Starbucks Holds A Lot of Consumer Funds, Maybe It Pays Better

by Ben Jackson 0

Marketwatch recently noted that Starbucks Corp. has more money loaded onto its prepaid cards than many banks have in deposits, racking up over $1.2 billion in the first quarter of 2016.

The Starbucks figure exceeds the deposits at many actual financial institutions, including California Republic Bancorp CRPB, -0.08% ($1.01 billion), Mercantile Bank Corp. MBWM, +0.38% ($680 million) and Discover Financial Services DFS, -0.01% ($470 million).

The article also notes that Starbucks outpaces open-loop prepaid provider Green Dot.

It far exceeds Green Dot Corp. GDOT, among the largest prepaid-card providers, with its $560 million on deposit. Such prepaid cards, the Wall Street Journal notes, are often used by consumers who don’t have traditional bank accounts.

While the Starbucks funds can only be spent in the stores, it is worth noting that they yield a better return for cardholders than most savings accounts, and with no minimum balance. reports that the average yield on Money Market &Savings Accounts is about 0.11% APY. That’s .0011. Not a lot of return. Savings account holders are losing value.

But let’s look at what a Starbucks customer gets. Assume the loyalty program works out to about 1 coffee on every 32, and that the cardholder is buying just plain coffee.

Cost of a cup of plain coffee: about $2

1 free coffee on every 32 purchases: $2 on $64

ROI = about 3%

This means that money on a Starbucks card has at least a chance of keeping up with inflation.

Granted this is fairly loose math, but it does show that consumers are not making an irrational decision when they decide to load up a Starbucks card. Customers get value in the form of the return on the loyalty, they have the convenience of funds dedicated to a daily purchase, and they can budget how much they spend by how much they load. The value of prepaid as a branded currency is fairly evident for the customer.

On the other side, Starbucks is saving money on every transaction that runs over its closed-loop rails as opposed to the open loop rails. Even when the card loads come from an open-loop card, the total transaction costs work out to be less expensive for Starbucks.

The large loads show the value of prepaid cards for consumers and issuers, and suggest that there is a future for branded currency as a payments type.

Overview by Ben Jackson, Director, Prepaid Advisory Service at Mercator Advisory Group

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