• Marc Primo

How Starbucks is becoming the biggest bank in the world

This is an article ‘How Starbucks is becoming the biggest bank in the world’ by Marc Primo


It's old news that some large-scale businesses are known for one niche and expand toward other industries. Besides striking gold in the fast food chain business, the McDonald's brand has long been in the real estate business since traveling salesman Ray Kroc convinced the chain's founding brothers to sell him their rights. Kroc would later enter the property game by acquiring and leasing land to his franchise partners. Many also know that Harvard and Stanford are hedge fund entities other than universities. What baffles today's entrepreneurs is how Starbucks's simple coffeehouse chain model rapidly gained the potential to become one of the world's largest banks today.



To clarify, Starbucks has never said they are a bank. But when they introduced a new e-payment scheme that allows customers to have coffee without taking out cash or credit cards from their wallets, it surpassed most traditional banks when it comes to assets via top-up accounts.


Let's first revisit the Starbucks story to appreciate further how the coffeehouse chain's money deposit strategy worked.


A story worth hearing over coffee


Jerry Baldwin, Zev Siegl, and Gordon Bowker founded Starbucks with their mentor, Alfred Peet, in Seattle back in 1971. Back then, the brand was solely focused on selling premium coffee beans. When Howard Schultz took the director of sales position, he soon envisioned the business as a chain of coffeehouses. Somehow, loving the product and a fateful trip to Milan encouraged the salesman to pull in some investors in the mid-80s that helped turn Starbucks into what it is today.


By the early 90s, the chain grew to 140 locations across the country and eventually filed for public listing by 1992. Schultz's Midas touch tripled the number of physical stores in just two years after going public and then opened its first international store in Japan just two years later. Undoubtedly, the Starbucks fever had caught on worldwide, with a whopping 2,500 locations before the end of the millennium.


Soon, the Starbucks business model morphed into what business experts call the Frappuccino Effect, wherein real estate value increased when a store was nearby. The concept is similar to how Whole Foods or Dunkin appreciate neighborhood value with their brand presence. However, when Wall Street crashed in 2008, the brand's stock prices dropped along with its signature customer service and experience. Only when Schultz came back on board as CEO did Starbucks map out a way to rebound from the low stock prices and bring back the green mermaid's glory.


How is Starbucks somewhat of a bank?


Though it might be confusing to many, how the coffeehouse chain serves its customers as a financial entity has much to do with technology. The brand was known for keeping up with the trends of the times and had already become an iconic symbol of modern professionals and elites. As the digital boom broke out during the ‘90s, Starbucks was one of the companies with the foresight to transition into potential possibilities, such as acquiring its first chief technology officer and introducing a loyalty card. With the release of its mobile app, 30% of its total customers soon found a way to get coffee more conveniently.


Providing the option to top-up their Starbucks accounts, pay for meals and coffee via mobile phones, and earn rewards proved appealing to many of its customers. Since the brand had grown to hundreds of thousands in store numbers worldwide, many customers soon developed the confidence and security to use the Starbucks app as their e-wallets. By early 2020, loyalty card holders and app users have appreciated a collective $1.5 billion in assets via the loyalty cards, overshadowing 3,900 US banks covered by the FDIC that only have less than a billion in total assets.


Of course, customers who top up their Starbucks accounts know they will be spending that money on food and coffee. But the fact is that these customers provide a significant loan amount for Starbucks by the billions, without any interest. This free loan gives the brand the leverage to invest in more business growth potential for profit.


And how it's not quite like a bank


Still, from a legal perspective, Starbucks does not operate like any traditional bank. Customers can never convert the money they deposit back to cash, while the company uses the collective amount as it pleases without any fault in the country's financial regulations. Customers can't withdraw cash, and Starbucks doesn't need any maintaining balance to give customers their money back. Since the brand is currently resorting to fractional reserve banking, it has the capacity to create its own currency or partner with other cryptocurrency traders to enhance its payment models further.


In a nutshell, fractional reserve banking is a system wherein only a portion of bank deposits are guaranteed by liquid cash. The system's idea is to boost the economy by making funds available for lending. It might not exactly be the same as how Starbucks earns money from loyalty cards and its mobile app, but the idea is there, and the company can grow into a stronger fintech player very soon.


And so it did take baby steps last year by teaming up with Bitcoin trading platform Bakkt to develop a global consumer app. Using the app, both customers and companies can now purchase, trade, store, and use digital assets while allowing merchants to free capital and strengthen business relationships with their customers.


Nonetheless, Starbucks gift cards are the closest thing the company has to currency. These gift cards are relatively liquid, not because they can be used to buy coffee, but because it is almost certain that someone will need one at some point. With how Starbucks gained such financial leverage over the years, it can quickly enter into asset management, forex, or even insurance markets if it wants to because it already has the fintech essentials in place.


In some ways, this type of financial model doesn't rest well with a few banks. One CEO from a South Korean bank had already labeled the company an “uncontrolled bank”. If the company does enter the financial industry, some Asian banks may find it challenging to compete with, considering the large sum that the coffee chain has already accumulated.