Why Square Coming to Starbucks Is a Big Deal

The mobile payments industry went mainstream, as Starbucks and Square signed a deal to bring Square's service to Starbucks 7,000 locations. This could change the shape of the payments industry forever.

The deal allows all Pay With Square users to find their closest Starbucks in the Square Directory using either their iPhone or Android device. Not only does Square get $25 million in a Series D financing (reportedly valuing the company at $3.25 billion), but Starbucks CEO Howard Schultz is joining Square’s board.

Square’s CEO Jack Dorsey (who also co-founded Twitter), was notably excited about the deal.

“We’re proud that Starbucks chose Square, as we share the value of always putting customers first,” Dorsey said in the press release. “More than 2 million individuals and businesses can already use Square. This partnership will accelerate our ability to provide them with the tools they need to grow their business and thrive in today's economy.”

Companies like Google, eBay (via PayPal), Visa, and MasterCard have brought their offerings to the customer with varying degrees of success (PayPal being the most well-known). But this deal has a huge impact on the industry,said Brian Sozzi, chief equities analyst at NBG Productions and Real Money contributor. “I think it’s [Starbucks] trying to localize themselves. It’s a great thing to be able to pay with the thing in your pocket. This transforms the industry.”

Starbucks did $3.3 billion in revenue in the third quarter, with a healthy portion of those transactions being credit and debit-card sales. Starbucks does not break down the percentage of payments.

Starbucks has been at the forefront of the mobile payment revolution with its own mobile payment app, but this puts the mobile payments industry on another level.

According to data from Ernst & Young, mobile payments are expected to be big business, with the market reaching a massive $245 billion by 2014. This deal with Starbucks puts Square in a position to capture a significant portion of that market, as the shift in payment methods continues to move away from credit cards, debit cards, and cash to smartphones, tablets, and other mobile devices.

This deal might even impact Apple, which announced its Passbook app at its Worldwide Developer Conference earlier this year, showcasing Starbucks as part of the presentation. An Apple spokesman could not be immediately reached for comment.

In an email obtained by TechCrunch, Dorsey wrote, “By embracing Square, Starbucks has validated these ideas as powerful tools — not just for small businesses, but for smart businesses.”

With this deal, the mobile payments industry might be coming to a consensus on how it is used, Sterne Agee analyst Greg Smith wrote in a recent research report. He said “the payment itself is becoming commoditized; it is therefore the functionality you wrap around the payment or embed in the mobile wallet that will differentiate the winners from the losers.”

It looks like Square and Starbucks is poised to be in the winners column.

—By TheStreet.com’s Chris Ciaccia

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