Starbucks, Target Buck NFC in Mobile Payments

Register now

Starbucks Corp.'s mobile payment system went from a "Short" trial at 16 stores to a "Grande" deployment in more than a thousand locations, validating a low-tech approach to high-tech payments.

Starbucks is using a system that generates a blocky two-dimensional bar code-like image that is displayed on phones' screens. Users wave the image under a scanner at the point of sale to access funds stored on a gift card.

Payments companies have been testing for years another mobile payments technology the requires near-field communication chips built into phones, and though many of these trials have been declared a success, few commercially available phones have the needed hardware.

By contrast, the bar-code system uses software, and can easily be installed on the current generation of smart phones.

It was the simplicity of the bar code that allowed for such a rapid expansion of this deployment.

Starbucks began testing the application last September, and in February, Target Corp. began using a similar system to accept its gift cards at all its U.S. stores.

Last week, Starbucks expanded its program to include about 1,000 of its coffee shops that are within Target locations; it only took a tweak to the software to make the Seattle company's mobile gift card payment app compatible with Target's system.

Observers say this demonstrates why 2-D bar codes, though not as flexible as NFC chips, may be a more practical and more adaptable technology for the near term.

"The potential for 2-D bar codes is somewhat understated at this point," said Nick Holland, a senior analyst at Aite Group LLC in Boston. "Why wait for NFC to happen when there's technology out there where you can get 95% of the solution right now?"

Still, many see NFC as the superior technology, and say 2-D bar codes may last only as long as NFC is unavailable. But the companies that offer bar-code payments today will be at an advantage when that time comes, Holland said.

"The companies that are early adopters now will be leaps and bounds ahead," he said, as they will have already worked out the tech and customer service issues.

Starbucks' mobile payment app was built by mFoundry Inc. of Larkspur, Calif. Target's system uses technology from another vendor, which it would not name; Target modified it in-house.

Drew Sievers, mFoundry's co-founder and chief executive, said that although Target does not use his technology, its use of a similar system made the rapid expansion of the Starbucks system possible.

"We had a flexible enough approach that we were able to change the bar code for everybody on the fly so that we could have a broader reach," he said.

The same could be done for other retailers interested in using mFoundry's technology, he said, and Starbucks' expansion serves as a very public endorsement of mFoundry's approach.

"They wouldn't be rolling this out to as many stores if it wasn't working," Sievers said.

Alisa Martinez, a Starbucks spokeswoman, said in an e-mail that, "We have seen a lot of enthusiasm among our customers" for the mobile payment system.

She would not provide details on how the app, which is only for Apple Inc.'s iPhone/iPod Touch, affected payment behavior.

Sara Moore, a Target spokeswoman, would not provide usage data for Target's mobile application. She said that its mobile gift cards can be used for purchases at Starbucks stores within Target stores, but the reverse is not true. Target cards can be accessed from any mobile device's browser or the company's iPhone app.

George Tubin, a senior research director at the research firm TowerGroup Inc., said that the Starbucks/mFoundry deployment could be a catalyst for further mobile payments projects.

"Anything that's done out there that gets people used to using their device for mobile payments is a … very positive step in the right direction," he said.

Tubin said the system could be improved by expanding to even more retailers and sharing a payment account among them. "To have it for not just one retailer, but for multiple, it's going to start to demonstrate what the value-add for mobile payments is going to be in the future," Tubin said.

Aaron McPherson, a research manager for payments at the research firm IDC Financial Insights, said that as a first step toward NFC payments, bar codes may be a better choice than what the industry calls "tags," stickers with NFC chips that are meant to be adhered to phones.

"The two aren't really comparable, but yeah, this does a better job because it leverages the mobile network … there's a lot of stuff you can do with this app that you can't do with just a tag," McPherson said.

However, as bar codes gain prominence, they may begin to clutter users' mobile wallets, McPherson said.

"If there's a different app for every store, after a while it gets to be annoying to keep scrolling around," he said. "Is it really faster than getting out your wallet and pulling a card out?"

For reprint and licensing requests for this article, click here.