Starbucks Bets the Store on Mobile

If pressed to name the leading smartphone app for paying for a purchase in a store, would you say Apple Pay? PayPal? Google Wallet?

Something from Visa, MasterCard, or one of the big banks, perhaps?

No doubt you’ve guessed it’s none of the above. Starbucks has emerged as the runaway leader in mobile payments at retail stores. Twelve million active users now pay for their Frappuccino with a wave of a phone. Of the $1.6 billion spent via smartphone in U.S. stores in 2013, the company claims, a full 90 percent went to Starbucks, and most payments experts don’t doubt it.

Starbucks’s mobile wallet is actually a digital stored-value card more akin to its popular gift card. Its success—the app now accounts for 16 percent of Starbucks’s 47 million weekly transactions (up 50 percent from a year ago)—makes it both a model and a target for payment apps from other retailers and tech companies alike.

Starbucks CEO Howard Schultz has even bigger plans for mobile payments. In comments to investors in late 2014, Schultz made it clear that he views the mobile app as a linchpin of plans to keep growth perking. For one thing, the company says, it speeds payment and reduces waits in line. It also makes it easier to track rewards points, giving customers incentive to buy more at Starbucks so they can get perks such as a free drink after buying 12.

But the real attraction is in the data that the company can collect. Whoever last touches the customer at the point of sale owns a wealth of information about purchases and preferences that can be fed back into the business. Starbucks has started using purchase data to send personalized offers the way merchants do online—say, for food to complement a drink. It’s beginning to result in additional purchases. “It’s going to be the Amazon experience, inside the store,” says Ken Morris, a principal with Boston Retail Partners, which helps retailers create systems like Starbucks’s.

To get more people to use the app and join the rewards program, the company plans to add major new features in 2015. One is the ability to order and pay in advance, which launched in Portland, Oregon, in December and will expand to other cities later. And in a few markets starting in mid-2015, the app will enable customers to schedule regular delivery of individual drinks and food to offices—further expanding Starbucks’s brand beyond its own stores.

Schultz wants to push deeper into the digital realm. He’s talking to tech firms and other retailers about licensing its payment and rewards software, much the way Seattle neighbor Amazon sells its cloud computing services to other companies. Starbucks even aims to turn its stored-value cards, app, and rewards points into a broader currency usable at other retailers, creating a potential alternative to credit and debit cards.

Launched widely in January 2011, the app generates a bar code on the smartphone that can be scanned at checkout readers already installed in most stores. At the time, bar codes were pooh-poohed by tech firms already looking to a radio-based technology called near-field communication that Apple Pay now uses to send payment information. But Starbucks was looking for ease of use above all, says Chuck Davidson, who then worked for the company’s prepaid-card business (worth $1.5 billion at the time) and is now head of customer engagement at the mobile-commerce firm CardFree.

The strategy worked. Just two months later, some three million people had paid with the app. Of course, Starbucks benefited from its brand name, customers who can afford smartphones, and a daily-habit product. But Davidson and other payment experts say other features were the real key to its success. Allowing easy tracking of card balances and rewards points encouraged customers to use the app more often.

New alternatives like Apple Pay and rival retailers’ apps present challenges for Starbucks. Dunkin’ Donuts, for instance, less than a year after relaunching its mobile app with a new rewards program in January 2014, said it reached two million rewards members and 10 million app downloads.

Starbucks created the iconic mobile payment app. Now its customers know how to use their phone to pay everywhere else, too.