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Starbucks is investing in Square, the mobile payments provider, and will use it going forward to process all of its credit and debit transactions.

The two companies made the announcement late this evening, adding that Starbucks will also invest $25 million in Square’s fourth round of funding, which has not yet been announced, but had been rumored to value the company up to $4 billion.

Following the investment, the New York Times notes that the company will be valued at $3.25 billion.

As part of the transaction, Starbucks CEO Howard Schultz will join Square’s board.

Square, which was founded by Twitter inventor Jack Dorsey, has quickly made accepting credit cards via a mobile phone into a mainstream and affordable concept for small merchants.

Starbucks marks one of the company’s biggest deployments to date, proving that it may not just be valuable to small businesses, but to large businesses, as well.

The Seattle coffee retailer has been one of the most progressive merchants when it comes to rolling out mobile payments. Today, consumers easily reload their iPhone and Android Starbucks apps to pay for a latte at the register by displaying a bar code on their phone. Recently, Starbucks said it has processed more than 55 million transactions since launching it in January 2011, and today is processing more than one million mobile transactions per week in the U.S. alone.

The partnership between the two companies seems natural, given Square’s leadership position in providing easy alternatives to bulky point-of-sale terminals normally found at the register — that, plus Starbucks increasingly geeky and tech-savvy customer base may just eat up the new payment type.

The two companies said the partnership has multiple components:

  • Customers will be able to use Pay with Square, Square’s mobile app, at 7,000 U.S. Starbucks later this fall;
  • Square will process all of Starbucks U.S. credit and debit card transactions, which will significantly increase Square’s scale;
  • Starbucks customers will be able to discover local Square businesses from within a variety of Starbucks digital platforms, including the Starbucks Digital Network and eventually the Starbucks mobile payment application;
  • Starbucks will invest $25 million in Square’s upcoming fourth round of funding;
  • and Starbucks Chairman, President and CEO Howard Schultz will join the company’s board.

“The evolving social and digital media platforms and highly innovative and relevant payment capabilities are causing seismic changes in consumer behavior and creating equally disruptive opportunities for business,” said Schultz, in a canned remark. “Both Starbucks and Square take a similar approach when building products and running our businesses, and together we can bring the best possible payment experience to Starbucks customers.”

When the partnership between the two companies goes live this fall, customers will be able to pay with the existing iPhone or Android Starbucks applications, or with Pay with Square, the company’s mobile application.

So far, Square has been able to easily win over small-business owners, and especially taxicab drivers and food-truck owners, because the company gives these mobile merchants an easy way to accept credit cards with a mobile phone and small square-shaped accessory that plugs into the phone’s headphone jack. Square also charges fairly low interchange rates.

But Square faces challenges when it comes to getting consumers to adopt its mobile phone app.

In March, it claimed that while it was processing $4 billion a year in mobile payments transactions, only about 75,000 of its one million merchants were accepting payments via Card Case. The app, which is now called Pay with Square, allows consumers to discover new merchants on the go and then place and pay for their orders, all from the phone.

In a letter posted on Square’s Web site, Dorsey writes about the opportunity for Starbucks to highlight its offerings: “When Starbucks builds the Square Directory into their apps and in-store Digital Network, it gives Square new visibility, driving more customers to opt-in to Square.” To steal a phrase from Schultz, Dorsey celebrates the company’s win by saying: “Onward.”

For now, the partnership is limited to the U.S., where Square operates today. The company has plans to expand internationally later this year.

Dozens of other well-established companies, as well as start-ups, are also competing in this space, including eBay-owned PayPal, LevelUp, Google, Intuit and others. Signing up a retailer, such as Starbucks, provides a big step between Square and the competition.

Via: ATD


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