Starbucks to Adopt New Payment Method in U.S. Stores

Smartphone-wielding Starbucks customers in the United States will get a new way to pay in early November when the world's biggest coffee chain begins accepting Square Wallet mobile payments at its roughly 7,000 company-operated U.S. stores.

Starbucks (NASDAQ:SBUX), which has embraced new technology ranging from social media to mobile payments, on Thursday said it also plans to add digital tipping next summer - something sure to thrill its baristas.

Details of the roll-out follow two months after the announcement of the high-profile partnership between Starbucks and Square, a hot start-up led by Twitter Inc co-founder Jack Dorsey. The deal is expected to help boost the nascent mobile payments industry because Square will process all of Starbucks' credit and debit card payments.

Starting next month, Square users will show Starbucks cashiers a bar code on their phones. That code will be scanned for payment.

That process eventually will change to one where Square's global positioning system, or GPS, technology detects the customer's phone in the store. The customer then will "pay" by giving his or her name to the cashier, who will verify it with a name and photo displayed on the register's screen.

Starbucks debuted its own payment apps for mobile phones in January 2011. Since then, its customers have conducted 70 million mobile transactions, Cliff Burrows, president of Starbucks' Americas region, told Reuters.

"Many of our customers are early adopters," Burrows said when asked what has driven the company to invest in mobile payments.

Users of Square and Starbucks' own mobile payment app in the summer of 2013 will get the option to add a tip to their check, Burrows said.

Starbucks Chief Executive Howard Schultz, who joined Square's board after the coffee chain invested $25 million in the San Francisco-based company, in August said the agreement with Square would lower the coffee chain's payment processing fees, but he declined to elaborate.

Debit and credit card swipe fees can amount to significant costs for merchants, especially those that make a lot of small sales. Square will handle Starbucks' debit and credit card transactions, which have a fee attached to each sale.

Starbucks' own payment application allows customers to load money into an account with a credit or debit card and then work off that balance as purchases are made. Starbucks only pays payment processing fees when the money is loaded into the account.

Starbucks rang up more than $8 billion in U.S. sales in fiscal 2011.

Globally, transactions paid for with mobile technology are forecast to increase nearly fourfold to more than $1.3 trillion annually by 2017, according to a recent report from Juniper Research.

Well-known restaurant chains like Starbucks, Dunkin' Donuts and McDonald's are helping to drive that increase.

Dunkin' Donuts in August released its own mobile app with a payment feature that is similar to Starbucks'.

Nigel Travis, chief executive of Dunkin' Brands <DNKN.O>, said the doughnut and coffee chain's payment app would save franchisees "a considerable amount of processing fees" because it also reduces the number of credit card transactions.

Elsewhere, fast-food giant McDonald's Corp <MCD.N> is testing mobile payments with provider PayPal <EBAY.O> at 30 of its restaurants in France.

Earlier this year, McDonald's ran demonstrations of a broader PayPal mobile payments service at its franchisee conference in Orlando, Florida.

Competition in the mobile payments arena is fierce. Square competes with a bevy of other start-ups as well as Google Inc <GOOG.O>, Microsoft Corp <MSFT.O>, PayPal and Intuit Inc <INTU.O>.