By Gerry Shih and Lisa Baertlein
SAN FRANCISCO -- Starbucks (SBUX) plans to switch its processing of debit and credit card payments to mobile payments start-up Square, the two companies said Tuesday, in a deal will help establish two-year-old Square as a bona fide player in the industry.
As part of the deal, the world's biggest coffee chain will invest $25 million into Square, the San Francisco-based company led by Jack Dorsey, co-founder of social media company Twitter.
The alliance comes at a time when Square is facing increasingly stiff competition from rivals like eBay (EBAY) and Intuit (INTU), which offer their own mobile payment processing tools.
Starbucks Chief Executive Howard Schultz, who will join Square's board, said the tie-up would lower payment processing fees at the coffee chain's almost 7,000 company-owned shops in the United States.
He declined to say which payment processor Square was displacing or how much the company would save.
"Hopefully the Starbucks partnership with Square is a catalyst for new businesses signing up with Square because in a sense we will validate with great confidence Square's position in the marketplace versus others," Schultz said in a joint interview with Dorsey.
In its quest for small business clients who do not currently accept credit cards, Square typically touts its flat, 2.75 percent-per-transaction fee as a simple alternative to the various fees that some payment processors charge.
The company has grown swiftly, saying in June that it was processing more than $6 billion a year in payments.
"Obviously, as you scale up you do see reductions in cost and Starbucks is a very significant scale compared to a lot of other merchants in the world," Dorsey said.
At least initially, consumers will not notice anything different about how a barista swipes their cards, but Starbucks plans to roll out other Square products, including one that allows stores to sense when a user has walked in the door, and accept payments simply by taking the user's name.
Starbucks has been a successful early adopter of technology ranging from mobile payment options to social media marketing tools like Facebook (FB) and Twitter.
In early 2011, it released a mobile phone app that lets users load money onto their smartphones, which is then scanned to pay for drinks at the cash register. It now boasts more than 1 million mobile transactions a week in the United States.