Startup offers small businesses a way to compete with Starbucks rewards

By Ivor Tossell
Published March 3, 2014
Source: The Globe and Mail

Three years ago, Starbucks rolled out a new way of paying for coffee: A “My Rewards” program that let people pay with an app, that would display a QR code that could be held up to a scanner. It gave the coffee behemoth a slick new way of catching consumers in a loyalty program – and became one of the few widespread applications of QR codes that actually took off.

Today, SmoothPay, a Toronto startup, wants to take the same concept – easy payment through smartphones, and a loyalty program, bundled into one – and offer it instead to independent businesses like coffee shops, restaurants and even fitness centres.

Brian Deck, SmoothPay’s founding partner, says that a system like this offers independent store owners ways of managing loyalty-rewards programs that don’t rely on stamping dog-eared pieces of card paper.

“They’re clumsy; they get lost; they don’t look great,” he says. “We’re giving the independents and the franchise groups a way of competing with Starbucks.”

SmoothPay is already in service with Balzac’s, a southern Ontario indie coffee-shop chain that’s grown out of the trendier corners of Toronto and Kitchener-Waterloo, and the company says it’s talking with even larger clients.

The system is two-fold: A custom-engineered scanning unit sits next to (but independent of) the store’s point-of-sale system. Meanwhile, customers bring up an app on their smartphones to pay by showing a QR code on their screen to the scanner. Unlike Starbucks’ proprietary system, however, SmoothPay doesn’t require users to top up ahead of time; it processes payments straight from a credit card, minus whatever rewards have been earned by the payer.

Mr. Deck says that the company opted for QR codes since the technology is already universally available to anyone with a smartphone screen that can display them. Fancier ways of paying through smartphones, like wireless NFC (near-field communications) technologies, have been bandied about for years, but only some smartphones are equipped to use it.

From the merchant’s perspective, the system offers a cashless payments in areas, like around university campuses, where customers might be more likely to be carrying a phone than paper cash.

But it’s the idea of loyalty-rewards programs that’s most engrained in SmoothPay’s business model. The company takes a 4 per cent commission only when rewards milestones are met: For instance, if a company sets and meets a $50 threshold for giving a customer a reward (a discount, say), SmoothPay takes $2.

“We get paid if this is successful for them,” says Mr. Deck.

Their cut stays the same, whatever the size of the reward the merchant gives to the customer. All the same, the company’s terms of service insist that merchants give at least 5 per cent back to customers in rewards.

And the company offers one other key perk to merchants that use it: It covers off the credit card processing fees that merchants would otherwise face, which usually run anywhere from 2.5 to 5 per cent.

For now, Mr. Deck says that SmoothPay isn’t providing merchants detailed breakdowns of what their consumers are buying; they’re in the payment business more than the analytics market. But customers do have the ability to rate their experience at that location in the app, rather than needing to be entreated to visit a survey website. Mr. Deck says this could be especially useful for larger franchises.

“If the experience at one location isn’t as good as the rest, they can act on the data.”