or credit or debit card accounts . In addition to the mobile payment capability, the app allows customers to manage their Starbucks Card account, check their card balance, reload their card, check their My Starbucks Rewards status and find a nearby Starbucks store with the store locator feature. The application has received some early criticism, though, because a potential thief could just take a picture of the barcode and begin using the card as their own since the barcode does not change on each transaction like some other mobile applications. If customers register the card with Starbucks, however, the company will freeze the account and replace the amount taken in situations where the card might be lost or stolen.

U.S. Has Been a Slow Adopter of Mobile Payments

While m-commerce remains in its infancy stage in the U.S., shoppers have been able to pay with their mobile phone for certain purchases in other markets like Japan and India for a number of years. In contrast, development toward the mobile wallet has been slow in the U.S. due to technology and infrastructure slowdowns. Almost no major cellphone up until now shipped with a microchip that would allow for secure touch-to-pay at registers. Even with the chips, retailers would have to install readers at every point of purchase to accept those mobile phones. Add to that the tug of war between carriers, credit card companies and merchants over who should benefit from the mobile transaction fees.

The push toward m-commerce in the U.S. has been led largely by retailers that have introduced mobile payment applications within their closed-loop system. For example, quick-service restaurant chain, Chipotle Mexican Grill, introduced an application in September 2009 allowing iPhone and iPod touch users to place customized orders and pay for their burrito, tacos or salads directly from their mobile device. Fast food giant Burger King and the Lorton, Va.,-based Five Guys burger chain have both entered the mobile commerce arena by letting consumers place orders and pay for them using their iPhone. All these applications also leverage the mobile device’s GPS functionality to find the closest location to the user. Fandango, the online ticket service, also introduced in March 2010 a mobile program to enable moviegoers to order movie tickets online, which allow them to bypass the box office windows and kiosks, opting instead to take their mobile phones with the on-screen barcode straight to the theatre ticket-taker.

Unlike these existing m-commerce applications, the m-commerce program at Starbucks has the potential to further lessen people’s reliance on making purchases with cash and credit cards and could help teach people about the benefits of paying with their phone. In addition, the Starbucks application has the potential to have a wider reach than these previous mobile apps. Starbucks is a major nationally recognized brand and the coffee retailer also has one of the most loyal consumer bases of any restaurant. But perhaps, most importantly, Starbucks is the type of retailer that consumers may frequent multiple times a week, if not daily. Due to the nature of its product line, this will lead to a high utilization amongst consumers and likely change the way coffee drinkers – at the very least — view payments. Starbucks is truly one of those unique retailers with the ability to alter the mobile payment landscape.


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