#313 2011 · Starbucks · Food servicefloat
Starbucks became a bank that happens to sell coffee
the problem
Cards loaded long before the coffee poured
background
By the early 2000s Starbucks was opening thousands of stores a year and needed a way to speed up the register line and lock in repeat visits without discounting the coffee itself. Cash and credit cards both had friction: cash meant counting change, and card-network swipe fees ate margin on a $4 transaction.
The obvious fixes were the ones every retailer already used — punch cards for a free tenth coffee, or straight loyalty discounts. Neither generated cash up front, and discounts just gave away margin. Starbucks instead let customers preload money onto a physical card, later a phone screen, turning a loyalty gimmick into a prepayment mechanism nobody was pricing as a financial product.
the move
Starbucks Card launched in November 2001 as a reloadable stored-value card; the mobile payment app followed on January 19, 2011. Customers preload cash before ordering anything, and Starbucks books the load as a liability it holds — and can invest — until the drink is redeemed.
the payoff
By 2016, press coverage citing Starbucks' own disclosures put the outstanding stored-value balance at roughly $1.2 billion — reportedly more than the deposits held by Customers Bank ($780 million) or Green Dot ($560 million) at the time. The figure has reportedly grown further in later fiscal years; Starbucks discloses it as a 'stored value card liability' on its balance sheet and earns interest income on the cash while it sits unredeemed, plus breakage income on balances that are never spent.
what came after
The stored-value/loyalty-app model became a template other chains and brands copied for their own gift-card and rewards programs, and the framing of Starbucks as holding more prepaid cash than many small banks has been repeated for years in financial press and fintech commentary as shorthand for a retailer accidentally running a deposit-taking business.
filed under
references
- [1]Starbucks Holds More Cash Than Many Banks [Infographic]Forbes, 2016forbes.com
- [2]Starbucks Cards Hold So Much Money The Company Could Be A Midsize BankHuffPost, 2016huffpost.com