How Starbucks won mobile payments
This is a story about Starbucks, but it isn’t a recounting of its global store expansion, or even of how it came to dominate the upscale coffee market. This is a story about how Starbucks became, quietly and then all at once, the worldwide leader in mobile payments at a time when Apple, Google, and other giants of technology struggled.
When Howard Schultz returned to Starbucks as CEO in 2008 after eight years away, the chain was struggling. It had grown too fast: In the wake of the global recession, it turned out that people didn’t actually want a Starbucks on every corner.
Schultz realized that the customer experience needed a reboot. So at the annual shareholders’ meeting in March 2008, just a few months after he returned to the helm of the company, he delivered a sweeping “transformation agenda” speech. The cornerstone of the whole enterprise was a rewards card, which would be tied to a regular gift card.
At the time, wedding the rewards to a prepaid gift card was unusual. But Starbucks’ new gift card program was already a little quirky: Empirical research showed that a majority of the rewards and gift cards were used within a year of their purchase—but by the original purchaser, as if to enforce his or her own coffee budget. Now, when customers used their registered cards, they earned free soy milk, breve milk, syrups, refills, and more.
But in keeping, perhaps, with Starbucks’ reputation as a place with options, the company didn’t settle on just one program. Some months later, Starbucks also launched a gold card, wherein customers paid a $25 annual fee to receive 10 percent off all purchases. A year after that came a hybrid, which stuck. (It stuck for a while, at least: Starbucks announced in February another iteration of the program.) When a member of the Starbucks program used a prepaid card connected to their mobile device, they’d earn “stars,” which would in turn translate to certain status tiers, like Gold.
“Consumers are presented a clear message: ‘The more you come in to Starbucks, the more we’ll reward you.’ The simplicity of this program encourages participation,” Hanover Research wrote in a review of the program.
Yet the simplicity of this message was also divisive.
“If you want to be part of the new rewards program, you’ll have to get a card. This is a pain. Wallets are thick enough already,” Ron Lieber wrote in The New York Times in June 2008, when the first card launched, perhaps portending the program’s next innovation.
THE TECHNOLOGY
In the end—and even in the beginning—requiring participants to load up their cards to receive rewards (which could have hindered adoption) made an enormous difference. Starbucks could account for the revenue when the customer loads the card, as well as deter customers from using credit cards—sparing Starbucks from expensive interchange fees.
It wasn’t long before Schultz and his team began dreaming up ways to put the gift card at the center of even more transactions—and of people’s lives. And so the Starbucks Card Mobile app was born in 2009.
Not typically one to outsource, Starbucks nevertheless contracted mFoundry Inc., based in Larkspur, Calif., to help its internal team develop the app for iOS, Android, and Blackberry. The lead developer was Benjamin Vigier, who now works on mobile payments at Apple.
The team envisioned customers being able to pay by displaying a 2D bar code from the app, which would be read by a scanner connected to the POS. According to American Banker, mFoundry provided the client-side solution, server-based wallet, and other technology in a private cloud that integrates into Starbucks’ back-end processing system.
Starbucks’ approach shifted the technology burden from the app to the POS system and barcode reader—which meant that the functionality of the wallet could be pretty simple. It needed only to display a custom 2D barcode. It even fit the coffee company’s existing POS.
This stood in contrast to the typical focus of mobile payment innovations at the time, which required massive hardware changes. Starbucks’ reliance on a software-based barcode system meant it could more easily be rolled out.
"Barcode is more of a software type deployment, where [near-field communication] is a hardware solution, so barcode mobile is easier to implement," Beth Robertson, director of payments research for Javelin, told American Banker in 2011. "But NFC seems to be the direction of most of the trials, because NFC can support a wider array of functionality."
THE ROLLOUT
The rollout of the Starbucks Card Mobile app was gradual, a strategy the Starbucks leadership team said was meant to put the customer first.
"We're really working on getting that [customer] feedback before we put any long-term plans in future markets," Stephen Gillett, the company’s senior vice president of digital ventures, told CNET in 2009. "This really is a consumer-driven app in so many ways. This is an app that we need the customer experience to have a very strong influence on."
The Seattle-based coffee chain debuted the pilot in September 2009 to 16 West Coast stores. In April 2010, it expanded to locations in Target stores, and expanded to 300 stores in and around New York City six months after that. By January 2011, Starbucks had rolled out support for mobile payments at some 6,800 company-operated stores in the U.S.
By 2015, the coffee chain was processing more than nine million mobile app payments per week.
So while the broader tech industry has spent years puzzling over how to get consumers to reliably use a mobile wallet, it was a firmly non-technical company that managed to take it mainstream — and keep it there. In late 2016, seven years after its mobile app debit, Starbucks reported having 12 million Starbucks Rewards members and 8 million customers who check out on their phones, making it the retailer with the largest mobile ecosystem in the world.
THE FUTURE
It's clear that innovation is an integral aspect of Starbucks' ethos, as the company didn't stop with winning the mobile payment game.
A key part of the company's most recent five-year plan involves a new app feature called My Starbucks Barista, which uses artificial intelligence and voice computing to allow users to place their orders via voice command or messaging interface. Once the order's been placed, the virtual assistant can confirm pickup location as well as facilitate payment.
In addition, consumers will also soon be able to take advantage of Amazon Alexa's "Starbucks Reorder Skill", which leverages the Alexa platform to further simplify the ordering process. In its current iteration, Alexa can only order a user's "usual" items — likely a strategic move to serve the company's most loyal customers — but who's to know what Starbucks has up its sleeve next.