Is Starbucks a Bank?

Ashley Garrison: Hello, everyone. This is Ashley Garrison with the fabulous Brian Peckinpaugh and our resident lending wizard—David Catalano—for Baker Hill’s inaugural episode of Lending Made Easy. 

Really excited about this. Bryan and David really loved to banter, so we thought it would be fun to get their perspectives on trends and topics in the financial industry.

So today’s episode is going to be a really fun one. Who likes coffee? David, Bryan, what are your favorite types of coffee? 

Bryan Peckinpaugh: I like a light roast, a little bit of cream. 

Ashley Garrison: Strong is what David said. So the reason we’re talking about coffee. A lot of people are asking, “Is Starbucks a bank?”

So we thought this would be a fun topic for you two to talk about. It has to do with how Starbucks asks you to download their app, put a little bit of money on it, and then you can use that. But it’s basically like a bank, you know? So any thoughts or comments on this concept?

Bryan Peckinpaugh: Yeah, I think it’s an interesting question—”Is Starbucks a bank?” You know, we’ve seen it across the board with lots of different retailers. 

Apple comes to mind of these consumer product companies that have some banking-like nature to them. And, as Ashley said, everybody’s view around Starbucks centers around the whole prepaid card and how that acts as free loans from their customers to Starbucks until they’re used, but do you see them going beyond that?

David Catalano: So, this is interesting going beyond banking now. This is behavioral finance. These guys at Starbucks are wicked smart, right? So there’s a theory in finance called behavioral finance. It’s a niche, and it’s really, really interesting, and there’s a couple of things going on here.

There’s something called affinity bias, and affinity bias is when a person will make what I would call an unintelligent but emotional decision around money. So, they’re biased toward something that makes them make a bad decision with their own resource. In this instance, they’re biased towards Starbucks. Starbucks makes you feel really good, right? It’s not about coffee. It’s about the experience, right?

There’s this affinity bias going on. I get you, from this affinity bias, to put money on a card. I was like, wow, they put money on a card! I still can’t believe that they did that. Now, the second bias is the mental accounting bias. In mental accounting, what that says is when I get money from a source that’s not normal, I don’t treat it the way I would treat regular cash in my hand. So this mental accounting is going on. 

Now I’ve got this card—let’s say it’s got ten bucks on it or a hundred bucks on it. I’m going through the line. And if I was paying cash, I’d get a $2.38 tall, which is another brilliant idea we could talk about on a podcast.

Instead, I get this $8.75 thing because I’ve got this card that has money on it. It’s not real money, right? I already kind of gave that money away, so I can spend a little bit more on this, or I can buy Brian one. So they’re playing with biases that are based on behavioral finance has got nothing to do with banking.

It’s got everything to do with making more money. And it takes a really powerful brand to pull this off, and their execution is phenomenal. So that’s my take on it.

Bryan Peckinpaugh: Let’s visit the financial aspect of it. David, what I find really interesting, you mentioned having incredibly smart people at Starbucks, and there’s no doubt from a marketing and brand perspective, some of the best on the planet.

What they’ve got that I think is really interesting in the banking space is the retail presence. You know, we struggle across the financial services industry to get people into the branches anymore. Even through the pandemic and today, people flock to Starbucks. Not only do they go in, but they also stay.

So Starbucks has this captive audience in a retail facility. I think it would be the envy of, well, any financial institution, but of lots of other retailers. And you know, what happens if they start to really capitalize on that presence. Right? I mean, they’re already doing some of it with what you have to do to get on their wifi, the ads that you see the selling that happens while you’re there.

But, think about Capital One and their cafes where they turned to trying to leverage a Starbucks-like experience as part of their loan growth strategies for selling financial transactions, but they don’t have the huge community of loyal followers that Starbucks has. So what if they—and maybe they don’t do it on their own—partnered with a Bank of America to offer Starbucks branch-type financial services? What could that look like? 

David Catalano: I do think that’s interesting. I think that solves a problem for a bank, but if I’m Starbucks and I’m in an unregulated industry, and I’m about to embark upon a highly regulated consumer industry, because that would be a consumer play, not a business play, I don’t know that my ROI would be there nor our return on equity in that instance. 

I just don’t know that the economics of that would be favorable for Starbucks as a DeNovo bank offering their products and financial products through Starbucks branches, and then, renting their space or cohabitating with another institution that doesn’t drive a whole lot of traffic. 

It gets them to rent. I get that. But is that really solving a problem that Starbucks has? I don’t know if it solves a problem they have correct? I don’t know. I guess I don’t see what problems that solves.

Playing around with behavioral finance, they’ve got all these consumers that just oogle at Starbucks and the experience, the affinity bias is baked. 

The mental accounting bias is baked. To me, that’s natural. That’s just a lay-down natural for these guys because they’re just so good. And they see that is a function of the strength of their brand and the strength of their branch presence going to Starbucks. 

Even though it’s not my favorite coffee, it’s a great experience, especially around the holidays.

Bryan Peckinpaugh: You’re right. It’s not the best coffee. It’s probably the most consistent coffee. And, that’s what keeps me coming back is—when we’re traveling, we’re on the road—it’s easy. 

We know what’s there, what we’re going to get. But you know, you, you mentioned that unregulated nature, David, and I think that’s probably the biggest concern to those in the industry. I see more of it outside the U.S. right. You see a lot of the foreign banks much more concerned about it because it’s one of the few international brand presences that have this type of capability. 

To put it in perspective, going back to 2019, they are seeing north of one and a half billion dollars on their prepaid cards. And that’s that unregulated nature. I mean, think about how many banks in the US are under that size from an asset perspective. Should they choose to do something different with that $1.5 billion, it certainly could be a disruptive force. 

Obviously, you’ve got the challenges of that’s a much more liquid investment—if you will—because they’ve got to be able to pay that on any given day if somebody comes in and redeems the cards. But then you’ve also got to tie into your finance discussion, the breakage concept where they see, I think, roughly about 10% per year or so moved to what they call breakage, which is just where somebody bought a card, and it’s never going to get used. 

Which 10%, you know, it doesn’t sound crazy until you think about 10% of $1.5 billion. And, you see $150 million in breakage going to the bottom line. So I think that’s probably the concern.

What do you think they could do with …

David Catalano: It’s a float, right? They’ve got some float there. They need to deploy the float. What do I think of that? I don’t know. Taking this beautiful business into a highly regulated environment where the employees that work there today don’t operate in that environment. Right? 

They do a great job doing what they’re doing. You know, they’ve got great benefits, so they’re probably stickier than your average retailer, but—at the end of the day—they’re not going through the same check to go before they get the job. They’re not going through the same level of training. They’re not dealing with money on a regular basis. 

It’s totally different animal. Transforming that animal would be challenging. If I was sitting on the board at Starbucks, I don’t know that I would vote for that move. I’d have to see the numbers. You’d have to be very, very compelling.

Could I do something else with that float? Yeah, probably. I don’t know, there are rules around that because it’s unearned until it’s earned, so … 

Ashley Garrison: So final thoughts, guys? Is Starbucks a bank? 

Bryan Peckinpaugh: Yeah—a final thought on my side. Starbucks is definitely not a bank. I’m with David. The regulatory piece is going to be really what kills them at least here in the United States, who knows what they do internationally.

I’m sure we’ll revisit the regulatory concept and landscape in future episodes. But yeah, to me, not a bank.

Ashley Garrison: Awesome. And, David, as your answer to “Is Starbucks a bank?” you say  loudly: It’s not a bank. 

The one question I have for you, though, is what about the behavioral analytics side of the app usage and learning from their consumers about the amounts that are being deposited, and how they’re spending money? Are they loading it with a hundred dollars and spending it all?

Is that something that you think a bank could potentially learn from? 

David Catalano: Yeah. I think a bank could always potentially find behavioral patterns. What’s the marginal return on that? I guess it would depend on how many of their customers are in that pool, and if they’re not, whether or not that pool represents the customers they serve.

There are always interesting things that can be teased out of data with smart people and the right amount of data. Of course, the opposite is true too. Right. You can pull whatever you want at a data if you’re pretty good at it. 

Ashley Garrison: Well, absolutely. Very fun topic for our first episode.

We hope you guys enjoyed “Is Starbucks a bank?” 

If you have any podcast suggestions, please, contact Baker Hill, and we’ll have Bryan and David contemplate a new topic.