#8 Why is Starbucks a bank?

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Why is Starbucks a bank?

Hello coffee lover, is Starbucks one of your go-to coffee spot? We are about to reveal their secret today – how they brew coffee, AND MONEY.

The Magic of Starbucks Cards and App 💳📱

When we load money into a Starbucks card or mobile app, we are actually lending Starbucks our money! By year 2022, Starbucks held a whopping $2.8 billion (approximately RM 11.8 billion) from customers’ pre-loaded cards and app balances.

Meaning? They have big money pumping in consistently before people even spend at their stores!

1. Zero-Interest Loans 0️⃣

Do you know that, whenever we top up money into the cards, we are indirectly giving out a zero-interest loan to them!

Unlike banks, Starbucks is not bounded by the same regulations, so they can freely use our cash to expand operations, open new stores, or for other needs.

2. Unspent Balances

Here is where it goes better than it looks – about 10% of the money loaded onto Starbucks cards and apps never gets spent. This added up to $196 M (around RM823 M) of unused balances in 2022, effectively giving Starbucks free money.

3. No Cash Reserves

Unlike regular banks that need to hold some cash reserves against deposits, Starbucks has no such requirement. All you can withdraw are their food and drinks, and that is usually worth so much lesser compared to the cash value you have in the app itself!

So here goes the story of how Starbucks operates like a bank. You may also wonder, out of so many coffee shops, why Starbucks is so successful? Here is my YouTube video explaining about the story of Starbucks, feel free to check it out!

Word of the Week: Options

Definition: An option is a type of derivative financial instrument that gives the holder the right, but not the obligation, to buy or sell a security at a predetermined price (known as the strike price), on or before a specific date (the expiry or expiration date).

Suppose you’ve been eyeing shares in Ziet Company, which are currently trading at $100 each, but you believe they will increase to $150 in the next three months. However, you’re not completely sure, and you don’t want to risk buying the shares outright.

To manage this uncertainty, you can buy a ‘call option’ for these shares. This call option gives you the right to buy Ziet Company shares at a set price of $100 (the strike price) at any time within the next three months (before the option expires).

Two scenarios can occur:

1. If Ziet Company’s share price rises to $150, you can exercise your call option, buy the shares at your strike price of $100, and immediately sell them at the market price of $150, netting a profit.
2. However, if the price falls to $50, you can decide not to exercise your option, meaning you’re not obligated to buy the shares at $100. Your loss is limited to the $50 premium you paid for the option.

On the flip side, a ‘put option’ gives you the right to sell a security at a predetermined price. This is handy if you predict a stock price will go down.

Remember, options can provide leverage, meaning potential high returns, but also higher risk. They’re complex financial instruments that require a solid understanding of financial markets. As always, thoroughly research and consider your risk tolerance before diving in.

Key Economic Dates:

• 3rd August: ISM Non-Manufacturing PMI (Jul)
• 4th August: Nonfarm Payrolls (Jul), Unemployment Rate (Jul)

What I’ve been reading:

Here are the top stories that caught my eye:

• US GDP grew at a 2.4% pace
• Federal Reserve (Fed) has raised interest rates again
• Elon Musk rebrands Twitter to ‘X’

You’re all caught up!

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Cheers,
Ziet