Starbucks and Square: Here’s Our Digital Wallet Strategy

Already leading the mobile payment charge with its own app, Starbucks (NASDAQ:SBUX) is teaming up with mobile payment processor Square in 7,000 stores to see if it can make our dreams of effortless latte-acquisition a reality.

Square was previously valued at $3.25 billion, and as part of the new deal Starbucks is taking part in its Series D financing round with a $25 million contribution. That’s a pretty penny in a good looking bucket. On top of the cash, Starbuck’s CEO Howard Shultz is joining Square’s board of directors, putting Twitter co-founder and Square CEO Jack Dorsey and Howard Shultz at the same table for a powerhouse team.

“We’re proud that Starbucks chose Square,” says Dorsey. “More than 2 million individuals and business 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.”

The hope is that with a giant like Starbucks on board, Square will become the standard in mobile payment processing. Square hopes to help liberate small and large businesses alike from the sometimes murky waters of traditional credit and debit transactions. Currently, it competes against Google (NASDAQ:GOOG), eBay (NASDAQ:EBAY) via PayPal, Visa (NYSE:V), and MasterCard (NYSE:MA) which already have mobile payment features, but customer adoption has been tentative.

Earlier in the year, Apple (NASDAQ:AAPL) used Starbucks as an example in their Passbook presentation, which would allow users to redeem gift cards and coupons from their iPhones. But with an existing mobile payment app and Shultz on the Square board, Passbook might not find the biggest seat when the music stops.

With about $6 billion in transactions processed annually, Square’s biggest competitor is eBay’s PayPal, which expects its processing volume to reach $10 billion this year. With $3.3 billion in revenue in the third quarter, Starbucks (which does not breakdown the percentage of payment types) could quickly help close that gap. Square, like PayPal, makes a profit by taking 2.75 percent off each transaction processed.

Square’s technology allows U.S. businesses to process debit and credit payments through the iPhone, iPad, or devices running Android. A Square user’s phone would automatically ping the store when they enter, and the cashier would verify identity with a photo that pops up on their screen, eliminating the need to even touch the phone.

With Ernst & Young expecting the mobile payments market to reach $245 billion by 2014, the fight for market share will be intense. If the Square-Starbucks alliance is successful, thousands of other small businesses may begin adopting the technology as customers become used to leaving their wallets behind when running out for a coffee and quick purchases. Both businesses and customers benefit from faster transaction times in stores. The smartphone revolution seems inevitable, and with it a shift away from plastic and cash and towards the mobile wallet.