Loyola University Chicago School of Law, JD 2023
Starbucks. What comes to mind? Expensive coffee in a nice atmosphere? Mermaids? A warm pumpkin spice latte? Perhaps. However, the words “billion-dollar bank” likely do not cross anyone’s mind. As wild as it seems, the huge coffee company actually has $1.5 billion in assets, an amount larger than eighty-five percent of the banks in the United States. Not only is Starbucks flush with cash, but, unlike actual banks, it can use this money to invest in other ventures, invest in the marketplace, or expand its business. This begs the question, is Starbucks merely a coffee company or will it join the ranks of Bank of America and Citibank?
How is a coffee company like a bank?
Though the coffee corporation doesn’t give out loans or provide wealth management services, through technological innovation, Starbucks was able to use its loyalty rewards program to gain the trust of its consumers and store their cash in their app. In this loyalty program, around 15 million coffee aficionados are able to add money to their Starbucks account and pay for their coffee through an app rather than using a credit card or cash to pay. The loyalty program is backed by a credit card system with exorbitant fees that creditors charge consumers, though, like all businesses, Starbucks pays those fees on the consumers behalf. As a result, consumers are comfortable keeping some money in their accounts since they know they will likely use it in the future. Thus, Starbucks, from its forty-one percent of its consumers, has billions of dollars on hand and is larger than 3,900 banks in the United States (though PayPal still boasts the lead in assets with over $13 billion). Even more beneficial to the coffee giant is breakage, which is revenue gained by retailers through unredeemed gift cards or other prepaid services that are never claimed. Around ten percent of the money in Starbucks apps is forgotten or unused. In fact, in the 2019 fiscal year, Starbucks gained $125 million from breakage. All of this money, and more, goes to Starbucks for no interest and the company is able to use it freely.
Ok, so is it actually a bank? Where is the coffee ATM?
Though Starbucks has cash on hand, its consumers cannot withdraw cash from the app. They are only able to pay for coffee, food, and other merchandise with the money that is deposited into their accounts. Thus, Starbucks is able to avoid banking regulations and does not have to keep cash ready for withdrawals like actual banks. This unregulated power has actually been a cause for concern for some banks, specifically in Korea. There are some Korean bank officials that claim Starbucks might not only be getting into asset management due to its sizable assets from their loyalty program and prepaid gift cards, but currency exchange, loan, and insurance industries. Furthermore, Starbucks has recently made some strategic moves that seem to indicate it is expanding from the coffee industry to the cryptocurrency industry. The coffee company is working with Bakkt, a cryptocurrency trading platform, as an innovation partner to create an app to manage digital assets globally. With this new app, consumers can use the Bakkt wallet to pay for their coffee with Bitcoin or convert their Bitcoin to cash in the app so they can reload the Starbucks app with US dollars. This partnership is attractive to many technology investors including Microsoft who is providing the cloud services needed for the app. As with any corporation, Starbucks is constantly expanding its portfolio and innovating in different ways to provide its consumers with the best possible experience.
So legally, what is Starbucks?
With its forays into the cryptocurrency industry, many are speculating that Starbucks might now have transformed from a coffee company to a fintech company, a company that integrates technology into its financial services offerings. However, even though Starbucks may have new ways to pay through embedded finance capabilities, this is not considered enough to be a fintech company, unlike Intuit with their budgeting app Mint. Additionally, as aforementioned, the coffee behemoth is not legally a bank, though a few bank officials might be worried. The company has also never said anything explicitly about becoming a bank and it cannot lend cash, nor does it have to follow financial/banking regulations. As it turns out, Starbucks has managed to dip its toes into new financial waters as a coffee company.