Starbucks Corp., the largest coffee-shop chain, will use Square Inc.'s payment system in 7,000 stores and invest $25 million in the startup, making it easier for customers to make purchases with mobile phones.
Starbucks Chief Executive Officer Howard Schultz will join the board of Square, which was started in 2009 by Twitter Inc. co-founder Jack Dorsey.
Square's software lets merchants accept electronic payments on their own hardware or through a device that plugs into a phone or tablet. Starbucks is marrying its own mobile-phone payment program with Square's transaction-processing tools, angling to make it as easy as possible to buy a latte at its U.S. stores.
The investment is part of $200 million in funding that gives San Francisco-based Square a valuation of $3.25 billion, a person with knowledge of the matter said. "Every tech company is trying to crack the code and chase down how to monetize their business in regard to mobile and mobile payments," Schultz said in an interview. "It's the fastest-growing opportunity we've ever seen in terms of customer acceptance."
Starbucks already processes more than 1 million mobile purchases a week in the U.S. through its smartphone app, and has logged more than 60 million since its introduction, Mr. Schultz said.
The Seattle-based coffee brewer last year expanded its mobile-payment programs in the U.S. by offering the Starbucks application on Google Inc.'s Android software. The app, which is also available for Apple's iPhone, lets users buy coffee and other items with a Starbucks card by scanning a barcode on the screen of the phone.
Square's software will similarly let Starbucks customers pay by scanning an enabled phone -- only Square will now process the payments, Mr. Dorsey said. Square typically charges merchants a flat rate of 2.75% to process credit-card transactions.
"We've always built the company and the technology around the idea of it being used by an individual all the way up to the largest organization in the world," Mr. Dorsey said in an interview. "It should scale effortlessly between that range." The market for mobile payments may top $170 billion in transactions by 2015, compared with about $60 billion last year, according to Juniper Research Ltd.
Square's technology lets U.S. businesses handle payments through Apple's iPhone or iPad, or through devices running on Android. The company's card reader, used by about 2 million merchants, is available for purchase at Walmart, Target and Apple outlets.
Schultz joins Mary Meeker, the former Morgan Stanley technology analyst turned venture capitalist, on Square's board, as well as former U.S. Treasury Secretary Lawrence Summers and venture capitalist Vinod Khosla. Square is processing about $6 billion in transactions on an annualized basis, while EBay Inc.'s PayPal expects mobile-payment volume to reach $10 billion this year.
PayPal rolled out a credit-card processor earlier this year that , like Square's, plugs into the headphone jack of phone or tablet and charges merchants 2.7% on transactions.