Starbucks Aims for Your Digital Wallet

There's a cool factor for shoppers, but merchants would gain most from mobile smartphone payments.

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Starbucks has changed the way millions of Americans drink coffee. Now it wants to change the way they pay for it—and perhaps for a lot of other things, as well.

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Starting this fall, about 7,000 Starbucks stores will allow customers to pay with a smartphone app provided by Square, a startup run by Twitter co-founder Jack Dorsey. Instead of taking out cash or a credit card, you'd pull out your smartphone and let the clerk scan a barcode. Square will then charge a credit card you've linked to your account.

Forthcoming technology will make it even simpler: Your phone will automatically communicate with the Starbucks system when you've entered the store, and your info, including a photograph, will pop up on a screen behind the counter. The clerk will handle the rest, while you leave your phone in your pocket.

Starbucks is one of the biggest retailers yet to embrace the "digital wallet," and tech blogs are gleefully heralding the death of cash. But such pronouncements may be premature. The digital wallet still faces several hurdles, and it starts with the consumer.

While smartphones are obviously becoming ubiquitous, it's not a given that masses of shoppers will use them to pay for things, since using cash or credit cards is well-established and pretty effortless.

"Neither consumers nor merchants are struggling with the swipe mechanism of traditional card payments, leading many to wonder if mobile digital wallets are a solution in search of a problem," Forrester Research analyst Denee Carrington wrote in a recent report.

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As big players like Google, Microsoft, PayPal, and several banks compete with startups such as Square and LevelUp, the digital wallet could become even more cluttered than a conventional one. Most merchants that take credit cards have a card reader that works with just about any form of plastic shoppers carry. But so far, most digital payment systems are proprietary, which means you can use Square's app to pay only if the merchant has signed up for Square's service. Same with most other forms of mobile payment. So far, merchants have been reluctant to commit to one proprietary system over the others—or to embrace all of them. And more complexity isn't something shoppers are clamoring for, either.

There's also bound to be pushback from goliaths like Visa, Mastercard, and American Express, which spend millions to make sure they remain "top of wallet." Yet Square and other mobile payment systems push them further back in the "purchase journey," as Forrester calls it. So card issuers are coming out with their own apps and other technology, giving shoppers more choices than they've asked for. So are cellular providers like AT&T, Verizon Wireless, and T-Mobile, which have formed a mobile-payment venture called Isis. Everybody, it seems, wants to control your digital wallet.

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Here's why: data. Whoever handles your payments can gather info on your shopping habits, which is prized by merchants. Loyalty cards were a start in gathering personalized shopping data, but smartphones allow something else: interaction.

If Starbucks, for instance, knows via the Square app that you just walked into its store, it can send a coupon or promotion straight to your phone, so it reaches you at the very moment you happen to be contemplating coffee. And if you get to the counter and the clerk knows you're who you are—even if the two of you have never met—it might make you feel like a regular, more likely to return. The Norms of the world no longer need to stop in at Cheers to find a place where everybody knows their name.

The digital wallet offers additional appeal for merchants. Square's technology allows customers to ultimately pay by credit card, but Square handles the processing instead of the merchant. For many retailers, that will cut down on the "interchange" fees they pay to card issuers, which can cut into profits, especially for retailers with low margins.

That's one reason a lot of small businesses—especially one-person operations or Mom and Pop outfits—don't even take credit cards. But Square's system can be used almost like a cash register that plugs into a smartphone or tablet device, allowing small businesses to accept a wider range of payments and even attract new customers.

One thing that seems certain is that mobile devices will become a more active participant in many consumers' shopping decisions. Forrester reports that about 20 percent of shoppers already use a smartphone or other mobile device while in a store to research products, compare prices with online offerings (which Amazon encourages) or look for coupons. Young shoppers are especially paired with their phones, so they may be the ones most receptive to the digital wallet.

Still, promising technology sometimes takes a lot longer to materialize than expected. Video-on-demand has been touted as a game-changer for 15 years, yet DVDs-by-mail and broadcast TV have proven surprisingly resilient. Facebook, which started a social-media revolution just a few years ago, is already looking like a bit of a fad. So don't retire that old leather billfold just yet. And make sure you always keep a few bucks inside, in case the network goes down at Starbucks.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.