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Has Starbucks Kicked Off the Mobile Payments Revolution?

by on August 15, 2012

Has Starbucks Started the Mobile Payments Revolution?

The mobile payments revolution appears to have finally begun, and the harbinger is none other than everyone’s favorite franchised coffee shop. This week, Starbucks officially announced that it will be forming a new partnership with Square, the mobile transaction platform. The historic move gives the mobile payments industry a real path into mainstream retail, and now that it’s finally happening, you might as well kiss your plastic credit cards goodbye.

This revolution has been a long time coming. Since 2004, experts have been predicting that mobile payments would eventually take over the market. In 2006, PayPal reinforced this belief when it released its wildly popular smartphone app. Though the app simply allowed users to use standard PayPal services from their phones, it revealed a massive demand for fully mobile payment platforms and created a market that is estimated to be valued at more than $600 billion globally in 2013.

However, up until now the growth of the industry has been stymied, largely by a lack of organization. To create a mobile payments system capable of rivaling the current system of credit and debit cards, three elements must be present: an application that can safely store financial information on a smartphone, a smartphone that can use near-field communications to securely transmit data to a merchant and a payment processing hub that can receive and process those communications. Making all three of these elements function together will require the cooperation of many different players, including banks, credit card companies, merchants, customers, phone service providers and phone manufacturers.

Needless to say, the going has been tough – but it has at least been going. Google, PayPal, Sprint, Microsoft and Isis (a coalition consisting of AT&T, T-Mobile and Verizon) have all come out with mobile wallets capable of storing and sending funds through smartphones. Additionally, Apple, Samsung and Nokia have released smartphones with NFC chips capable of wirelessly handling those transactions. The only puzzle piece that’s been missing? A processing system that’s powerful and safe enough to meet the standards of corporate retailers.

And that’s where the Square-Starbucks partnership comes into play. Before this, the only mobile payment hubs to make it into national retail were the Paypal machines installed in 1,976 Home Depot stores this March – and they’re still in the test phase. Starbucks, on the other hand, is diving in headfirst. The company is investing $25 million into Square and will be installing mobile payment machines in 7,000 stores nationwide with the expectation that even more stores will adopt the technology within the year. This means that it’s basically on like Donkey Kong. Now that one major retailer has fully embraced mobile payments, it’s only a matter of time before others follow suit.

Mobile payment systems should also appeal to the 66% of America’s 27 million small businesses that currently refuse to accept credit and debit cards because of the expensive processing fees associated with such transactions. Square hasn’t released a fee schedule for mobile payments yet, but at the moment it only charges a 2.75% flat fee for any transaction of any size. It’s reasonable to expect that smart phone transactions shouldn’t be much higher.

Now, it’s still going to be some time before credit cards are rendered totally obsolete. The technology driving mobile payments is still new, and there are more than a few kinks that need to be worked out before the industry shifts into high gear. The security of near-field communications, for instance, is proving to be especially problematic. At the moment, it’s incredibly easy for hackers to manipulate the NFC chips in smart phones and thereby invade the phone’s operating system. This will need to be addressed before the technology is universally adopted.

No matter how you look at it, though, the Starbucks-Square partnership is still a major step forward for all parties involved. There will be growing pains as more and more stores adopt the technology, yes, but they won’t be severe enough to kill an industry eight years in the making. What matters now is that the door to retail is finally open for the mobile payment platforms. And that, for sure, is a victory worth celebrating.

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