As a headline, this is an eye opener, but no surprise to us. Years ago, Mitch Goldstone spent a full day with Starbucks founder, Howard Schultz during a University of Southern California Marshall School Entrepreneur event. Mr. Schultz is one of our nation’s most admired and smartest entrepreneurs.
And, that is why this headline, that Starbucks is planning to regroup and *briefly close more than 7,000 coffeeshops at 5:30 pm on Feb 26 is smart management, and a brilliant media event.
The reason is to provide a refreshing training session to the 135,000 “store partners” [employees] across the U.S. to get the famed purveyors of much more than just selling coffee back on track. [click here for company press release].
OK, you must be asking, so what does this have to do with credit cards and interchange fees? Unlike ScanMyPhotos.com, where our average Ecommerce order is more than $150.00, think about the Starbucks business model. The average order must be just a few dollars. My order is $1.85 and I pay in cash.
Think of the interchange fees on credit and debit card transactions at Starbucks for micro-payments. If a customer spends about $2.00 and uses a Visa or MasterCard-branded debit card, there is a minimum fee to Starbucks; in our case, it is about .55 cents. Even credit card transactions are costly too.
A question is: why are Starbucks Cards free from interchange fees? After all they are using an electronic payment network that costs money to print, promote and operate the card program. In the case of Visa and MasterCard, may times the issuing and acquiring banks are the same, which means the four-party electronic payment network is on par with retailers’ internal gift card programs. There must be a degree of fraud (people were recording the authorization codes on the back of the cards and wiping out the balance on cards that were later validated). The banks plastic and Starbucks plastic are very similar, yet there are no interchange fees for gift and store cards.
Another question is: what would happen if Starbucks ceased accepting credit cards? Mr. Schultz is on of the most dynamic entrepreneurs in the nation and if he did the math and reviewed the annual interchange fees, a similar conclusion could arise. Sure, it is convenient to use plastic to pay for a cup of coffee, but most people (other than those watching the silly Visa commercials [click here]), would just as easily pay with cash to help Starbucks regain it entrepreneurial and storied edge. For the larger purchases of cappuccino machines, cards could be used.
PAPER OR PLASTIC?
The banks along with Visa and MasterCard are spending millions to entice consumers to insist on plastic. Starbucks and other merchants with many small individual transactions has fallen for this gimmick. But, as Starbucks prepares to regroup, we wonder if they will also reevaluate the cost and benefit of those hefty merchant interchange fees?
But, this is not to suggest that there is competition from other sources. In our case, if ScanMyPhotos.com were to terminate our credit card payment option, we would be out of business, as much of our revenues are derived from Ecommerce transactions and much higher per ticket in-store transactions which more require the use of charge cards. The two giant credit card associations control nearly 80% of that market.
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