Home > Credit Cards > Why Wal-Mart & Starbucks Are Focusing on Rewards Debit Cards

Comments 1 Comment

[Update: Some offers mentioned below have expired. For current terms and conditions, please see card agreements. Disclosure: Cards from our partners are mentioned below.]

Starbucks and Wal-Mart are looking a lot more like banks lately. Starbucks just announced a new debit card that sounds a lot like an airline miles card, while Wal-Mart is about ramp up its cash-back and other benefits on some transactions run through its plastic. What’s in it for these big retailers? And for you?

The “for you” part is pretty easy: free money, or free stuff.

Starbucks fans already get “stars,” like airline points, when they shop at the coffee giant’s stores. And millions of them also use something that’s similar to a Starbucks credit card — an app or gift card that’s pre-loaded with cash. So the transition to Starbucks plastic that can be used anywhere is quite natural. Soon, as with airline credit cards, Starbucks fans will be able to earn free drinks and such by using Starbucks plastic, co-branded with Chase bank, at almost any store. How quickly the free lattes will pile up is still a mystery. The Starbucks card won’t be a credit card, however — it will be a prepaid debit card. We’ll get to why in a moment.

Wal-Mart’s proposition to its 10 million or so cardholders is even simpler: Customers who shop at Walmart.com — using either the store’s credit card or preloaded debit card — will get 3% cash back. They will also get 2% back on some gas purchases, and 1% back on everything else.

Now, what’s in it for them? Well, in a generic sense, all retailers have to act more like banks nowadays, says Gartner payments analyst Avivah Litan. Payment processing is expensive, and big retailers are tired of sharing revenue with big banks.

“Paying more for payments eats into profits. The big chains have had this problem for years,” she said. “The only way around it is to create payment mechanics that generate revenue.”

While the two firms’ aggressive plastic moves sound similar, they have very different motivations.

Again, Wal-Mart’s story is simpler. The discount giant is making the move chiefly to maneuver in reaction to Costco, which is about to make a dramatic change in its credit card offering. For 16 years, Costco only accepted American Express credit cards in its stores. This summer, Costco shifts to Visa. It’s also ramping the reward offering for its own Costco Visa card, promising consumers up to 4% cash back on gas and 3% on travel. So Wal-Mart is partly reacting to Costco’s enticing offer with its own. At the same time, Wal-Mart is also making a jab at Amazon and other online retailers by heavily incentivizing Walmart.com purchases. Consumers who order online, but pick up at local stores, will still earn 3% cash back, giving regular Wal-Mart shoppers a huge incentive to plan ahead before their shopping trips. That also gives Wal-Mart critical data about their shoppers, and a logistical leg up for its supply chain.

Keeping Wal-Mart Customers Loyal

Meanwhile, Wal-Mart’s preloaded debit card product, “Wal-Mart MoneyCard,” continues to be a decent alternative for millions of consumers who otherwise don’t have access to traditional checking accounts or credit cards. MoneyCard holders, who can reload their cards for free at Wal-Mart, tend to be among the store’s most loyal shoppers. More cash back will help prevent them from being lured by Costco’s offers.

Not to be overlooked, encouraging use of Wal-Mart branded plastic — credit or debit — makes things a bit easier for the Costco security department, Litan said.

“They know the customer. They control the shipment,” she said. “It’s a lower risk payment for them.”

Starbucks has intertwined payments and loyalty, too, but in a very different way. Consumers love the Starbucks app, which has become by far the most successful form of mobile payment, far outpacing Apple Pay and its rivals. Roughly $1 out of every $5 spent at a Starbucks is now spent through the app. As of the firm’s most recent Securities and Exchange Commission (SEC) filing, Starbucks currently has $1.4 billion sitting on its balance sheet, representing cash consumers have loaded onto apps and gift cards that hasn’t been spent yet. That’s an enormous free loan to the firm — it’s roughly one month’s global revenue — and the amount is growing about 20% annually.

A Pile of Cash for Starbucks

Letting consumers spend Starbucks bucks at any place where credit cards are accepted by joining forces with Chase creates even more incentive for consumers to load up the app with cash. It’s easy to imagine those $50 reloads becoming $500 reloads for devoted coffee drinkers. That will give Starbucks an ever-larger pile of cash it gets to hold and can use to retire debt or invest.

Meanwhile, Starbucks will probably get to share in transaction fees with its card partner, Chase, when consumers swipe the plastic at other stores. Contrast that to the current situation that Starbucks, and all retailers, encounter when a consumer pulls out plastic at its stores. A small-dollar transaction such as a $2.75 cup of coffee could result in fees of around 25 cents, after a per-transaction fee and percentage fee is added. Most of that fee is eliminated when Starbucks drinkers use the Starbucks app to buy java.

“Starbucks is becoming a cash and float and fee machine,” Litan said.

An added benefit is that some of this gift card money — called “stored card liability” on its balance sheet — will never be spent, and Starbucks gets to keep it. It’s not a lot — about $40 million of so-called “breakage” in 2015. But that’s pure profit with almost no expense.

Finally, the Starbucks Chase card will serve much the same function that airline miles cards serve: It will get consumers thinking about Starbucks even when they are shopping at other stores, and it will nudge them firmly towards Starbucks when it comes time to buy coffee. After all, “free” coffee is pretty hard to resist, even if you are the kind of coffee drinker who might prefer a local brand instead.

“This new model is just the beginning of Starbucks opening up its digital ecosystem as well as extending its payment platform,” the firm announced at its annual shareholders meeting.

It’s important to carefully read the terms and conditions of any payment method you are considering when trying to decide if it is right for you. It’s also important to note that prepaid debit cards don’t generally help you build credit since they’re not linked to any financing. Chase confirmed, for example, that it will not be reporting Starbucks cardholders’ use to the credit reporting agencies. If you’re looking to build credit, you may want to consider a secured credit card, which requires a cash collateral deposit that serves as a credit line for the account. (You can see where your credit currently stands by viewing your two free credit scores each month on Credit.com.)

Note: It’s important to remember that interest rates, fees and terms for credit cards, loans and other financial products frequently change. As a result, rates, fees and terms for credit cards, loans and other financial products cited in these articles may have changed since the date of publication. Please be sure to verify current rates, fees and terms with credit card issuers, banks or other financial institutions directly.

More on Credit Reports and Credit Scores:

Image: SweetBabeeJay

Citi Rewards+℠ Card

Apply Now
on Citi's secure website
Card Details
Intro Apr:
0% for 15 months on Purchases

Ongoing Apr:
13.49% - 23.49% (Variable)

Balance Transfer:
0% for 15 months on Balance Transfers

Annual Fee:

Credit Needed:
Snapshot of Card Features
  • The Citi Rewards+℠ Card - the only credit card that automatically rounds up to the nearest 10 points on every purchase - with no cap.
  • Earn 15,000 bonus points after you spend $1,000 in purchases with your card within 3 months of account opening; redeemable for $150 in gift cards at thankyou.com
  • 0% Intro APR on balance transfers and purchases for 15 months. After that, the variable APR will be 13.49% - 23.49%, based on your creditworthiness. Balance transfer fee — either $5 or 3% of the amount of each transfer, whichever is greater.
  • Earn 2X ThankYou® Points at Supermarkets and Gas Stations for the first $6,000 per year and then 1X Points thereafter. Plus, earn 1X Points on All Other Purchases.
  • The standard variable APR for Citi Flex Plan is 13.49% - 23.49%, based on your creditworthiness. Citi Flex Plan offers are made available at Citi's discretion.

Card Details +

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

  • Joel Copeland

    Pfft, enough of this nonsense. Cash is king, let’s keep it that way!

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team