Wanna know why it's called Starbucks? Cos they have turned fake "stars" into real bucks!

Star. Bucks. ??

Starbucks?is smarter than you think.

Starbucks is an unregulated bank, not a mere coffee company.

Starbucks is, in fact, a fintech firm now.

Over the years, the company has invested heavily in?its mobile app.

Customers have grown to love the user-friendly experience.

They love the customization features.

And most of all, they love the rewards.

Starbucks makes a lot of money from selling coffee, as well as food and mugs etc.

However, that’s not the piece that I find the most interesting.

Recently I discovered a very unique strategy Starbucks is using to pull even more value from its mobile customers:

By using those customers as a very generous lending partner.

Starbucks's ingenious mobile strategy

Here's how Starbucks makes more bucks than you can imagine.

As we all know by now the fast-food giant, McDonald's is in the real estate business and Harvard and Stanford are Hedge Funds with Universities as their side hustle.

So what if I tell you that Starbucks is in the banking business not the coffee business?

Allow me to explain, it starts with the story of Starbucks.

The Story of Starbucks

Starbucks was started by the trio, Jerry Baldwin, Zev Siegl, and Gordon Bowker with Alfred Peet as their mentor. This was 1971 in Seattle and Starbucks mainly sold coffee beans. Then enters Howard Schultz who liked Starbucks and lobbied the founders to hire him as Director of Sales and Marketing. Then on a visit to Milan, Italy Howard Schultz decided to make Starbucks a coffee shop rather than a coffee beans store but the founders were not excited about the idea.

In the year 1985–86 Howard and his investors purchased Starbucks and thus began the Starbucks we know today.

Within five years Starbucks had grown to around 140 locations and filed paperwork to go public in 1992. The infusion of cash allowed Howard Schultz to accelerate his already rapid expansion plan and within just two years of going public, the company’s store count had already tripled. By 1996 Starbucks had opened its 1000th store and debuted its first international location in Japan. Three years later Starbucks had doubled yet again with a total store count of nearly 2,500. But with all this growth the brand experience and consistency of coffee around the stores were well maintained.

In 2000, Howard Schultz transitioned to Chairman, and Orin Smith became the CEO. At the time company had around 3000 stores and under new management, Starbucks charted a new course towards even faster expansion. From 2000 to 2007 Starbucks grew more than four times and over the course of those 7 years, Starbucks opened around 1,500 new stores a year.

On a side note, Starbucks grew so much that a phenomenon called the Frappuccino Effect was observed.

It says that the price of real estate increases significantly when a Starbucks was nearby.

All this quick growth did not happen without its problems. Starbucks was cannibalizing its market share with oversaturation but the more serious problem of all was that management had been cutting corners for years by prioritizing profits over product quality and customer experience sacrificing the values that Howard Schultz had made an integral part of Starbucks.

It seemed that Starbucks’ Green Mermaid(or Siren) had lost her soul.

The 2008 Stock Market Crash had an adverse effect on the stock price of Starbucks.

So in 2008, Howard Schultz returned as the CEO of Starbucks.

He started restoring the Green Mermaid(or Siren)to its founding principles of product quality and customer experience.

In 2016, Howard Schultz resigned as CEO after bringing the company to the previous glory.

Starbucks Today and its Technology

With amazing foresight, Starbucks also hired its first chief technology officer and launched the Starbucks loyalty card.

The new focus on digital eventually paved the way for Starbucks to release its own app which is now responsible for a remarkable 30% of the company’s total sales.

Let me say that again, "now responsible for a remarkable 30% of the company’s total sales"!

Today such loyalty apps have revolutionized the food and restaurant industry.

These loyalty apps allow users to easily accumulate rewards points and get a free drink, meal, or discount. If you are unaware of the way it works now, is that instead of paying with cash or credit card, you can also add money to your Starbucks account.

Then, you can pay with the app on your phone, giving you twice the number of “stars”, which let you redeem free drinks.

While this may not sound all that genius, Starbucks is one of the most popular restaurant rewards apps in the industry.

Because of Starbucks’ size and customer loyalty, customers are not afraid to keep some of their money in their Starbucks account, as they know they’ll use it someday or other.

41% of U.S. and Canadian users pay with their Starbucks card.

At the end of 2019, users held a collective $1.5 billion in balances.

1.5 billion dollars might not sound like a huge amount, but it’s significant when you consider that more than 3,900 banks across the U.S. have less than $1 billion in total assets, according to the FDIC.

That’s higher than the deposits held by Customers Bank ($780m) and the Green Dot Corporation ($560m). Starbucks still has a long way to go to catch Paypal which boasts a whopping 13 billion dollars on its customer accounts across the world.

Starbucks and Banks: Sabai Sabai ( same same)

Customers will one day exchange their money for coffee, but in the meantime, they unknowingly provide Starbucks with a 1.5 billion dollar loan, at 0% interest.

Starbucks may use this money to invest in the market, earn profits for free, or spend on expansion.

It’s even better than it looks.

About 10% of this money will be forgotten or lost and therefore never be used — known in the industry as breakage.

In the FY 2019, 2018, and 2017, Starbucks, according to its annual report, found the breakage income of $125 million, $155.9 million, and $104.6 million, respectively.

But the thing is Starbucks is not a bank legally.

So with only a few exceptions, Starbucks' balance cannot be withdrawn for cash like a real bank, only coffee, allowing it to bypass financial regulation and use deposited money however it likes.

You can understand it easily by the diagram below.

In a general Bank, the people who deposit their money can withdraw their money whenever they want, so the Banks need to keep some amount of cash to give money when customers withdraw money.

This is called Fractional Reserve Banking.

But Starbucks doesn't have to keep a certain amount of cash ready in case of mass withdrawals.

It just needs coffee!

However if Starbucks wanted to, it has all the elements to build a fully-fledged currency or partner with other brands to create a widely-available mobile payment system.

Customers already use Starbucks gift cards as the next best thing to money.

Starbucks gift card is somewhat liquid not because it can be converted to Coffee, but because you can reasonably be sure that anyone will have some use for it, making it an almost universal intermediary.

All this is giving chills to regular legal banks.

The CEO of South Korea’s third-largest financial group stated that Starbucks is an unregulated bank, not a mere coffee company.

We cannot be sure what Starbucks will do next, or what its goals are but industry experts believe Starbucks could get involved in asset management through its prepaid cards, as well as the currency exchange, loan, and insurance sectors.

Starbucks' rewards program is an innovative example of a non-banking entity using loyalty and trust to amass significant customer deposits.

This forward-thinking approach led many to categorize Starbucks as a 'neobank', 'FinTech', or even 'an unregulated bank'.

What do you think?

Let me know in the comments!