August 27, 2019

Starbucks borrows billions from its own customers… with gift cards

Starbucks uses its gift-card reserves to borrow billions of interest-free cash from its customers… while still providing free lattes.

Photo via 401kcalculator.org (Flickr CC)

Starbucks is well known for its rewards programs, which give caffeine junkies a mobile app and gift cards to load up cash, earn stars, and redeem them for more jitter-bean juice.

But what’s less commonly known is that all of the money Starbucks customers load onto their gift cards and into their apps also functions as a $1.6B loan to Starbucks.

And, as Canadian writer JP Koning shows in a detailed blog post (which is worth checking out), it’s a great deal for Starbucks.

Big ’Bucks uses its customers as creditors…

And Starbucks doesn’t have to pay any interest on all that money that customers “lend” it. Starbucks also offers bonds, but it has to pay back its creditors interest of between 0.46% and 4.5%.

But customer gift card totals aren’t just a cheaper way to borrow — they actually make Starbucks money: The Seattle chain brings in $155m every year from unredeemed balances — which means Starbucks’ gift card program effectively lets it borrow cash at a negative 10% interest rate.

So… why doesn’t every company do this?

Some companies try: PayPal, for example, also receives about $20B in loans from its customers — and it pays no interest. 

But it has to keep money in reserve in case its customers withdraw their cash en masse. Starbucks, on the other hand, just has to keep a reserve of… coffee. So S’Bucks can earn waaaay more in interest than PayPal.

Other retailers could conceivably use prepaid gift cards to bring in free financing — although few of them do it as well as Starbucks. 

Walmart, for example, does 20x as much in sales as Starbucks ($500B vs. Starbucks’ $25B), but has a similar amount of gift card cash in its bank ($1.9B).

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