Starbucks — The Bank That Sells Coffee
Embedded Finance

Starbucks — The Bank That Sells Coffee

In early 2008, Starbucks hit a wall after a period of rapid over expansion. In-store sales were on the decline and this soon led to the closing of over 600 stores across the U.S. After the stock market crash of October, the entire economy took a turn for the worse. As customers began to cut spending, Starbucks took a major leap toward recovery by launching a new loyalty program. This mobile app coupled rewards with gift card services, social media strategy, and emerging financial technology to create one of the most influential customer loyalty programs recognized today.

With a complete turnaround, Starbucks has now served more than 100 million customers across 78 markets around the world. By 2021 Starbucks had the largest mobile payment user base in the United States with 31.2 million active users. How Starbucks got here is an incredible journey focused on creating the best customer experiences possible by developing a new era of customer engagement, digital personalization, and dynamic rewards and incentives.

Going Digital with My Starbucks Idea

Under the guidance of its infamous CEO Howard Schultz, Starbucks set out to differentiate its company through new technology and the internet very early on. Schultz launched the platform My Starbucks Idea in March 2008, which was a co-collaborative online space for Starbucks to proactively collect their customers' ideas and feedback on beverages, food options, business operations, rewards, and perks.

Customers could create profiles, vote or comment on other people's ideas, and interact with an entire community of coffee lovers all in one place. Ahead of its time with its own version of basically a Coffee Facebook, the My Starbucks Idea platform was pivotal for product and services advancement, customer engagement, brand identity, and brand loyalty.

As inspiration constantly flowed from customers' wants, needs, and interests directly into the company for over eight years, a lot of the most popular ideas are still being successfully implemented today after becoming synonymous with some of Starbucks' most popular features as a brand.

  • Free Wifi in stores.
  • Free birthday treats.
  • No receipts for purchases under $25 to save paper.
  • Online gifting of beverages between friends.
  • Collaborating with Keurig to create K-Cups.
  • Sell cake pops.
  • Introduction of a rewards system.

The My Starbucks Idea platform was the perfect segue into enhancing customer experiences both online and in-stores. By 2009 Starbucks launched its mobile app for the first time, and the famous My Starbucks Rewards program was officially born.

The program that awards Starbucks customers with "stars" to be redeemed for perks like free coffee, bakery items, and branded merchandise now boasts nearly 25 million members as of 2021. Starbucks Rewards now represent 53% of the spending in their stores, meaning more than half of Starbucks sales are generated directly from rewards customers.

Starbucks began offering in-app mobile payments by 2011, eventually including the roll-out of mobile pre-orders by 2014, and curbside pickup by 2020. With $1 spend per star rewarded to pay-as-you-go customers, and 2 stars rewarded per $1 spend for customers who preload funds on gift cards or in-app, these simple incentives increased spending per customer, improved retention rates, and upgraded engagement and marketing efficiency.

Starbucks customers now had a central hub of information about menus, store locations, and opening hours that also covered all the main functions any customer would need on the go including browsing the menu, ordering, paying, pickup, and personalized rewards.



Deep Brew: Machine Learning + Coffee Machines

Taking business a step further Starbucks launched Deep Brew by 2019, an AI-driven machine learning platform to keep pace with the fast-moving market changes and to collect data on customer behavioral patterns. This meant the more data Starbucks collected, the more prepared they were to make the right decisions to grow their business. In 2020, Starbucks generated $19.16 billion in revenue. That’s double their revenue after implementing AI into its mobile apps.

Deep Brew is the fuel behind Starbucks’ delivery of highly personalized recommendations to every customer. Not only has Starbucks mastered creating individualized offers at an enterprise scale, but its platform creates millions of offers each week with dynamic actions and rewards that influence customer behaviors for cross-selling and upselling opportunities every day. Deep Brew also enables continuous learning over time, tracking customers’ historical data and interaction patterns to optimize individualization the more they use the app.

By collecting and analyzing huge amounts of first-party data on customer spending behaviors and preferences, Starbucks utilizes vital never-before-seen insights. This enables the brand to personalize customer experiences on an individual level, based on unique preferences, historical orders, and other unique customer patterns.

The coffee giant's loyalty program deploys customized offers through omnichannel marketing covering mobile app alerts, emails, and push notifications. In addition to these enhanced connections to customers, Starbucks is also able to directly measure the impact of its initiatives by gathering key performance indicators that strengthen and feed into the next promotional campaign. This data is also utilized to plan where to open new stores. Starbucks' Artificial intelligence creates revenue projections based on unique demographic and location data and this helps determine where the next big revenue opportunities can be uncovered worldwide. 

The company can easily push out tailor-made recommendations according to the time of day and frequency with which customers usually visit their particular store location. By sending real-time push notifications, they create a deeper level of connection with the customers and in turn, customers notice that Starbucks takes their preferences into account.

Having capitalized on behavioral and geographical segmentation they can take advantage of sales opportunities connected to repeated behavioral patterns on the customer level.



Customer-Centric Rewards Paired with Coffee

Starbucks has full visibility into customer profiles. The company can view whether customers prefer mobile ordering, their repeated food or beverage preferences, the amount of their average order, how frequently they're visiting, how stars are being redeemed, and even what location customers frequently visit. This is a critical driver behind customer retention and customer lifetime value, as the Starbucks app can automate offers with dynamic actions and rewards to influence certain customer behaviors including purchase frequency, product category exploration, and pushing cross-sell and upsell opportunities of new products.

Starbucks' early use of embedded financial technology is why Starbucks is at the forefront of excellent customer experiences, a leader in customer loyalty, and a pioneer of digital personalization. Today they have essentially become their own neobank and tech company.




Here’s how Starbucks uses financial services to keep their customers coming back to their stores:

Starbucks has implemented closed loop cards, which are cards that store value and can only be used to make purchases directly from Starbucks. Their customers preload their virtual wallets and gift cards with the incentive to earn double the rewards for spending all while Starbucks gets to skip out on costly transaction fees.

These preloaded funds act as a source of free lending with no interest for the company. Stored card values for Starbucks act as bank deposits and have fewer regulatory requirements since they can’t be redeemed for cash and aren’t insured.

These deposits are recorded as a liability for Starbucks and in doing so the brand can use these funds for business as they see fit.


Starbucks Outpacing Big Banks

In addition to facilitating and processing purchases, Starbucks also stores an incredible amount of money per year. Remember that customers receive double the stars as reward points if they preload money into their Starbucks account, an incentive that is not a coincidental move.

Starbucks customers have accumulated a total unspent balance of US$1.628 billion on the company's prepaid physical and digital reward and gift cards in 2021. This means Starbucks keeps all preloaded funds that go unused or unspent over time, eliminating any breakage from gift cards.

To put Starbucks' $1B+ in stored value in context, consider that 85% of US banks have less than $1B in assets.

In recent years, digital banking services have graduated from a niche product offering to a mainstream business trend as the opportunity to create better customer experiences has motivated large brands like Starbucks to recognize that the future of retail is tied to embedded financial technology. Technology that not only powers personalization at scale but deepens customer relationships, solidifies brand loyalty and strengthens customer lifetime value.

Starbucks has created a streamlined customer experience that raises the convenience of the checkout process, all while being their own bank. Through continuous machine learning and optimization of customer data and insights, Starbucks easily paces ahead of its competitors as the app anticipates the needs of each customer and gets better at doing so each time it’s used.

Starbucks exemplifies everything embedded finance brings to the table for an enterprise organization. They have set the bar high, showing other companies how a robust customer rewards and loyalty program can benefit both customers and the company for the long haul.


What Starbucks Could Do Next

There's no doubt that Starbucks paved the way for the world's top brands to see the vision of what embedded finance could offer. With that said, there's always an opportunity to evolve. A natural progression for Starbucks' card program could be to open-loop their cards in the future.

Open-looping cards would subject the brand to new regulatory requirements and a keeper level of KYC for their customers, so Starbucks would need an embedded finance partner with full security and compliance coverage. Even so, the opportunity for Starbucks to create an open-loop card system would grant the brand the ability to capture interchange fees from its 30 Million mobile payment app users.

Not only would this change how customers can use their Starbucks cards and engage with branded financial services, but it would also allow the company to capture all customer spending data from outside their store. This invaluable data would enable Starbucks to adapt its business practices as customer preferences, and behaviors shift and change over time.

Using an open-loop card system, Starbucks can continue optimizing customer experiences by creating next-level personalization for their loyal customers to use in everyday life. And with a new line of revenue made through the interchange, Starbucks can reduce marketing costs and increase profit margins through a service that already holds incredible brand loyalty. Obtaining full visibility into customer spending behaviors can uncover new brand partnerships and boost marketing expansion, optimizing Starbucks' overall business operations.

Interested in learning more about closed-loop card programs? Or looking to evolve your closed loop card and open it up to swipes or taps at any merchant? Contact us today.




Written by Alviere