Starbucks’ plan to be your ‘bank’ comes into focus — under a $1.4 billion pile of cash (Wal-Mart, too)

Starbucks and Wal-Mart are looking a lot more like banks lately. Starbucks just announced a new debit card that sounds a lot like an airline miles card, while Wal-Mart is about ramp up its cash-back and other benefits on some transactions run through its plastic. What’s in it for these big retailers? And for you?

The “for you” part is pretty easy: free money, or free stuff.

Starbucks fans already get “stars,” like airline points, when they shop at the coffee giant’s stores. And millions of them also use something that’s similar to a Starbucks credit card — an app or gift card that’s pre-loaded with cash. So the transition to Starbucks plastic that can be used anywhere is quite natural. Soon, as with airline credit cards, Starbucks fans will be able to earn free drinks and such by using Starbucks plastic, co-branded with Chase bank, at almost any store. How quickly the free lattes will pile up is still a mystery. The Starbucks card won’t be a credit card, however — it will be a prepaid debit card. We’ll get to why in a moment.

(This story first appeared on Read it there.)

Wal-Mart’s proposition to its 10 million or so cardholders is even simpler: Customers who shop at — using either the store’s credit card or preloaded debit card — will get 3% cash back. They will also get 2% back on some gas purchases, and 1% back on everything else.

Now, what’s in it for them? Well, in a generic sense, all retailers have to act more like banks nowadays, says Gartner payments analyst Avivah Litan. Payment processing is expensive, and big retailers are tired of sharing revenue with big banks.

“Paying more for payments eats into profits. The big chains have had this problem for years,” she said. “The only way around it is to create payment mechanics that generate revenue.”

While the two firms’ aggressive plastic moves sound similar, they have very different motivations.

Again, Wal-Mart’s story is simpler. The discount giant is making the move chiefly to maneuver in reaction to Costco, which is about to make a dramatic change in its credit card offering. For 16 years, Costco only accepted American Express credit cards in its stores. This summer, Costco shifts to Visa. It’s also ramping the reward offering for its own Costco Visa card, promising consumers up to 4% cash back on gas and 3% on travel. So Wal-Mart is partly reacting to Costco’s enticing offer with its own. At the same time, Wal-Mart is also making a jab at Amazon and other online retailers by heavily incentivizing purchases. Consumers who order online, but pick up at local stores, will still earn 3% cash back, giving regular Wal-Mart shoppers a huge incentive to plan ahead before their shopping trips. That also gives Wal-Mart critical data about their shoppers, and a logistical leg up for its supply chain.

Keeping Wal-Mart Customers Loyal

Meanwhile, Wal-Mart’s preloaded debit card product, “Wal-Mart MoneyCard,” continues to be a decent alternative for millions of consumers who otherwise don’t have access to traditional checking accounts or credit cards. MoneyCard holders, who can reload their cards for free at Wal-Mart, tend to be among the store’s most loyal shoppers. More cash back will help prevent them from being lured by Costco’s offers.

Not to be overlooked, encouraging use of Wal-Mart branded plastic — credit or debit — makes things a bit easier for the Costco security department, Litan said.

“They know the customer. They control the shipment,” she said. “It’s a lower risk payment for them.”

Starbucks has intertwined payments and loyalty, too, but in a very different way. Consumers love the Starbucks app, which has become by far the most successful form of mobile payment, far outpacing Apple Pay and its rivals. Roughly $1 out of every $5 spent at a Starbucks is now spent through the app. As of the firm’s most recent Securities and Exchange Commission (SEC) filing, Starbucks currently has $1.4 billion sitting on its balance sheet, representing cash consumers have loaded onto apps and gift cards that hasn’t been spent yet. That’s an enormous free loan to the firm — it’s roughly one month’s global revenue — and the amount is growing about 20% annually.

Letting consumers spend Starbucks bucks at any place where credit cards are accepted by joining forces with Chase creates even more incentive for consumers to load up the app with cash. It’s easy to imagine those $50 reloads becoming $500 reloads for devoted coffee drinkers. That will give Starbucks an ever-larger pile of cash it gets to hold and can use to retire debt or invest.

Meanwhile, Starbucks will probably get to share in transaction fees with its card partner, Chase, when consumers swipe the plastic at other stores. Contrast that to the current situation that Starbucks, and all retailers, encounter when a consumer pulls out plastic at its stores. A small-dollar transaction such as a $2.75 cup of coffee could result in fees of around 25 cents, after a per-transaction fee and percentage fee is added. Most of that fee is eliminated when Starbucks drinkers use the Starbucks app to buy java.

“Starbucks is becoming a cash and float and fee machine,” Litan said.

An added benefit is that some of this gift card money — called “stored card liability” on its balance sheet — will never be spent, and Starbucks gets to keep it. It’s not a lot — about $40 million of so-called “breakage” in 2015. But that’s pure profit with almost no expense.

Finally, the Starbucks Chase card will serve much the same function that airline miles cards serve: It will get consumers thinking about Starbucks even when they are shopping at other stores, and it will nudge them firmly towards Starbucks when it comes time to buy coffee. After all, “free” coffee is pretty hard to resist, even if you are the kind of coffee drinker who might prefer a local brand instead.

“This new model is just the beginning of Starbucks opening up its digital ecosystem as well as extending its payment platform,” the firm announced at its annual shareholders meeting.

It’s important to carefully read the terms and conditions of any payment method you are considering when trying to decide if it is right for you. It’s also important to note that prepaid debit cards don’t generally help you build credit since they’re not linked to any financing. Chase confirmed, for example, that it will not be reporting Starbucks cardholders’ use to the credit reporting agencies. If you’re looking to build credit, you may want to consider a secured credit card, which requires a cash collateral deposit that serves as a credit line for the account. (You can see where your credit currently stands by viewing your two free credit scores each month on

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About Bob Sullivan 1637 Articles
BOB SULLIVAN is a veteran journalist and the author of four books, including the 2008 New York Times Best-Seller, Gotcha Capitalism, and the 2010 New York Times Best Seller, Stop Getting Ripped Off! His latest, The Plateau Effect, was published in 2013, and as a paperback, called Getting Unstuck in 2014. He has won the Society of Professional Journalists prestigious Public Service award, a Peabody award, and The Consumer Federation of America Betty Furness award, and been given Consumer Action’s Consumer Excellence Award.

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