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Does Starbucks Want to Be Your Bank?

The company's prepaid card program has some financial industry players asking tough questions.

Your average Starbucks (NASDAQ:SBUX) store doesn't look anything like a typical bank. But as surprising as it might sound, there's rising speculation in some corners of the banking industry in Asia that the coffee giant might be seeking to enter the financial services industry.

To be clear, Starbucks itself has never come out and said point blank that it has any interest in becoming a bank. But when you look at how the company's prepaid gift card and mobile app business is blossoming, the idea that you could one day open a bank account at the same time as ordering your Pumpkin Spice Latte seems a little less far-fetched.

Does Starbucks Want to Be Your Bank?
Image source: Starbucks.

Competitive concerns from Korean banks

A group of Korean bankers are worried that Starbucks will indeed launch into financial services in a few years, according to a recent report from The Korea Times. They cite the cash that the coffee chain has brought in as the main reason for their competitive concerns. Industry experts believe Starbucks could get involved in asset management through its prepaid cards, as well as the currency exchange, loan and insurance sectors.

An anonymous bank official was quoted as saying, "Starbucks have been regarded as a fintech firm, not a coffee company, over the past few years. The removal of the word coffee from its signboard also proves this."

Starbucks has certainly had great success with its stored value cards and mobile app. The company reported $1.56 billion in stored value as of the end of 2019. That 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.

Some recent strategic moves might also have made bankers nervous. Starbucks partnered with the cryptocurrency trading platform Bakkt at the end of last year in order to create a consumer app that will allow merchants and customers to buy, sell, store and spend digital assets at a global level. According to Bakkt, the app will help merchants with both "freeing up capital and supporting a direct relationship with their customers."

Is Starbucks following Capital One's game plan?

Starbucks isn't the only company linking coffeehouse culture and cash. Capital One Financial (NYSE:COF) launched its Capital One Cafes at the end of 2017. The spaces serve as community rooms that allow people to use free Wifi, while sipping on a beverage from Peet's Coffee. But the cafes are also a strategy for drumming up new business.

Capital One has ambassadors and money coaches at each cafe. Ambassadors show people how to open Capital One accounts and credit card accounts, while money coaches offer free appointments, and probably push new Capital One products when appropriate.

Yet Starbucks has an advantage over Capital One, because the coffee giant already has a loyal customer base. By contrast, as Ron Shevlin, director of research at Cornerstone Advisors, pointed out in 2018, Capital One Cafes face a big challenge in that loyal Starbucks or Dunkin fans aren't likely to forego their favorite coffee brand for Capital One.

Starbucks obviously doesn't have this problem. In fact, it has everything the modern bank branch could dream of at a time when the whole retail world is struggling to generate foot traffic. Moreover, the company's digital growth is actually driving more visits to its retail stores.

CEO Kevin Johnson said during the company's recent earnings call that Starbucks had grown its rewards program in the U.S. to 18.9 million active members at the end of 2019, up 16% year-over-year. "This is important because we know from experience that when customers join our rewards program, their total spend with Starbucks increases meaningfully," he said on the call.

Don't hold your breath

Yet even if all of the pieces are theoretically in place, Starbucks couldn't become a bank overnight. Banks are heavily regulated entities and even Capital One, as a registered bank and bank holding company, is limited to the transactions it can conduct in its cafes. Korean bankers are already calling for regulatory authorities there to require prepaid service providers like Starbucks to have a certain capital adequacy ratio.

One thing I wonder about initially is specifically how Starbucks could use all of its prepaid card cash, considering most of it has a short maturity. According to the company's fiscal year 2019 annual report, the majority of stored value cards are redeemed within one year, and have no expiration dates in most markets. If Starbucks had a capital ratio requirement, would the short maturity factor force the company to have a majority of its cash on hand at all times? It's far from certain.

That said, Starbucks' annual report goes on to say that when the company determines that prepaid card redemptions are unlikely, and there is no requirement for remitting balances to certain government agencies, those unredeemed card balances may turn into breakage income.

In fiscal 2019, 2018, and 2017, Starbucks, according to its annual report, recognized breakage income of $125 million, $155.9 million and $104.6 million, respectively. That's plenty of capital when you consider that most start-up banks raise just $20 million to $30 million in capital to launch.

Who knows what's next?

The idea of large companies looking to enter the financial services realm isn't new. But if Starbucks were to move forward with such an initiative, it'd make banking look very different from what it is today. You can already open up bank accounts from the comfort of your home -- why shouldn't you be able to do it while ordering a cup of coffee?

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