Starbucks also will be investing $25 million in four-year-old Square. In addition, Starbucks president, chairman, and CEO Howard Schultz will join Square's board of directors.
"The evolving social and digital media platforms and highly innovative and relevant payment capabilities are causing seismic changes in consumer behavior and creating equally disruptive opportunities for business," said Schultz in a statement. "Both Starbucks and Square take a similar approach when building products and running our businesses, and together we can bring the best possible payment experience to Starbucks customers."
Later this year, Starbucks customers will be able to make purchases using the Pay with Square application, on either iOS or Android mobile devices. Starbucks presently has its own mobile payment app and customers will be able to continue to use that if they choose.
[ Learn more about Square. Read Square Launches iPad Point-Of-Sale Service. ]
At first, Starbucks customers will have to present a barcode generated by the Pay with Square app to be read by a laser scanner. "The initial experience of paying with Square at Starbucks will be similar to the Starbucks mobile payment application," a Starbucks spokeswoman said in an email. "Customers will be initially able to pay with Square at Starbucks stores by opening a tab within the application, which will surface a 2-D barcode that can be scanned at the counter."
The New York Times reports that at some later date, customers' phones will pass customers' names and photos to payment terminals operated by Starbucks cashiers to accelerate transactions. Starbucks' spokeswoman said that the presentation of names and pictures to cashiers "is one of many options we are looking at but nothing has been finalized."
Michael Gartenberg, research director at technology consultancy Gartner, said in a phone interview that the partnership represents a huge win for Square and validates the company's position in the mobile payment marketplace.
The deal will put pressure on competitors--Google, Microsoft, PayPal, and Sprint, to name a few--but won't necessarily change consumer behavior. "At the end of the day, you still have to convince consumers to use their phones to pay for things," Gartenberg said, noting that shoppers are already accustomed to using their credit cards at Starbucks. "When you go into Starbucks, it only takes about five second to swipe your card."
Presenting cash can be equally swift, if not more so. Video footage provided by Starbucks shows that using Pay with Square takes about 15 seconds.
Part of Square's value proposition for merchants is that its fees are lower than those charged by conventional credit cards, but Gartenberg believes that consumers may need an incentive to change their habits too. "When it comes to giving up personal information, consumers are increasingly expecting to get something of value in return," he said. He suggests that discounts for usage of the system may work but also says that a lot of consumers don't want to have their purchases tracked and their information aggregated.