It is a little known fact but the world's most famous coffee chain, Starbucks, also perhaps a better bank than most American banks.

Why?

There are three broad financial themes here:

It is a little known fact but Starbucks has deposits. Lots of them in fact - nearly $2 billion at last count. And the risk of them suddenly being withdrawn or regulated as bank deposits is very low. In fact, these funds are incredibly stable and impressively unregulated precisely because no one thinks of Starbucks as a bank.

Even better, Starbucks pays precisely zero in interest on these funds and exchange very, very few benefits to people who leave their precious capital with a coffee chain. It is an interest free loan, basically, from the company's most loyal customers. You know you popular when......

Finally and most wonderfully, not only do people give Starbucks their hard earned money with the intention of eventually using it to buy coffee (or a mug or whatever) but then sometimes they never actually do that. They forget, they move, they lose their phone or password or gift card, they might even pass away. When this happens this interest free loan actually just becomes free money.

It sits there forever which means Starbucks can do what it wants with it. Borrow against it, spend it, lever it up, you name it.

Remarkable. Do you think your bank ever forgets about its loans?

How does this magic occur?

Back in 2001, Starbucks came up with a brilliant idea to allow people to deposit money onto special rewards accounts that they then could use to make purchases at the coffee outlets all over the country. The whole idea is that these accounts would be both virtual and make for a seamless transaction at checkout.

First these occurred on plastic cards like credit cards and later largely moved to smartphones and the eponymous Starbucks app.

It is difficult to remember this now but even in the 21st century a lot of transactions used to occur with cash.....

Later, once it was established, Starbucks then came up with a loyalty program that sends you Starbucks "Stars" for every dollar you spend on anything at the company. Additionally, a loyal customer would get more Stars (or points) if you spent above a certain amount (which nearly everyone does) and another boost if you spend on the app using your account.

That last part is incredibly important. Regular Starbucks users, of which there are millions, are quietly and subtly nudged to buy via the app. After all you get more Stars and that means a free coffee quicker and so why wouldn't you?

This fact encourages people to constantly keep a balance on their Starbucks accounts. This balance can be any size you want but if you keep it very small then you constantly have to re-load, which is intentionally annoying. Very quickly, for a lot of Starbucks fans, this balance can get pretty sizable.

As we alluded to above, this past quarter Starbucks announced that they had $1.8 billion in deposits in their reward accounts. This is up from $1.2 billion as recently as 2021 and $1.6 billion in early 2022.

Business is good!

(Side note: amusingly, the pandemic was good for deposits as people did not want to touch cash and ordered online for pickup which of course incentivized using the app and therefore a rewards account. Starbucks would never likely say this outright but the pandemic was great for their banking franchise and the overall stickiness of their brand.)

At the time of writing, according to the coffee chain itself, 31 million loyal customers have money in their accounts. And sure, they are constantly spending down their balances but they also adding new funds constantly as well. Like anything these flows can be modeled and there is likely even a seasonality to the money coming in and out related to pay and bonus/tax cycles etc.

Now, in a day and age where $100+ billion deposit banks are imploding left and right $1.8 billion may sound like chump change but it actually isn't. Rather, $1.8 billion dollars is bigger than 90% of the institutions regulated by the FDIC.

So, Starbucks is not just borrowing long and never lending, they are also doing so at a size and scale that is far larger than most US banks. And, most critically, the (free) deposits are growing rather than shrinking.

Lastly and perhaps best of all for Starbucks itself, by encouraging people to use the rewards accounts they also make more margin or more money per transaction.

Why?

Well, by using their online reward accounts customers are also NOT using a credit card or some other form of payment. This is VERY wonderful as it means they save on payment processing fees to the likes of Visa, Mastercard, banks etc.

Let us summarize the benefits. Starbucks gives out Starbucks rewards and in return receives:

1. Free money - always nice.

2. More customer loyalty with a better customer experience and faster service - a better retail experience relative to other coffee house chains.

3. Higher profit margin - via significant savings on payment processing fees.

More money, more custom, more profits. Not bad.

It enough to even make you feel some sympathy for America's bankers (speculative). They find themselves caught in a vicious crossfire between more regulation from one side and a technological shift with ever more fluid and fast moving funds on the other.

That is a tough place to be in an absolute sense but even worse they are watching a major American company that sells them their morning coffee slowly become a larger and larger deposit taking institution with better profits.

The best part is that they are even fueling Starbucks Bank's rise. No JPMorgan banker would dream of having an account at Bank of America but guess what the likely most popular place for American bankers to buy coffee is.....

*******

Have questions? Care to find out more? Feel free to reach out at contact@pebble.finance or join our Slack community to meet more like-minded individuals and see what we are talking about today. All are welcome.