Wednesday, August 8, 2012 at 11:36 am.

Let’s Clear Up Some Details About Square’s Big Partnership With Starbucks

Howard Schultz and Jack Dorsey

Last night, Square announced that it would take over credit-card processing for Starbucks stores and that Starbucks would now accept Square as a payment tool. It’s a big deal, but it left more questions than answers. This morning, I attended a press breakfast with Square CEO Jack Dorsey and Starbucks CEO Howard Schultz. The picture is clearer now.

Starbucks will use its existing point-of-sale registers and infrastructure to add Square to its stores. For now, there won’t be any Square-powered iPad registers, no cute little Square credit-card readers, and no geolocation-powered Square “tab” feature. Starbucks may add more Square features in the future, Schultz said, but for now, it seems mostly a back-end thing. (That’s the easiest, fastest, safest, and cheapest way to start, so it makes sense.) Square will handle credit- and debit-card transactions, but Starbucks’ existing infrastructure will handle the rest.

Starbucks cashiers will scan a Square barcode on your phone to “pay with Square”, the same way they currently scan a barcode on your phone’s Starbucks app. Both of these should support iOS 6 Passbook, I’m told.

Schultz said about 1 million people a week are using their phone to pay at Starbucks. He also said Starbucks does about 60 million transactions a week, worldwide. These don’t seem like perfect apples-to-apples figures — people vs. transactions — but they suggest that perhaps 2% of transactions are going through mobile apps. That’s small and huge at the same time.

Starbucks’ existing loyalty and card programs will remain unchanged, and any loyalty program Square offers will remain separate (for now). If you are a Starbucks “gold card” member like I am, you’ll want to keep paying with your Starbucks app/card to keep earning rewards. Starbucks says more than 25% of its transactions are made via Starbucks card; “pay with Square” is basically another payment option — alongside cash and physical credit cards — for the other 75%.

Square will only handle U.S. credit- and debit-card transactions. (It announced 7,000 stores; Starbucks has 18,000 in more than 60 countries.) It won’t work outside the U.S. yet, but perhaps someday. Square also won’t process the Starbucks card transactions.

Starbucks isn’t doing anything radical with its cashier / point of sale design / philosophy yet. There won’t be any pre-ordering drinks a block away, or paying anywhere in the café like you can at an Apple Store. Schultz says Starbucks has tried some of that and it’s “highly complicated.”

So, why is Starbucks doing this?

My sense: To lap its competitors in customer experience and technology the way Apple has in electronics retail and Nike has in shoes. Starbucks is already way ahead of the game, and as I wrote last night, didn’t need Square. But Schultz seems to have recognized that Dorsey, Keith Rabois, and the Square team are doing something special in retail, with a particular focus on the customer experience that most other payments and software companies see as an afterthought.

For now, Starbucks gets to save a little money by having Square do its transactions. It’s getting more attention for being a pioneer. It might get some more customers who are curious about this whole Square thing. It now owns a tiny chunk of Square that might provide financial upside in the future.

But Starbucks also gains long-term access to Square’s thinking and technology. Starbucks can pick and choose which parts of the Square “stack” it puts into its stores — ahead of its competitors, probably — extending its lead. And similarly, Square gains access to Starbucks’ data, brand, leadership, thinking, customer base, etc., which should help its own development as a company and product.

The deal seems much bigger for Square than for Starbucks today, but mutually beneficial. It might actually be a rare win-win.