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Starbucks is a bank dressed up as a coffee shop
What is a Bank?
Simply put, a bank is a financial institution licensed to receive deposits and make loans. Other financial features and instruments like payments, cashflows, customer engagement, and retention come into the picture to facilitate these two major objectives.
By this definition, Starbucks is one of the best-known banks in the world. As of March ‘24, Starbucks has 34m users on its rewards app and $1.9 Billion unspent, stored rewards value on its balance sheet – similar to customer deposits. In comparison, 85% of US banks have less than $1 billion in assets.
However, Starbucks isn’t the only bank hiding behind a consumer brand. Consumer brands like Apple, Nike, airlines, and even club memberships operate as banks. By delivering value to customers, they encase them in an ecosystem and bind them with loyalty. Dig deep into any successful company and you will find a financial institution keeping it upright.
Let’s deconstruct the financial models of companies from other industries to understand how.
Retail brand - Starbucks
Starting with the most popular brand, Starbucks operates like a bank through its Starbucks Rewards program and gift cards. It manages large sums of customer money while offering a system that resembles traditional banking in several ways.
Stored Value (Savings Account):
When customers load money onto their Starbucks card or app, it’s like depositing money with the company. These funds stay with the company until the customer spends it at the store at a later time. Similar to one depositing cash in a bank. They don’t even have to pay this money back, they just have to serve coffee!
Every year, Starbucks customers load around $10 billion onto their cards. As of March ‘24, the Starbucks Rewards app has 34m users and ~$2B of stored funds. For reference, an average bank in the US has less than $1 billion in assets.
Free Capital:
The money loaded onto Starbucks cards provides working capital, just like deposits do for banks. Starbucks can use this money to finance daily operations, invest in new projects, or even cover expenses. They don’t even have to pay interest on deposits that banks need to or keep money in reserve for withdrawals.
Starbucks also gets to keep the money when customers forget their balances over a certain period, called breakage, as profit. In 2023 alone, Starbucks recognized $215 million in breakage, about 13% of stored balances. This is similar to banks earning from the deposited stored with them.
Funds abandoned in dormant accounts in banks have to be transferred to the government.
Customer value and retention:
With the rewards program and perks, Starbucks ensures a higher CLTV by keeping customers within its ecosystem, much like how banks try to incentivize customers to upsell and cross-sell financial products with perks and interest.
Starbucks Rewards program serves as a tool for building a large financial structure, all while offering coffee instead of traditional banking services.
Airlines - Delta
Get a thrill every time you pay your flight fare with miles? Those miles are actually “deposits” you made with the airline that you are withdrawing later.
Like a financial institution, Delta Airlines operates like a bank by using SkyMiles as currency to generate revenue and manage cash flow.
Deferred Revenue (Savings Account):
As a loyalty program member, when you buy a regular ticket, you pay for the flight you have chosen and the mileage credit you plan to redeem. Airlines allocate the ticket cost between the flight and the mileage credits. Meaning, you made a deposit in the form of Skymiles, with plans to withdraw later.
Delta holds on to SkyMiles points, similar to how a bank holds onto your deposited money. These miles have a value, just like a currency, and aren’t spent immediately. This allows Delta to defer revenue from miles earned and only record it when customers redeem them. It’s like a bank holding your money in a deposit and paying out later.
At the end of 2023, Delta had $8.4 billion in deferred mileage credits or deposits.
Earning Interest (Loans):
Another way to earn miles is by using a credit card. However, in this case, Airlines earn money from selling miles to credit card companies, similar to how banks sell loans to borrowers.
Credit card companies buy miles from the airline in bulk, typically at a discount. These miles are then distributed to their customers as rewards for future redemption for flights. For airlines, the bulk sales of miles to credit card companies provide cash flow. Also, only a portion of customers redeem these miles. The unused miles are considered as breakage or profits for the airline, similar to the interest paid to banks over a period of time.
Delta earned $6.1 billion from mileage sales in 2019. Only $3.6 billion worth was redeemed. Keeping aside $152 million for expenses, the airline earned $2.4 billion of cash flow, for a 39% cash margin. Is that starting to look like a loan to you?
In essence, Delta Airlines uses its miles to behave like a bank by issuing currency (SkyMiles), deferring revenue (like deposits), and earning high-margin interest (from partnerships). The SkyMiles program also helps maintain customer loyalty, similar to how banks encourage customers to stay with them through incentives.
Club - Naked Wines
From the outside, Naked Wines looks like a club for wine aficionados. It sells wine direct to consumers in the UK, the US and Australia and boasts almost 800,000 customers.
The company operates a kind of savings scheme for wine. Their members, called angels, sign up and deposit a fixed sum every month, which they can redeem for wine.
Monthly “Deposit”
Similar to depositing money into a traditional bank account, "Angels" pay a fixed amount into their Naked Wine account each month, which they don’t redeem till later.
In March 2023, Naked Wines had £67 million in customer deposits, with the average active customer having deposited £78.
Interest on Deposit
Instead of getting interest like you would in a bank, Angels get discounts on wine. For example, a box of wine might cost £166.88, but Angels can get it for £129.99, which is a big discount. It's like how banks credit interest after a certain period, but Naked Wines gives you savings on future purchases.
Cash Flows:
Naked Wines uses the money deposited by Angels to finance its inventory, treating it as cash flow. These customer deposits fund over 40% of the company’s wine stock. This works similarly to how banks use customer deposits to make loans or fund investments. The company benefits by having upfront cash to source quality wines before they even sell them.
While Naked Wines enjoys the benefits of a bank from its Angels, it also faces the threat that banks do. Angels can withdraw their deposits (spend them on wine) all at once, straining the company's liquidity, just like a bank crisis.
Conclusion
Money can be anything that can serve as a store of value, which means people can save it and use it later. By creating an ecosystem of high value to a specific segment, these businesses have successfully activated financial products like deposits and loans from their customers. Banks can borrow a lot from their success in engaging and building loyalty.
When banks drive value to customers via ecosystems, they will also see customers engaging and transacting with their products and services. The more niche the customer segment and the more relevant this ecosystem is, the higher the probability that that customer will pay for it.
References:
1. https://www.imf.org/external/pubs/ft/fandd/2012/09/basics.htm
3. https://gonuclei.slack.com/archives/C062BG7QCP7/p1725369938699559
4. https://www.readtrung.com/p/starbucks-digital-dilemna
5. https://www.netinterest.co/p/the-points-guy
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