George Kamel - Is Starbucks Really a Bank in Disguise?

Episode Date: April 19, 2023

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Starbucks, home of the Grande No-Wip, half-calf, white chocolate milk with five pumps and an extra shot made with soy. You know what? Scratch that. Coconut milk. We're doing keto now. Or is Starbucks actually the home of a massive, unregulated financial institution that uses a coffee shop as a front? Bro, what are you talking about, man? Now, I know I might sound like one of those Denver Airport conspiracy theorists.

Shout out to my lizard people. But hear me out here. Because the business model might just be a stroke of genius. That's pretty good. I'm George Camel, your friendly neighborhood personal finance man, and today we're going to uncover the pros and cons of Starbucks's strategy and how you can use it too. But before we do, would you be a bro and give us a like and subscribe

to keep this content flowing like a Christmas blonde roast? And if you don't, I swear, I'll drink Folgers. Don't make me do it. And before you coffee snobs monopolize the comment section and start grinding my beans over this, let me spare you. I don't care about your opinion of Starbucks coffee. I know you make it at home and I'm proud of you. I know you support your local coffee shop and I'm proud of you.

I know you disagree with their political opinions and I'm also proud of you. But just enjoyed the video today without your thoughts and feelings about Starbucks, Sherry. Okay, can we do that? I'm exhausted already. Back to the question on hand. Is Starbucks actually secretly a bank? Well, here's how we got here. Starbucks, aka the largest coffee chain on the planet,

was one of the first restaurants to really lean in to the digital experience side of their business. So 14 years ago, back in 2009, the Starbucks app hit the scene, which is pretty early considering that back in 2009, you were still ruining friendships over your Myspace top eight. Today, 55% of all Starbucks transactions come through loyalty cards and mobile transactions. And if you do the math on that, it adds up to like over half the transactions. So if you're one of those loyal 20% of the customers who need their pink drink fix 16 times, times per month, you're probably making an app transaction close to 100 times each year.

And yes, that's a real stat. 20% of Starbucks customers visit 16 times per month. But if you're like my friend Graham Stephan and you brew your own coffee at home to save money and therefore have no idea how this app works, here's a primer for you. So Starbucks incentivizes you to use the app because of the rewards. So you earn one star for every dollar you spent, one to one. But that doubles to two stars for every dollar spent if you use your Starbucks gift card. Now, let's talk rewards.

Starbucks recently changed how the reward program works to your detriment and to their benefit. Sneaky, sneaky. I am very, very sneaky, sir. It used to cost 50 stars to get a free, brewed, hot, or iced coffee, or tea. Now that same brewed hot or ice coffee or tea now costs 100 stars. That's double. Oh, and to get a free sandwich with your stars, you now need 300 of them. Which means you're spending anywhere from 150 to 300 bucks to get yourself a solid.

sandwich. And don't kid yourself. A Starbucks sandwich is just an egg mac muffin with a master's degree. And don't even get me started on their new Delta Sky Miles partnership. You know what? I'm already started. We're already here. All you savvy Starbucks users, you might be taking advantage of that Delta Sky Mile rewards partnership where you get one Sky Mile for every one dollar you spend. And you might be thinking, why, I mean, if I'm already buying into this, why not make the app purchases go further? It's a money hack, right, George? You should be proud of me. Well, here's the math. If you If you earn one Delta Sky Mile per dollar you spend, you're drinking $30,000 worth of coffee to get a free round trip from Nashville to L.A. And here's what the math amounts to.

That's about 10,000 cups of tall-brewed coffee or one cup daily for 27 years. That's an awfully hot coffee pot. I'm not sure what's going to be in worse shape at that point, your acid reflux or your bank account. And we all remember when Miley prophesied this in her hit song party in the USA? A hopped off the plane at L.A.X. No reward. No retirement. Welcome to the land of the broken stressed. Am I going to fit in? You'll fit in just fine, Miley.

Just fine. The journey is usually the part that you remember anyways. Okay. So where am I going with all this talk about the Starbucks app and the money you keep in there in the name of rewards? Well, here's the big reveal. Any money that you upload into the Starbucks app, Starbucks counts as revenue before you even use it to buy anything.

Think about it. When you go to a store and you buy a gift card, that store already made the money. In fact, at any given time, Starbucks has, close to $3 billion sitting inside that app. But Starbucks doesn't just let this money hang around like those jelly-filled Wally people. No, they're smarter than that.

They invest it, meaning they're earning interest on your coffee money, which is making them even bigger billionaires. And that's unofficially how Starbucks became the 385th largest bank out of thousands of banks across the country, at least by the numbers. But unlike a bank, once you give your money to Starbucks, no takes these backseasease. Trust me, I tried. I got $14.66 in my account and I'm strapped for cash. So I need to withdraw this money.

Let's see if they'll let me. Hi, I'm going to get for you. Hi, I'd like to make a withdrawal from my account. Oh, this is Starbucks. Oh, I have money loaded on to my account. I can't take the money out? No, I don't think so. Oh.

Okay, I have $14.60. $14.66. So the only thing I can do is use it on Starbucks products, essentially. Yeah. Got it. Okay, I guess I'll do that then, since I can't get it out. Can I do a tall iced Americano? All right, $3.79. Thank you. $3.79 for a tall. I try to get the cheapest thing on the menu. What in the world? Who's paying for this? This dingus. Now, there are two exceptions to the no-take-sees-backseas rule. If you live in California, you can take out a whopping $9.99 or less from your account. And if you live in Oregon, you can withdraw $4.99 or less in cash.

Now, this isn't a brand-new concept. A lot of companies are founded on this business model of investing your money, like Venmo, cash app, PayPal. But the caveat is, you can take your money out at any time with those apps. But now, tons of restaurants are doing this when you think about all the fast food places you visit, the Chick-fil-A app, you load the money in there, what do you think they're doing with that money? Hopefully putting it to good use. But even though lots of companies do this, it does shed some light on the motive behind Starbucks' so-called loyalty rewards.

You see, whether it's credit card points, airline miles, or Starbucks rewards, they're all just a psychological mind game to get you to spend more and load up more. And we all know when you're using the app, it feels like free money, doesn't it? Since it's not actually coming out of your bank account, again, because it already did. And if getting you to spend more in their app also earns them more money and interest, it would be genius of them to offer features like auto reload to get more of your money stuck with them. Oh, wait, they do. Which side note, turn off your auto reload.

It's not helping your caffeine addiction or your bank account. This is how they get rich and keep us broke. Is Starbucks behaving unethically here? Should companies be doing this with your money? Well, personally, I think their strategy is brilliant, and you should do it too. not start your own coffee shop and use it as a front for investing billions. I mean, if you pull that off, I'm impressed. But now, here's what I mean.

Wealthy people, successful entrepreneurs, businesses, if they have a pile of money, they're going to put that money to work. And that's how they build wealth and keep it and grow it. And it's how you can begin to build wealth too? So how can you do this for yourself? How can your money make you more money with the power of compound interest? So here's how compound interest works. You take a pile of money and you save it or invest it,

and you earn something called interest. Now, interest you pay is a penalty. Interest you earn is a reward. So here's what happens. Your $100 bucks turns into $101. But now you're going to earn interest on top of that $101. So it turns to $103, and you earn more interest and more interest. And that is how you can use the power of compound interest.

So where should you keep your money so that it grows that way? Well, since we've already established that the Starbucks app is not the place to do it, you need to figure out what the goal of this market. money is to know whether it's short-term or long-term. So here's an example. If you need to use this money in the next two or three years, do not invest it into the stock market. It's way too volatile and you can lose money instead of gain it. Instead, you'd want to part that money in something like an online high-yield savings account because it'll earn a higher rate of interest than a typical savings account or a money market account. That's where I keep my savings,

my emergency fund is in a high-yield savings account. And at the time of this recording, it's making about 4%, which is pretty stink and cool. Nice. So if your time horizon for this money is, let's say, five years or longer, then it could make more sense to invest your money into the stock market through mutual funds or index funds. So here's the difference between the two. Your savings account isn't invested in anything.

The bank is taking that money, they're doing some investing, and they're paying you back a little bit of interest. When you invest for the long term in mutual funds or index funds, this is a giant pile of stocks from a bunch of different companies that we're all rooting for to grow. And that is called a rate of return. When they make more profit, the company grows, the stock price moves up. That's when you get your rate of return. Now here's the difference between a retirement account and a brokerage account.

Your retirement account is long term. We're talking 60 years old plus. But if you want to invest further than five years, but before you're 60, a brokerage account that's taxable may be right for you. Now, again, you're going to pay taxes on the growth of this money. It doesn't have the tax advantages of retirement accounts. But what's beautiful is that you can cash out at any time without penalties. So listen, if your money is just out there sitting in a savings account, getting 0% right now, you can do better.

So here's the recap. Emergency fund and short-term savings goals stick to a high-yield savings account. For long-term savings goals of five years or longer, mutual funds and index funds in a taxable brokerage account. And then for retirement savings, stick to your employer retirement plan. like a 401k or an IRA. And here's another pro tip. If you see the word Roth, go for it. Roth versions of both of these are better.

Roth 401k, Roth IRA. Here's how that works. You use your after-tax dollars to invest, but the money can be withdrawn tax-free in retirement. That's a big win. And a quick note here, all of these options assume that you're debt-free, you have no consumer debt,

and you have a fully-funded emergency fund. If you're not there yet, save all this investing stuff for later and go throw any extra money you have at knocking those things out first. You're going to be back to investing with a vengeance, since you'll have way more money in peace than you did when you had a pile of debt and no savings at all. We're coming full circle here.

Is Starbucks a bank? Not technically. Technically, I'm homeless. But they sure do operate like one with their assets and with their investing. Is what they're doing ethical? Sure, I think it's smart business. But it's also slick marketing. They've got the marketing game dialed in.

So what does that mean for? you. Don't fall for their psychological mind games to get you to spend more. And that's where a budget comes into play. When you have a budget and you've set a certain amount to your Starbucks runs, you don't go over that number. Stop it. Get some help. That's it. It's that simple. And when you have a budget, you can feel good about the money you're spending because you did it with intentionality instead of impulse. And leverage the power of compound interest. Because if you don't, it's going to hurt your long-term ability to build wealth. So basically, be more like Starbucks. judge people silently for their coffee preferences, give all the dogs you meet some free whipped cream,

and make the money you have go further. Now, if you want to learn more about how to build wealth that actually lasts, make sure to subscribe to this channel and hit the like button to get more content like this. And check out the link in the show notes to one of my favorite free investment tools to see how big your pile of money could get later on down the road. Oh, and if you're wondering what my Starbucks order is,

nitro cold brew all day, son. Is there any better sound in the worst? Come at me, bro. Hey, thanks for watching, and until next time, remember, a yawn is just a silent scream for coffee. See on the next one.