Howard Schultz, the chief executive of Starbucks, has called mobile payments “the fastest growing opportunity we’ve ever seen in terms of customer acceptance”. That explains why the coffee shop chain is investing in Square, the company led by Jack Dorsey (the co-founder of Twitter) that aims to become the default “wallet” service for mobile payments. The latest round of financing, to which Starbucks contributed, offers a clue as to how big an opportunity this business might be. The fundraising – some $200m – values Square at $3.25bn.
Whenever you make a purchase with the swipe of a card, various companies play a role in the payment-processing chain. Square makes a plastic card reader that enables the start of this process to occur over smartphones. Charging a fee of 2.75 per cent of the value of each transaction, Square claims to be processing $8bn worth on an annualised basis. To put that number in context, nearly $4tn of payments transactions ran through Visa’s network in the 12 months until the end of June.
If Square can initiate 1 per cent of that amount – running through Visa’s network or that of another card company – in, say, the next five years, it would make more than $1bn of revenue. Once Square has hit scale, it could also be a high-margin business. Visa’s margins are 60 per cent while running a massive payments network. Assuming a75 per cent margin for Square and a tax rate of 35 per cent, it could reap net income of $282m. That would mean that Starbucks and its fellow investors wind up with a multiple of 12 times on their investment.