The Real Reason Wal-Mart & Starbucks Want You to Get Their Rewards Debit Cards

by Sarah Grotta 0

Walmart and Starbucks have both recently made announcements regarding their payment card options. As reported by

Starbucks and Wal-Mart are looking a lot more like banks lately. Starbucks just announced a new debit card that sounds a lot like an airline miles card, while Wal-Mart is about ramp up its cash-back and other benefits on some transactions run through its plastic. What’s in it for these big retailers? And for you?

To be clear, these are prepaid debit cards, not the so called decoupled debit that Target utilizes. The reasons for the giant retailers’ payment products are quite different. For Starbucks, who is partnering with JP Morgan Chase for its product, it’s all about the processing fees:

Letting consumers spend Starbucks bucks at any place where credit cards are accepted by joining forces with Chase creates even more incentive for consumers to load up the app with cash. It’s easy to imagine those $50 reloads becoming $500 reloads for devoted coffee drinkers. That will give Starbucks an ever-larger pile of cash it gets to hold and can use to retire debt or invest.

Meanwhile, Starbucks will probably get to share in transaction fees with its card partner, Chase, when consumers swipe the plastic at other stores. Contrast that to the current situation that Starbucks, and all retailers, encounter when a consumer pulls out plastic at its stores. A small-dollar transaction such as a $2.75 cup of coffee could result in fees of around 25 cents, after a per-transaction fee and percentage fee is added. Most of that fee is eliminated when Starbucks drinkers use the Starbucks app to buy java.

For Wal-Mart, it’s about the competitive landscape:

Wal-Mart’s story is simpler. The discount giant is making the move chiefly to maneuver in reaction to Costco, which is about to make a dramatic change in its credit card offering. For 16 years, Costco only accepted American Express credit cards in its stores. This summer, Costco shifts to Visa. It’s also ramping the reward offering for its own Costco Visa card, promising consumers up to 4% cash back on gas and 3% on travel. So Wal-Mart is partly reacting to Costco’s enticing offer with its own. At the same time, Wal-Mart is also making a jab at Amazon and other online retailers by heavily incentivizing purchases. Consumers who order online, but pick up at local stores, will still earn 3% cash back, giving regular Wal-Mart shoppers a huge incentive to plan ahead before their shopping trips. That also gives Wal-Mart critical data about their shoppers, and a logistical leg up for its supply chain.

Overview by Sarah Grotta, Director, Debit Advisory Service at Mercator Advisory Group

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