Starbucks is a Bank, not a Coffee Shop

Starbucks coffee shops are a cover for the world’s largest unregulated bank.

Starbucks Corporation poses as an international chain of coffee shops, headquartered in Seattle, Washington.

In 2022, it had 33,833 stores in 80 countries, 402,000 employees, and $32.25 billion in revenue. Making Starbucks the world’s largest coffee shop chain.

On the outside they serve coffee, but if you look a little deeper, it’s one of the world’s largest banks.

All thanks to their cleverly marketed Loyalty Program.

A deeper look at the Starbucks Rewards Program

Before we can truly understand how Starbucks operates as a bank, we need to take a dive into how they convince customers to make deposits in the first place—the Starbucks Rewards Program.

In May 2008, Starbucks introduced its loyalty program called Starbucks Rewards.

According to Starbucks’ 2022 earnings report, they had 27.4 million active Starbucks Rewards members, in the U.S. alone.

It is a system in which customers put money into a Starbucks Rewards account, on the Starbucks app, via a credit card or Starbucks gift card, and then use those funds to get coffee.

But why are 27 million Americans putting money into an app so they can buy coffee later, instead of just paying for the coffee directly? Why go through the stress of an additional step?

Well, Incentives.

The prepaid funds on the app can be used to make payments for the coffee, after which, for using the app, the customer receives loyalty points, called Stars.

These Stars can then be accumulated and later redeemed for complimentary snacks, drinks, and discounts.

Due to these incentives, customers are willing to deposit tens, and in some cases hundreds of dollars into the Starbucks app.

In fact, in its 2022 earnings report, Starbucks stated that it had US$1.7 billion loaded on Starbucks accounts, waiting to be spent in stores.

And by holding $1.7 billion in deposits, according to the Federal Reserve Statistics, March 2023, if Starbucks was legally viewed as a bank, it would rank as the 545th largest commercial bank in America, out of 2118 banks, in terms of deposits held.

But that’s not all.

Just a coffee shop?

Sure, Starbucks holds $1.7 billion of customers' funds, but they still have to convert it all to coffee, and they don’t make money from it, right?

Wrong.

Traditional banks store the deposits of customers, then loan those deposits out to borrowers for interest. After the loans are paid back, the banks will then split the interest (profits) between their customers and themselves.

Starbucks on the other hand, operates in a similar way, except it doesn’t share any of the interest it generates with its customers.

But how does Starbucks generate money from these deposits? They do so in 2 ways:

Firstly, Starbucks benefits from breakage. Breakage occurs when customers forget to use their deposited funds, hence Starbucks simply keeps it. In 2022, Starbucks reported that about $196 million worth of deposited funds had not been touched by depositors that year.

And guess what, they recorded that as Revenue!

Secondly, by investing in short-term low-risk ventures, Starbucks is able to generate about 0.05% on customer deposits. That may seem insignificant at first, but let’s do the maths:

0.05% of $1.7 billion. That’s $850,000 in pure profits each time they decide to invest it, which could be daily.

Assuming they invest customers fund just 100 times a year.

$850,000 times 100 equals $85,000,000.

$85 million pulled straight out of thin air. Now that’s impressive.

Additionally, Starbucks doesn’t need banks.

Traditionally when companies want to expand their operations, they request a loan from the bank and pay interest on the loaned amount.

But Starbucks doesn’t need to, as its customers have effectively given it a $1.7 billion loan at a 0% interest rate.

Allowing Starbucks to expand its operations at an incredibly fast rate, without paying interest.

In conclusion, Starbucks makes so much money operating as a financial institution that one wouldn’t be wrong to say:

Starbucks coffee shops are a cover for the world’s largest unregulated bank.

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