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Can Starbucks Replace Your Bank?

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Starbucks Corporation (SBUX - Free Report) is perhaps the first name that comes to mind when you’re thinking of getting a cup of coffee. The brand’s position in the American marketplace is secure. But is the coffee icon grabbing a share of your bank’s business? Can it easily perform a big chunk of those functions?

Power of Pre-paid Cards

In many senses it already has. The era of going down to your local bank is long gone, with the tremendous growth in online transactions. You are probably more likely to go to Starbucks on a regular basis.

The reason why banking functions come into the picture are the coffee chain’s pre-paid cards. These loyalty cards mimic savings accounts, (redeemable only at Starbucks outlets of course). This already accounts for two banking operations, saving money and payments.

But these are more than gift cards. You can use your own card to buy someone else a Starbucks card. This covers an even more crucial function: money transfers. This is because by doing so, you are passing on your savings while Starbucks acts as an intermediary.

Increasing the Value Proposition

The money involved may not seem significant when you take the larger banking picture into consideration. But it is not a sum to be trifled with. More than thirty percent of transactions at Starbucks stores in the U.S involve the use of the chain’s pre-paid cards.

Taken together with data from the most recent earnings release, this implies that transactions using cards make up $2.5 billion of the company’s domestic sales. Starbucks could add even greater value to card transactions by allowing customers to use them at its other franchises such as La Boulange or Tazo Tea.

It could even offer a method of redeeming loyalty card value in cash, which in effect is a withdrawal. Its 11,000 stores in the U.S. could pose a serious challenge to conventional financial services using the power of a high number of interactions

Challenges for Traditional Banking

In a recent article in the Harvard Business Review, senior consultants from Accenture plc (ACN - Free Report) claim that players from outside the industry are eating into the business of banks through innovations such as Starbucks’ loyalty cards. These include such industry giants like Wal-Mart Stores Inc. (WMT - Free Report) , Google Inc.  and PayPal.

Google Wallet and PayPal can be used to both store and spend money. Using Google Wallet, you can simply email your cash via Gmail. Meanwhile, Wal-Mart has partnered with American Express to create Bluebird. 

This is a pre-paid debit card which allows you to make ATM withdrawals, charging $2 for each transaction. In fact, the first withdrawal made every month carries no charge. The low fees charged for the card is because it is structured in a manner which allows Wal-Mart and American Express Company (AXP - Free Report) to avoid bank interchange fees.

A Digital Future

Banks need to embrace digital methods in a big way in order to stop non-industry players from increasing their influence. Leveraging their large reserves of transaction data they can easily leverage the buying behavior of customers. Several banks across the world are already attempting to do so.

In fact, closer home, Bank of America Corp. (BAC - Free Report) is examining transaction data closely to provide cash back services to customers for frequently used merchants. This process has been used to return $17 million to customers.

Undisputed Leader

Going digital in a proactive manner seems to be the way forward for banks. On a different note, Starbucks is the undisputed leader of the coffee business and a great investment option. The forward price-to-earnings ratio for the current financial year is 27.47 and the stock has expected earnings growth of 20.90.

Given that Starbucks has a Zacks Rank #3 (Hold), it would be wise to remain invested. You can only expect more from this iconic brand which is changing the rules of the game.

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