Starbucks Is Reinventing the Role of Payments
Transactions don’t have to be just an afterthought – they can play an important supporting role.
Starbucks is generating buzz – and not just from too many Grande Macchiatos. Their $450 Steel card, which has already sold out and is now commanding jaw-dropping premiums on eBay, once again has Starbucks at the center of the conversation in payments. Is the Steel card just a novelty item? Or does it tap into something deeper that other issuers and merchants can learn from?
Of course, it’s not just Starbucks that wants to create a conversation piece. Other issuers also spend massive amounts of time and money creating cards that feel tailor-made for the holder. Special materials, colors, images, and affinity cards abound. But this route may be a red herring. Despite all the investment in custom cards, what’s lacking is a clear sense of how to win customer loyalty.
Over time, cards have woven themselves into the fabric of our culture in a far deeper way than most financial services. Their design for portability helps us carry cards everywhere that money goes. As a result, many people no longer think of credit, debit, or prepaid as a service: people view payment cards as objects, with all of the iconic power that an object has when it becomes so ubiquitous.
Of course, ubiquity can lead to commodity, and the more widely used payment cards get, the harder it is to differentiate between them. Most of us don’t think about money as a differentiated object – one five-dollar bill by definition can’t be better than another five-dollar bill. The more that a payment card becomes like a five-dollar bill, the harder it is for most people to see it as something special. Moreover, the success of the original card design has spawned imitators from grocery club cards to transit cards to hotel key cards. Some dentists even give away credit card-sized floss dispensers.
The imitation of the card’s design language has helped to commoditize payments. Rectangular plastic no longer communicates value: it’s simply a convenient size and shape for anything that we’re likely to carry in our wallets.
People represent abstract concepts with more immediate physical stand-ins. Baseball caps are powerful examples of physical symbols of abstract ideas. A black-and-silver cap isn’t just decorative. It symbolizes allegiance to the Raiders, and to the outlaw attitude that the team represents. In the same way, we use objects in our everyday lives to stand in for concepts that are too complex, or too abstract, to wholly grasp.
Payment cards, though they bear little similarity to fan paraphernalia, operate on the same principle. Plastic is a stand-in for our past credit history, our current financial situation, and our remaining credit line. The payment card represents the abstract service that networks and issuers provide.
However, the more payment cards become like the five dollar bill, the less thought we give to that service. In the same way that we don’t think about the Treasury when we pay with cash, payment cards don’t force us to think about our issuers when we swipe plastic.
As payment cards become commoditized, we’re not just devaluing the plastic card itself. Because the object is linked to the service, we’re devaluing that too. And though payment cards are essential to today’s financial world, we don’t see them as anything special. Unlike a Raiders cap, our cards don’t stand for experiences we’ve had, communities we’re part of, or beliefs we share. The only place the card explicitly links to the service is in the monthly statement. This lack of clear association between object and service makes it hard for us to connect great new payment products with our plastic rectangles – much less our lives. Some cards have started to address this issue with affinity logos of alma maters, sports teams, or charities. But even that hasn’t been enough to sustain significant customer loyalty.
Startups like Wallaby are trading on this very commoditization of credit. The Wallaby card is a loyalty card aggregator. It’s linked to its owner’s credit cards. When swiped, it automatically selects from the owner’s suite of cards, and chooses the one with the optimal rewards for that purchase. This is great for consumers. But it’s terrible for issuers. Rewards programs are designed to be profitable when they sometimes generate payback – not when folks game the system. But that’s exactly what issuers are training consumers to do, and services like Wallaby are making it easier. The explosion of mobile payments will only accelerate this trend.
So if their choice of funds carries financial consequences, why are consumers so indifferent to their payment method?
Perhaps it’s because payments – as they stand today – are an afterthought. Consumers may be loyal to what they buy, and even how they buy it, but not how they pay.
Starbucks’ over-the-top Steel card is clearly taking aim at this very problem. In making the card ultra-premium, they’re trying to make the store experience ultra-premium, too. It’s an interesting experiment, and one that’s clearly yielded some short-term gain. But ultimately, this experiment doesn’t go far enough. It doesn’t fundamentally alter the role that the card – or the payment – plays in the experience.
Starbucks’ venture with Square is actually a much smarter play. With Square, the payment isn’t an afterthought to the experience at all. Instead, the payment reinforces the “third-place” store experience. Using Square, baristas should eventually be able to see customers’ pictures on terminals and should be able to address them by name. This system increases the sense of community, belonging, and personalization that the brand works hard to create.
With the Steel card and the Square venture as initial experiments, Starbucks can now take payments even farther. In addition to supporting its in-store experience, the payment can be integrated into the business in other ways. Perhaps Starbucks can even explore new revenue models beyond transaction fees with its technology and network partners. Imagine a payment system that offered a subscription service or brewing equipment rentals. Such a system might operate on a similar revenue model on the back end, too, by tying fees to utilization, subscription growth, or other business drivers.
If Starbucks is a bellwether, then issuers and networks alike should take notice. Transactions don’t have to be just an afterthought – they can play an important supporting role for merchants. Startups are jumping on the opportunity. Now, it’s up to industry leaders to decide if they want to join in.