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  • Tausif Mulla

Bank of Starbucks? The Coffee Brand Becoming More Like a Bank

Some may be surprised to hear that McDonald's, which is known for its fast-food menu, is in the real estate business. You might also be a bit confused when you find out that Harvard and Stanford are more Hedge Funds than Universities. These organizations have ventured into these businesses in different ways. Like these companies, Starbucks, the popular coffee chain is becoming more like a bank. You read that right, a bank, where you keep your money.

However, Starbucks has never explicitly mentioned any plans to become a bank.

Starbucks has been able to grow its market share exponentially by appealing to a wider range of consumers and providing an experience that is more in line with the customer's lifestyle as well as competitive pricing. Howard Schultz, the CEO of Starbucks, is one of the most successful businessmen in the world. He decided to transition to chairman in 2000 and Orin Smith was appointed as CEO. When Howard Schultz left Starbucks, it had around 3000 stores and Orin Smith set a new course for the company towards faster growth.

Starbucks has become a household name and part of the American culture. From 2000 to 2007, Starbucks grew more than four times and over the course of those 7 years, Starbucks opened around 1,500 new stores a year. In 2007, the company had its best sales year with 6 billion cups sold.

Over the years, Starbucks has grown so much that it has resulted in a phenomenon called the Frappuccino Effect” where real estate prices increase significantly when a Starbucks is nearby. This phenomenon has been noticed in many cities worldwide.

What is Frappuccino Effect by Starbucks?

Source: David Perell on Twitter

More than a cup of coffee.

Starbucks is leading the industry with its innovation and foresight. Starbucks hired its first chief technology officer, former Adobe Systems Inc. executive Gerri Martin-Flickinger to lead its technology team and launched the Starbucks loyalty card. The company has been at the forefront of technology since the beginning and is now focusing on digital because it is a more efficient way to make and sell coffee.

To ensure that its digital vision is properly executed, Starbucks has put in a lot of effort to develop its own app. Since 2015, this app has been responsible for a remarkable 30% of the company’s total sales.

The restaurant and food industry has been transformed by the popularity of loyalty apps. They allow people to enjoy rewards without any major work - just by simply using their phones! Starbucks is transforming the way consumers pay for coffee. They now offer a more convenient alternative to cash and credit cards with their app that lets users add money to their Starbucks account, which allows consumers to redeem free drinks. It may not be the most genius way to ensure that your customers keep coming back but Starbucks is one of the most popular reward apps in the industry.

Starbucks reward points as currency

Source: Starbucks

Considering Starbucks is a large company with a loyal following, it motivates customers to keep some of their money in Starbucks accounts, knowing they will use it someday. A total of 41% of U.S. and Canadian Starbucks cardholders make purchases with their cards. User balances stood at $1.5 billion at the end of 2019. Even though 1.5 billion dollars isn't a large amount, it represents a significant amount when you realize that more than 3,900 banks across the US and Canada have less than $1 billion in assets.

MarketWatch looked into the data and found that Starbucks customers had around $1.2 billion in cards and apps at the end of 2017. This is higher than the deposits held by Customers Bank ($780 million) and the Green Dot Corporation ($560 million) by the end of 2017.

Starbucks Bank has more cash than some US based banks

Source: MarketWatch

Starbucks has generated $1.5 billion in new revenue from customers who have unknowingly provided the coffee chain with a 1.5 billion dollar loan, at 0% interest. In order to earn free profits, Starbucks can invest that money in the market or spend it on expanding into new markets. There is actually more to it than it seems. It is estimated that 10% of this money will be forgotten or lost and never be used - referred to as breakage. Its annual report shows that in FY 2019, 2018, and 2017 respectively, Starbucks earned $125 million, $155.9 million, and $104.6 million in breakage income.

Starbucks itself has never explicitly stated that it wants to become a bank. When you consider how well the company is doing with its prepaid card program and its mobile app, the idea that you can one day open a bank account while ordering your Pumpkin Spice Latte becomes less bizarre.

Starbucks, on the verge of change?

Korean bankers are worried that Starbucks will indeed launch into financial services in a few years, according to a recent report from The Korea Times. Korean banks have expressed concerns that if Starbucks does enter the financial industry, it will be too big of a threat to them and they will not be able to compete. According to them, the cash the coffee chain has brought in is what concerns them most. Industry experts see Starbucks becoming involved in asset management by way of its prepaid cards, along with currency exchange, loans, and insurance.

Bankers might also have been concerned about recent strategic moves. In 2020, Starbucks partnered with cryptocurrency trading platform Bakkt to create a global consumer app that lets customers and merchants buy, sell, store, and spend digital assets. The app, according to Bakkt, will allow merchants to 'free up capital' as well as build direct relationships with their customers.

Concluding thoughts on Starbucks as a bank

Large corporations are not just looking to make a profit; they are also looking to change the way consumers interact with their financial services. If Starbucks officially ventures into banking, the world of banking would be completely different in the future. This will greatly affect the financial landscape, and it will be interesting to see how this coffee chain changes banking for banks and other financial institutions.

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