Square’s Starbucks Deal Puts It At The Epicenter Of ‘Seismic Change’ Away From Cash

The $25 million funding and sales deal announced late yesterday between mobile payments startup Square and coffee giant Starbucks is big, but it is only the tip of the iceberg for what the implications will be for Square and for mobile payments in general.

The deal formally covers 7,000 U.S. Starbucks stores, where Starbucks says customers will have “another way to enjoy a quick and seamless payment experience” at the coffee houses, alongside Starbucks’ existing mobile app, which also lets users pay without cards or cash and has seen some 60 million transactions to date.

But however big that already is, the Starbucks deal could mean more.

It potentially gives Square, which has 2 million businesses and individuals using it worldwide, a partner on which to piggy back into international markets. And a big back it is: Starbucks has nearly 20,000 stores worldwide today. Around 12,000 of them are in the U.S. But growth is happening just as much outside the home market as inside it: in Q2 earnings from the end of July Starbucks noted that it had plans to grow that by 1,200 stores in fiscal year 2013: 600 in the U.S., 500 in China and 100 in EMEA.

The “Squarebucks” deal gives rise to questions of what is going to happen with all of the other players in this space. Since Square launched in 2009, a number of companies have cropped up offering similar products to enable card-based payments. In the U.S., among the bigger plays are Sail from Verifone; Here from PayPal; and GoPayment from Intuit.

The connection between those existing and Square is very strong indeed: we heard from one reliable source that in fact PayPal’s development of Here was directly a result of the company wanting to develop a product like Square’s. “The whole ethos at PayPal right now is to bring in as many technologies for processing as possible,” I was told. When PayPal saw what Square was doing, it created Here, and card.io fits in perfectly with this plan.

Over in Europe, there has been a period of free-form growth with none of those U.S. players yet to set up shop. There are several players, but some of the more active include iZettle from Sweden, mPowa in the UK (which had its own, slightly absurd run-in with Square) and PayLeven from the Samwer Brothers. All of these have been developing and promoting their own point-of-sale, card reading mobile accessories, with much promise but still small numbers for roll-outs.

There is still room for consolidation among all of these — either in the form of acquisitions or just falling by the wayside for lack of scale.

But you know what? It may not matter. That’s because this partnership will let Starbucks customers use “Pay with Square”, its mobile app that circumvents the use of cards altogether. That means this partnership catapults Square into a place where its cardless app could get used significantly more than the company’s phone attachment.

As Howard Schultz, the CEO of Starbucks, noted earlier today on CBS, “The consumer is going through a seismic change in which cash is eventually going to be obsolete.”

And given that Pay with Square is software based it could end up linking up with whatever solution finally becomes the de facto hardware standard, whether it involves NFC chips, QR Codes or barcodes, mobile card-reading dongles or something else completely different — or even if it remains focused on cards, which are likely going to remain for a long time to come.

Pay with Square lets the company forge relationships directly with consumers rather than with merchants — and that means that whatever happens under the hood — whether it is about NFC or QR, or even if it decides to lift off the credit card platform to a different kind of financial instrument altogether — that customer relationship will remain, something that could be welcomed by a population that doesn’t really care about which technology does what. Indeed, as Jack Dorsey told Charlie Rose this morning on CBS: “My fascination has always been simplifying complexities.”

As for Square itself, there will almost certainly be more news coming in its wake, since the company notes in the release that the $25 million Starbucks investment is “part of the company’s Series D financing round”. Other backers in the Series D, which in total is reportedly in the $200 million range, include Rizvi Traverse.

And with money, there are likely to be more product/partnership announcements to come. That’s because Square is, like Dorsey’s other company Twitter, very much built in the mold of a modern startup. Although Square has yet to release APIs like its European rival iZettle, there is still an emphasis on ecosystems and linking up with other players in this space to create compelling offers for users. There are so many players in the market right now that you can see already dancing around mobile payments — Groupon, Foursquare, Facebook, Amazon, naming four not yet in the retail space — that Square may be spoiled for choice for partners.

There there is just one small thing left to conquer for Square: actually getting the masses to think of pulling out their phones instead of their wallets to set the wheels in motion.