Square’s deal with Starbucks is costing the payments startup millions

Video thumbnail for youtube video Is this how you'll buy your next cup of Joe? Square mobile wallet arrives at 7,000 Starbucks storesSquare lost at least $20 million as a result of its partnership with Starbucks in 2013, according to a report in the WSJ, which doesn’t paint a very rosy picture for the mobile payments company.

Two years ago, the coffee king invested $25 million in the white-hot start-up, and as part of the deal, Square was also able to handle all of its credit card transactions.

All-in-all, the deal seemed pretty good for Square, which was also getting free publicity for its application. But it doesn’t seem so simple now. In addition to the losses, the WSJ also reported that Square’s fee on each Starbucks transaction amounted to 2 percent last year, which falls below the 2.75 percent it charges many others.

In all, sources told the WSJ that Square recorded a loss of roughly $100 million in 2013, and that over the past three years, the startup has burned up more than half of the roughly $340 million it has raised in venture capital.

The report is the second in recent weeks that suggests the company is running out of time.

Square has reportedly put its IPO plans on hold and is considering a sale. The WSJ says Square has been in preliminary talks with Apple, Google and PayPal, according to multiple sources.

Square is known for its Square-shaped credit card swiper that attaches to smartphones to accept payments. When the two announced the deal, it sounded like a mutually good fit. The San Francisco company, founded by Twitter’s Jack Dorsey, was interested in disrupting payments using the phone and Starbucks has done one of the best jobs in fast-food of getting consumers to adopt the phone as a form of payment.

But flash forward two years, and the deal has not continued to produce the same amount of pizzazz as it once promised.

In reply to an earlier article about the status of Square and Starbucks, a Starbucks spokesperson told GeekWire it was not correct to assume that the two companies’ dealings are over, “when, in fact, Square remains an important strategic partner for Starbucks and we continue to partner together on initiatives stemming from our original agreement.”

  • armorandwings

    Of course it did! I’m not sure why this is surprising news. Square is not a technology company, they are a merchant acquirer that nominally provides hardware/software to its customers. And merchant acquiring is a well worn commodity. Square found a niche where acquiring was not well served (micro-businesses). But Starbucks? They were undoubtedly getting the best price that Chase, Wells, Bank of America and a dozen others negotiated for — I doubt they were paying more than a penny or two over interchange. That Square couldn’t compete with people processing 100x more volume? Not surprising.

    So my question, Tricia, is why were tech writers so bullish on it? How did, what was obvious to anyone in the financial industry, get missed by professional journalists? It feels like journalists have become PR messengers more than journalists.