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Analysts: Starbucks’ Bar-Code Embrace Unlikely to Slow NFC

By: 
Tom Zind

While NFC-based mobile payment could roll out by late this year, Starbucks, the world’s largest coffee shop chain, has made it clear it is not prepared to wait.

Starbucks announced yesterday it would roll out its mobile-payment service based on 2-D bar-code technology to all 6,800 company-owned Starbucks stores in the United States, in addition to 1,000 other Starbucks outlets in Target discount department stores. It has billed the service as the "largest mobile-payment program in the U.S."

But at least two mobile-payment analysts and the head of the company that developed the m-payment application for Starbucks believe the 2-D bar code technology is only a prelude to NFC, perhaps even for Starbucks itself.

Nick Holland, senior analyst with Yankee Group research, said he doubts 2-D bar codes will form the foundation of any new mobile-payment infrastructure. But it’s a workable technology that’s attractive to such progressive merchants as Starbucks that are keen to offer mobile payment.

"This looks to be the right fit for Starbucks customers, who are tech-savvy high spenders up the development curve on using mobile devices," he told NFC Times.

Holland said Starbucks’ initiative could get many more U.S. consumers comfortable with using mobile phones for payment. And by moving full speed ahead with bar-code payment now, Starbucks is positioning itself for whatever course mobile-payment technology takes, one he thinks will ultimately lead to NFC.

Even though it has decided to fully embrace bar codes for mobile payment, Starbucks has probably been careful not to close the door on NFC or any other technology, agrees Beth Robertson, director of payments research for U.S.-based Javelin Strategy & Research. It’s unlikely, she said, that a company such as Starbucks, even though it has expressed reservations about NFC, would have invested in a technology that would restrict its ability to adapt to an ever-changing payments landscape.

"I don’t think it is the wrong step for them to take, and it doesn’t preclude them from getting involved with or accepting NFC transactions," she told NFC Times. "Ultimately, they could even set it up to where they could do both."

The Starbucks mobile-payment app, now available for iPhones, the iPod Touch and several BlackBerry models, is based on the coffee chain’s popular prepaid Starbucks Card. Customers use the private-label card for one in five transactions at Starbucks coffee shops and last year loaded $1.5 billion in their card accounts, up more than 20% from 2009, said the company.

With the app, after the customer scans the 2-D bar code, or QR Code, at the point of sale, Starbucks deducts the amount of the purchase from his Starbucks Card account over the network. The app also lets cardholders track the card balance, add to it with a major credit card, check the status of rewards points and locate nearby Starbucks outlets. IPhone users also can reload with their PayPal accounts

Vendor: 'We're Not Pushing 2-D'
Drew Sievers, the co-founder and CEO of U.S.-based mFoundry, which developed the app for Starbucks, was touting the rollout announcement yesterday to journalists. But he doesn’t see his company's future in bar codes.

"We’re not pushing 2-D bar-code technology," he said. "We’re heavily focused on helping our bank customers with NFC solutions."

Yet, given the persistent uncertainties about the timing of NFC and how it will eventually play out, Starbucks has likely tied its mobile-payment ambitions to the bar-code-based application until something fundamentally changes in the availability of NFC or other mobile-payment technology, he added.

"Two ways to look at this are that their capital expenditure on this is a validation of this (bar-code) technology, and also that it’s a stepping stone to NFC, although maybe not for Starbucks," Sievers told NFC Times. "If I’m Starbucks, I can support this bar-code system with any phone on the market. Why would I wait for an (NFC) ecosystem that’s been running in place for (nearly) 10 years?"

Starbucks has indicated in the past the bar-code app is an interim step, but it’s not clear if that remains the case given its decision to roll out the technology nationwide.

Chuck Davidson, category manager for innovation for the Starbucks Card earlier told NFC Times that while he’s a fan of NFC, “bar codes are our proxy right now." That was last fall, after Starbucks had expanded its trial to 300 New York City locations. Bar codes are the “the quickest way” to learn how customers take to mobile payment, he said at the time. A Starbucks representative was not available for comment yesterday following the rollout announcement.

With the decision by Starbucks to go with bar codes for payment, other merchants clamoring to try mobile payment might take it as a cue, Javelin’s Robertson said.

Though confident that NFC will eventually emerge as the vehicle for mobile payments, the analyst said there could be heightened interest among those who’ve looked into bar codes. The technology’s comparative affordability and the ease of deploying it without needing phones equipped with special chips have led to bar-code technology making inroads in such markets as Japan in some application categories, she said.

"It isn’t a given right now that NFC is the right solution, so at this point I think some merchants are actively considering bar-code solutions," she said. "If NFC is too expensive to deploy or something else of that nature (becomes a roadblock) bar-code solutions might end up being something that could find their way into the market."

While offering a simpler way to gear up to offer mobile payment, bar codes have their drawbacks, which could give users pause. Analyst Holland said bar codes have the potential to be duplicated, saved and used fraudulently. They also can be a bit cumbersome to use compared with contactless tapping, since the 2-D bar code on the phone screen must be properly lined up with the scanner. NFC payment is also expected to be faster.

Clearly, Starbucks found a way to overcome these and other obstacles, Holland said. While the full implications of the giant chain’s move are hard to gauge, it’s certainly significant in the context of mobile-payment development, he said.

"Looking at it in terms of 'signal' and 'noise,' this goes beyond noise," he said. “This is something that’s actually going on, where a physical merchant is putting its money where its mouth is. NFC will take some time to develop; this is something that’s another step along the way." 

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