Lauren Goode

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Here’s How Mobile Payment App Square Will Process Your Bucks at Starbucks

Earlier today, buzzy mobile payments start-up Square announced a partnership with Starbucks to process credit card transactions at 7,000 Starbucks shops across the U.S., and to make Square’s mobile phone app an option for payment, as well.

Starbucks will invest $25 million in Square, and Howard Schultz will join Square’s board.

In a sit-down with a small group of journalists this morning in New York City, Starbucks chief executive Howard Schultz and Square creator and CEO Jack Dorsey answered questions about what the tie-up means for both companies, as well as how it has the potential to revolutionize payments for customers. Both stressed that Starbucks’ current register system isn’t going anywhere — for now — but adding Square to the mix adds a whole new layer of payments that might leave some people wondering how, exactly, it works.

Starbucks won’t put iPads at its registers — at first. Currently, the 75,000 merchants across the U.S. that accept Pay with Square use iPads as registers. The iPads are loaded with Square’s merchant software and are also equipped with the actual Square dongle, a little, white, credit-card-swiping tool.

In this case, Starbucks will take credit cards using Square software on its existing registers. Part of the appeal of this deal, Schultz said (in addition to the lower interchange rate), was that Starbucks was able to “seamlessly integrate Square into stores” without an overhaul to current infrastructure. For Square, this is the first time the company has developed point-of-sale credit-card-processing software specifically for a business not using the iPad register.

Customers will be able to use the free Pay with Square smartphone app, too, which usually enables a user to walk into a Starbucks store, activate a tab on the app that virtually announces their arrival at that location, and pay for a coffee just by walking up to the register and saying their name. But in Starbucks, it will involve showing a 2-D bar code. Dorsey said today that he hopes to see more use of the “geo-fencing,” hands-free technology in the future. (For more on how this works, check out my review of the app here.)

Starbucks customers can still use Starbucks mobile apps to pay. Mobile is big for Starbucks. As my AllThingsD colleague Tricia Duryee reported here, Starbucks has processed more than 55 million transactions since launching mobile apps in January 2011, and today is processing more than one million mobile transactions per week in the U.S. alone. And 25 percent of customers use Starbucks cards, including purchases made with the phone. Schultz has said that he expects a majority of these transactions to transfer over to Square, but customers will still be able to use these Starbucks-branded mobile apps to get their daily, and sometimes twice-daily, doses of caffeine.

Square will now show Starbucks locations in its directory. Square has tried to make its Pay with Square app more than just a payments app by adding a list of local merchants in your neighborhood that accept Square. In my test of the app, the list of merchants in my neighborhood was thin, but existent nonetheless. But if there are thousands of Starbucks stores, and those are now part of the listings, isn’t the app going to be completely bombarded with Starbucks? Square has assured me this isn’t the case, and that only one or two Starbucks nearby will pop up on the app. Note: Those Starbucks counters you see inside Target stores and airports won’t accept Square as a form of payment — it has to be a full Starbucks shop.

Sorry, Windows Phone users: Square-Starbucks payments are for iOS and Android smartphone users only. “We will will build apps for wherever the users are, and we’re excited about Windows Phone, but we don’t have a timeline for when Square might build for Windows,” Dorsey said. “IOS and Android are just the largest in the market right now.”

How secure is Square at Starbucks? Dorsey said that Square isn’t adding additional layers of security for the Starbucks transactions, and that Square continually verifies the protections it has put into place for transactions. He did say, however, that Square would be pushing harder for people to use a legitimate photo of themselves — not a random avatar — in the Pay with Square app, for verification purposes; and that users have the option to set a PIN code on the app to prevent a fraudster from using it. A representative from Square added that the company will be working to integrate “chip and PIN” technology as that standard for payments makes its way here to the U.S., and as Square makes its way abroad.

You’ll still have to pay at the Starbucks register. If you’ve ever been to a crowded Starbucks, you might have had your order taken while you’re waiting in line. While retail may eventual move more toward a kind of floating point-of-sale system, where the transaction happens anywhere in store (think Apple Store), for now, enabling Square doesn’t mean customers won’t have to wait in line. The transaction still has to happen at the register.

Did you know that you can buy Starbucks at a drive-through? Yup, it’s true. Caffeine-addicted Americans can now use the Starbucks app to pay for a coffee at a participating drive-through window. But it’s unclear whether Square’s app will be useable here. Part of the reason why customers will still be required to pay at Starbucks registers to start is because payments elsewhere “are complicated,” Schultz said, adding that the company has been experimenting with orders via email and online payments, as well.

For now, Square will only work at U.S.-based Starbucks locations. But Square hasn’t hidden its intent to expand overseas, and partnering with Starbucks is certainly a step in that direction. “We’re pushing hard to bring Square outside of the United States, and you can expect to hear more on that,” Dorsey said.

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I think the NSA has a job to do and we need the NSA. But as (physicist) Robert Oppenheimer said, “When you see something that is technically sweet, you go ahead and do it and argue about what to do about it only after you’ve had your technical success. That is the way it was with the atomic bomb.”

— Phil Zimmerman, PGP inventor and Silent Circle co-founder, in an interview with Om Malik