Starbucks as a Bank: The Genius Behind Their Financial Moves

Just hearing the name "Starbucks" may conjure up images and aromas of coffee, with the company's swanky cafes that can be found in almost every corner of the world. [3] Starbucks has grown into a global brand operating more than 33,250 stores in some 78 countries, dominating the coffee and beverage market through its fintech innovations, digital banking services, and customer engagement strategies. [3]

While initially starting as a single store offering coffee beans and coffeemakers in 1971, Starbucks has expanded into financial services like mobile payments, digital wallets, and prepaid cards to drive customer loyalty and retention. [3] This article explores how Starbucks transitioned from a coffeehouse to a fintech player, assessing if it can be considered a bank, and examining the genius behind its risk management and customer lifetime value strategies. [3]

Starbucks' Financial Services Ecosystem

Starbucks has developed a robust financial services ecosystem, leveraging digital technologies to enhance customer engagement, loyalty, and retention. [10] The Starbucks Card, a prepaid debit card, allows customers to load funds and earn rewards, fostering brand loyalty. [10] Customers can reload their cards in-store or link a payment method to their Starbucks account for online reloads or auto-reload. [10] The Starbucks app and Mobile Order & Pay feature streamline the ordering process, enabling customers to pay through the app, earn rewards, and skip the line. [10]

The Starbucks App and Mobile Order & Pay

The Starbucks app and Mobile Order & Pay feature revolutionize the coffee-buying experience. [10] Customers can place orders in advance, pay through the app, and pick up their orders without waiting in line. [10] This convenience enhances customer satisfaction and encourages repeat business. [10]

Starbucks Rewards Loyalty Program

The Starbucks Rewards program incentivizes customers to earn "Stars" with every purchase, redeemable for free food, drinks, and other rewards. [7] Customers can join the program, create an account, and earn Stars regardless of their payment method. [7] This program fosters customer loyalty and encourages frequent visits. [7]

Starbucks Card and Prepaid Debit Cards

The Starbucks Card is a prepaid debit card that customers can load with funds and use for purchases at Starbucks stores. [10] Customers can earn Stars twice as fast by preloading their Starbucks Card, incentivizing its use. [10] The card also allows for consolidating balances from multiple cards, enhancing convenience. [7]

From Coffeehouse to Fintech Player

Evolution of Starbucks' Financial Services

Starbucks formally started its fintech journey back in 2001 with the introduction of the Starbucks Card, a program that allows users to preload money into an account for later purchases. [13] A few years later, the company launched its Starbucks Card rewards program. [13] In 2009, Starbucks consolidated the two concepts to form My Starbucks Rewards and launched the Starbucks Card Mobile App, a mobile payment platform that enables users to load money, pay for purchases, check balances, and view transactions. [13] This app aimed to improve convenience, user experience, and provide data to understand customer preferences and behaviors for personalized rewards and retention. [13]

From 2009 to 2015, Starbucks focused on expanding its digital payment capabilities and achieving a frictionless payment experience through partnerships with banks, payment networks, and fintech companies to enable contactless, mobile, and online payments, building customer loyalty. [13] The company's latest initiative, Starbucks Odyssey, seeks to connect with customers in new ways by providing immersive experiences both physically and digitally. [13]

Benefits of Embedded Finance for Starbucks

Starbucks exemplifies how embedded finance can benefit an enterprise organization through its smart use of financial products and a robust customer rewards and loyalty program. [12] [15] The company has full visibility into customer profiles, including preferences, order history, visit frequency, and rewards redemption, driving customer retention and lifetime value. [12] [15]

Starbucks has implemented closed-loop cards, which are stored-value cards usable only at Starbucks stores. [12] [15] Customers preload their virtual wallets and gift cards, earning double rewards while Starbucks avoids transaction fees. [12] [15] These preloaded funds act as interest-free lending for the company, with fewer regulatory requirements since they cannot be redeemed for cash or insured. [12] [15]

Starbucks customers have accumulated a total unspent balance of $1.6 billion on the company's prepaid cards. [12] [15] Starbucks also gains $118 million in revenue from unused gift cards and loyalty credits, keeping all preloaded funds that go unspent over time. [12] [15] To put this in context, 85% of U.S. banks have less than $1 billion in assets. [12] [15]

A natural progression could be offering open-loop cards, allowing customers to use a Starbucks-branded debit card for any purchase while earning rewards. [12] [15] This would subject Starbucks to new regulatory requirements and the need for an embedded finance partner with full security and compliance coverage. [12] [15] However, it would grant Starbucks the ability to capture interchange fees from its 31+ million mobile payment app users and optimize customer experiences through next-level personalization. [12] [15]

Is Starbucks a Bank?

Just like how a bank collects cash deposits from its customers, Starbucks collects large amounts of cash from its members through its loyalty program. [17] Interestingly, this amount is greater than the cash held by some banks - in 2016, Starbucks held $1.2 billion in customer deposits, higher than banks like Customers Bank and Green Dot which held $0.78 billion and $0.56 billion respectively. [17] [20]

Similarities to Traditional Banking

However, unlike a bank which needs to pay interest on customer deposits, Starbucks does not. [17] [20] As such, Starbucks members effectively provide the company with a $1.7-billion loan at zero percent interest. [17] [20] Additionally, Starbucks earns a profit from breakage — the amount that is unused from gift cards every year, which amounted to around $164.5 million in 2021 or around 10% of all stored value balances. [17] [20] So not only does Starbucks get an 'interest-free loan' from its members, but it also earns a roughly 10% return based on breakage! [17] [20]

Differences from Traditional Banking

What's even better for Starbucks is that as opposed to a bank where customers can withdraw money anytime, Starbucks members can only withdraw coffee. [17] [20] This essentially locks in customers the moment they transfer funds into their Starbucks Rewards account, providing guaranteed revenue for Starbucks. [17] [20] Legally, Starbucks is not a bank, but it holds more assets than 85% of U.S. banks. [18] This unique position allows Starbucks to operate without the regulations that traditional banks face, making it a disruptive force in the financial sector. [18]

Potential Future Developments

Starbucks can use the money deposited into customer accounts however it likes, from investing in the market to expanding its store network. [18] This is essentially free money for the company. [18] With its financial strength and customer loyalty, Starbucks has the potential to create its own currency or mobile payment system, further disrupting the financial sector. [18] That said, Starbucks hasn't mentioned any ambitious plans to utilize these funds and has largely used it for working capital, which leaves a lot of untapped potential for the company. [17] [20]

Conclusion

In today's rapidly evolving business landscape, Starbucks stands out as a pioneer, blurring the lines between traditional industries and redefining the boundaries of what a company can achieve. Its fintech innovations and financial services ecosystem have transformed it from a mere coffeehouse chain into a disruptive force in the banking sector. The company's ability to leverage customer data, cultivate loyalty through rewards programs, and utilize prepaid funds as interest-free loans showcases its strategic genius.

While Starbucks may not legally be classified as a bank, its financial prowess and customer engagement strategies have allowed it to accumulate assets rivaling those of traditional banking institutions. As we witness the continued convergence of industries, it will be fascinating to observe how Starbucks capitalizes on its unique position. We encourage you to share your thoughts on Starbucks's banking potential and to subscribe for more intriguing insights.

FAQs

1. How does Starbucks function similarly to a bank?

Starbucks operates in a way that mirrors some banking functions due to its highly successful loyalty program. Customers often preload money onto their Starbucks cards, which the company can then use for various business developments. This arrangement allows Starbucks to benefit from what are essentially interest-free loans from its customers.

2. If Starbucks were considered a bank, how would it rank in size in the U.S.?

If Starbucks were to be classified as a bank, it would be the 385th largest bank in the United States. As of the fourth quarter of 2021, Starbucks had approximately $2.4 billion in customer funds loaded onto its app, akin to customer deposits in a banking scenario.

3. What are the potential benefits of a partnership between Starbucks and Bank of America for both entities and their customers?

A partnership between Starbucks and Bank of America could be mutually beneficial. Bank of America cardholders would have the opportunity to earn an additional 2% cash back and receive 1 Star for every $2 spent at Starbucks when they link their eligible card with their Starbucks Rewards account. This collaboration enhances rewards for customers while potentially increasing customer loyalty and spending.

4. Is Starbucks subject to the same regulatory oversight as banks?

No, Starbucks is not regulated as a bank nor does it face the same level of regulatory scrutiny. Despite this, the amount of money customers load onto the Starbucks App is significant. If Starbucks were a bank, its cash reserves would rank it fifth in the U.S., following major entities like PayPal, American Express, SunTrust, and SVB.

References

[1] - https://stories.starbucks.com/press/2022/starbucks-enters-new-era-of-growth-driven-by-an-unparalleled-reinvention-plan/

[2] - https://www.researchgate.net/publication/370572161_Analysis_of_Starbucks'_Financial_Strategy_and_Operational_Strategy

[3] - https://www.investopedia.com/articles/markets/050616/starbucks-stock-capital-structure-analysis.asp

[4] - https://investor.starbucks.com/ir-home/default.aspx

[5] - https://stories.starbucks.com/stories/2020/a-how-to-guide-for-digital-ordering-at-starbucks/

[6] - https://www.reddit.com/r/starbucks/comments/gnx4ml/can_someone_please_explain_how_mobile_orders_work/

[7] - https://www.starbucks.com/rewards

[8] - https://stories.starbucks.com/press/2022/top-reasons-to-join-starbucks-rewards-2/

[9] - https://stories.starbucks.com/press/2018/starbucks-and-chase-introduce-starbucks-rewards-visa-prepaid-card/

[10] - https://www.starbucks.com/terms/manage-gift-cards/

[11] - https://stories.starbucks.com/uploads/2019/01/AboutUs-Company-Timeline-1.6.21-FINAL.pdf