If we say Starbucks, what comes to your mind first? Coffee, right? But what if we say Starbucks is beyond its Vanilla Latte, Cinnamon Rolls, and Croissants? Ever associated the words ‘finance’ and ‘bank’ with Starbucks? Most of you will say “No”. But, believe it or not, Starbucks is directly associated with these terms.
How Did It All Start?
Starbucks was going through an extremely difficult time in 2008, just like every other business, so the board decided to re-appoint Howard Schultz as its CEO. Schultz, who served as the company’s first CEO from 1982 to 2000, was in charge of creating Starbucks as a household name. After being reappointed, he implemented some significant reforms, the most important of which is the Starbucks Reward Program.
According to this Program, you get rewarded when you deposit money into your Starbucks account on the app and use that money to buy a coffee. Although this might not sound revolutionary, Starbucks is the most well-known restaurant rewards program in the US, where 41% of customers use the app to make payments.
There is a total of 1.5 billion dollars lying in Starbucks accounts all over the world. Hence, instead of letting it sit idle, Starbucks decided to use it for its investing ventures so whenever you put money in the account you are lending it to Starbucks at zero percent interest. Now what is surprising in this is the fact that 85 percent of banks in the United States have less than 1 billion dollars in total assets.
What Distinguishes Starbucks From Banks?
Since the money in the account can only be withdrawn for coffee and not as cash, Starbucks can avoid many financial regulations that bind other banks. This particular stroke of genius is precisely what has made international banks very concerned about Starbucks’ future potential in the economic space.
People who deposit money in a general bank can withdraw it whenever they want, so banks must keep some cash in hand to give money when customers withdraw money. This is referred to as a cash reserve ratio. But in Starbucks’s case, it is not required to keep any reserves.
Customers will obviously exchange their money for coffee at some point, but in the meantime, they are unknowingly providing Starbucks with a 1.5 billion dollar loan at 0% interest. Starbucks may use this money to invest in the market, earn free profits, or expand. It’s actually better than it appears. Unlike other banks, the breakage income has been tremendously high for the past few fiscal years.
What If It Were A Real Bank?
Starbucks would be the 385th largest bank in the United States if it were a bank. Breakage income occurs when a customer forgets to deposit money into a Starbucks account or if the money is never used for some reason. According to Medium, Starbucks’ annual report revealed a breakage income of $125 million, $155.9 million, and $104.6 million in fiscal years 2019, 2018, and 2017. Approximately 10% of this money will be forgotten or lost and thus never used — this is referred to in the industry as breakage.
The CEO of South Korea’s third-largest financial group stated that Starbucks is not a coffee company but an unregulated bank. We don’t know what Starbucks will do next or its objectives, but industry experts believe Starbucks may enter the asset management industry through its prepaid cards, as well as the currency exchange, loan, and insurance sectors. According to another bank official, Starbucks is a fintech company.
Another Attempt – The Starbucks Currency
In 2013, founder Howard Schultz told investors – “What we’re establishing is the Starbucks currency. … Stars can now be leveraged across consumer products … to provide our customers with a reward and an incentive to come back and forth. This is just the beginning of us being able to thread these multiple channels of distributions and brands.”
Conclusion
Starbucks might just seem to be coffee and snacks for most of us, but it has entered into the world of finance, beyond its core competency of being a coffee house. They say it is not about the finance, but how they manage it. Starbucks not only understood this but also implemented it in the best and most innovative way, and just hit it out of the park. They have proven the meaning of innovation in its real sense. They derived and applied the technique, and since they had the acumen, today they have become much more than a coffee house
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