Starbucks’ New Prepaid Card Underpins Its Next Plot for Payments

When Starbucks' new loyalty program rules go into effect this month, it will set the stage for a wave of new payments innovations with intriguing benefits for the coffee giant and its payments processing partner, JPMorgan Chase.

The first new product emerging from Starbucks' increasingly tight relationship Chase is the Visa-branded Starbucks Reloadable Prepaid Card from Chase, which rolls out later this year, enabling users to earn Starbucks rewards on all spending—including purchases at other merchants—which also benefits Chase in many ways.

Though Starbucks hasn't disclosed full details of the new product, a company spokesperson said the reloadable prepaid card—a first for Starbucks—will be marketed through Starbucks' mobile app, carry no monthly fee, will be free to load and have no overdraft fee.

The deal is "just the beginning" of more new payment options to come, Kevin Johnson, Starbucks' chief operating officer, said at the coffee giant's annual shareholder meeting March 23, and several analysts say it showcases how closely linked retailers' payments arrangements are becoming to their broader marketing goals.

"Starbucks has had great success with a prepaid approach to its rewards program, and combined with its thriving mobile payments app, it's achieved a certain leverage in dealing with financial services providers," said Rod Reef, an analyst with Reef Karson Consulting.

It's no coincidence that Chase is now experimenting with new approaches to working with key merchants like Starbucks, Reef added, pointing to Chase Pay, the mobile wallet Chase announced last year that promises a new, lower transaction-processing rate for participating merchants.

The latest phase of Starbucks' payments strategy began last fall when the Seattle-based company selected Chase to broadly handle its card-processing. Chase replaced Square Inc., which Starbucks teamed up with in 2012 for a high-profile—but relatively short-lived—union which also involved Starbucks investing $25 million in Square and Starbucks CEO Howard Schultz taking a seat on its board for a year.

In February of this year Starbucks said it's also adopting Chase Pay as a funding option for the Starbucks app, which accounts for 21% of all transactions its U.S. stores. More than 70 million consumers worldwide regularly pay using the Starbucks mobile app, the company said.

With Starbucks and Chase joining forces now on a new, reloadable prepaid card, both companies stand to benefit in a variety of ways, Reef said.

"Based on Starbucks' existing, broad relationship with Chase, we speculate Starbucks could be getting special 'relationship pricing' breaks, and Chase may be getting special incentives on handling Starbucks' migration to EMV terminals," Reef said. "Chase may also get a chance to market a financial services product directly to Starbucks customers through its stores, and with a retailer with as large and global a presence as Starbucks, that's no small thing."

Chase knows that territory well. Chase and Starbucks collaborated on the popular cobranded Duetto Visa credit card from 2003 until 2010, when the relationship abruptly ended.

Chase already covers more consumers than any other card issuer, said Eric Grover, an analyst with Intrepid Ventures.

"But with the new prepaid card, Chase could maybe reach customers it's not already serving: A younger or subprime consumer that pays with cash at Starbucks," Grover said. "And with Chase as Starbucks' processor and prepaid card issuer, the bank will have access to all kinds of data and could execute marketing programs to those customers, if that were an option."

There's still plenty of mystery surrounding who exactly Starbucks aims to target with the new prepaid card, however.

Analysts say Starbucks' newest prepaid card likely will be a different beast than the common type of reloadable prepaid card that is marketed to the underbanked with  features including bill-payment and broad ATM access.

Chase already targets that audience with Chase Liquid, a reloadable prepaid card that carries a $4.95 monthly fee and provides many features of a bank account (with no rewards), and analysts agree it's unlikely the Starbucks Prepaid Rewards Card from Chase would overlap it.

The new Starbucks reloadable prepaid card likely will carry certain other features that encourage consumers to routinely keep funds loaded on the card for everyday spending, said Ben Jackson, director of the prepaid card practice at Mercator Advisory Group.

"What we don't know is how Starbucks will promote the new prepaid card, and who it's designed for," Jackson said. "Starbucks could be aiming this card at millennials, who aren't big credit card users, but it's anyone's guess what their endgame is here."

A key element of the new prepaid card's appeal will be how rich the Starbucks rewards program will be for purchases made outside of Starbucks stores, Jackson said.

Starbucks has not disclosed exactly how rewards will stack up with the prepaid card, though it has already expanded its "Starbucks Stars" rewards to brands it does not control. In July 2015, Starbucks announced partnerships to offer Starbucks Stars to customers of The New York Times, Lyft and Spotify.

It's unclear how Starbucks' experience with those partners will inform the rewards it offers on its upcoming prepaid card. "We are currently evaluating the right rewards structure and will have more to share when we launch this product," a Starbucks spokesperson said.

The changes Starbucks is making in its loyalty program are a big part of its evolving new payments strategy, taking its brand into new realms of retail and services, analysts say.

Starbucks' new loyalty program goes live April 12, replacing the old system of rewarding customers with a free drink or food item for every 12 purchases with rewards based on money spent. Customers will earn one "Star" for every 50 cents spent, and 125 stars are required to redeem a free food or drink item.