Trends & Tactics: Groupon Moves Beyond the Daily Deal

With its core daily-deal market getting crowded, market leader Groupon Inc. recently made two moves that position the company as a rival of independent sales organizations, value-added resellers, PayPal Inc., and others trolling for mobile-payments transactions from small merchants.

In October, Chicago-based Groupon rolled out its Breadcrumb service, a point-of-sale system for restaurants, cafes, and bars centered on Apple Inc.’s iPad tablet computer. That announcement followed September’s unveiling of Groupon Payments, a mobile service for the local merchants that form Groupon’s main customer base.

The question now is if Groupon can distinguish itself by moving from one highly competitive field into another. Groupon does have some unique assets, including relationships with 250,000 merchants that have ever done a Groupon daily deal (the company won’t say how many are in the U.S.). As of the first quarter, some 37 million consumers had cashed in these deals, which typically offer 50% off at a local restaurant, recreation establishment, or store.

“Overall, I think it all makes sense,” senior analyst Rick Oglesby of Boston-based Aite Group LLC, says of the Groupon Payments offering. “Groupon brings on a tremendous amount of value to merchants due to the volume of eyeballs they attract.”

And while Breadcrumb is not a payment system, it dovetails with Groupon Payments and could give small merchants another reason to do business with Groupon.

“I think that [Breadcrumb] fits in with Groupon’s strategy of branching out from the daily deals,” says Mary Monahan, executive vice president and research director for mobile at Pleasanton, Calif.-based Javelin Strategy & Research. “They’ve got to branch out, but it is branching out at the low end of the market.”

Breadcrumb is a cloud-based business-management software application that handles everything from menus and ordering to table arrangements to sales and employee time tracking. Groupon acquired Breadcrumb in May when it bought a New York City-based hospitality-technology startup by the same name.

Breadcrumb’s four-tiered pricing plan ranges from $99 to $399 per month depending on how many iPads the merchant has, with a maximum of 10. Merchants must provide their own hardware, but Groupon will sell them whatever they need, including the iPad.

Besides Square, some ISOs, notably Harbortouch, offer business-management systems to small merchants. Long-time POS system providers in the hospitality niche include Micros Systems Inc. and Radiant Systems, which is now owned by ATM and kiosk maker NCR Corp. NCR recently rolled out its NCR Silver point-of-sale service for small merchants, which runs on iPads or Apple’s iPhone.

While restaurants have many new choices, plenty of small establishments still get by on older business-management platforms, according to a Groupon spokesperson.

“Obviously there’s a number of antiquated POS systems out there,” he says. “Breadcrumb costs thousands of dollars less than these systems. The best thing about it is it’s run on an iPad; it’s easy to pick up and use.”

Groupon clearly hopes that many Breadcrumb restaurants will take its new Groupon Payments service, which is for merchants using the iPhone or Apple’s iPod touch to accept credit and debit cards. One hook is low pricing of 1.8% plus 15 cents for most swiped transactions to compete with PayPal, Square, Intuit Inc., and other processors. Any merchant that has ever offered a Groupon deal or has committed to doing one is eligible for that pricing.

Groupon’s merchant acquirer is Wells Fargo & Co., which employs First Data Corp. processing systems.

The service provides a free card swiper made by Roam Data that plugs into the Apple devices’ audio jacks, or a $100 wraparound case from Infinite Peripherals for merchants that expect heavier usage.

“We found that merchants were struggling with their antiquated payment services,” says Gene Alston, a former PayPal executive who is now vice president and general manager of payments at Groupon. “Our core business delivers a lot of value to merchants. We think of payments as a situation where we can save merchants a ton of money and make a little money ourselves.”

Did The Fed Give AmEx an Edge?

The new Bluebird prepaid card from American Express Co. for Wal-Mart Stores Inc.’s U.S. customers is noteworthy for several reasons. In a card market often associated with high fees, it’s practically fee-free. The issuer is a company usually associated with the carriage trade, not the working stiffs who frequent Wal-Mart.

It gives Wal-Mart, which tried and failed to buy a bank, another financial product. Bluebird runs on AmEx’s Serve platform and offers direct deposit, mobile deposits, and person-to-person and bill payments, and can be used for purchases at AmEx-accepting merchant locations. More features are coming, including the ability to write checks on a Bluebird account beginning in 2013’s first quarter.

But the card also is noteworthy in that the Federal Reserve’s interpretation of the Durbin Amendment to 2010’s Dodd-Frank Act might have given AmEx a competitive advantage in pursuing a major card program with a client such as Wal-Mart, the world’s largest retailer, by shutting out competitors that probably would be interested in the business and have the capacity to pursue it—large banks.

AmEx’s pricing to Wal-Mart won’t be bound by the debit card interchange price controls that have cut about 50% of big banks’ debit-interchange revenues. It’s a bit complicated, but here’s why:

The Fed’s rule implementing the Durbin Amendment sets interchange price caps on issuers of debit cards with more than $10 billion in assets—the now familiar 21 cents plus 0.05% of the sale and another cent for fraud control. The Fed’s rule defined issuers in so-called four-party networks such as Visa and MasterCard as subject to the Durbin controls.

What the Fed calls three-party networks—American Express and Discover Financial Services—are not bound by the amendment.

“Discover and American Express, because they’re three-party networks, gained an advantage with Durbin because they’re not subject to the restrictions,” says Ben Jackson, a senior analyst at Mercator Advisory Group who researches the prepaid card industry.

Big banks, so-called non-exempt issuers, can issue prepaid cards and avoid the price controls, but under the condition that only the card can access the underlying account. A bill-payment or check-writing feature, such as Bluebird’s, is another access method, so a card program with that capability from a large Visa or MasterCard issuer likely would be subject to the interchange controls.

“Bluebird will offer features that many traditional prepaid card providers would shy away from because they are afraid of the interchange cap,” Jackson says.

Does all this mean that big banks in AmEx’s league, perhaps Chase, Bank of America, and U.S. Bancorp, all of which issue prepaid cards, couldn’t legally offer a product nearly identical to Bluebird without triggering the interchange ceiling?

“It looks that way,” says Jackson. He’s careful not to make that assertion outright, however, because with the regulations still fairly new, no known prepaid card program has yet run afoul of them.

“It’s really a very comprehensive service that makes it simple, easy, and secure for consumers who either don’t have access to traditional banking, they feel that they’re underbanked, or importantly, unhappily banked in some way,” Dan Schulman, group president, Enterprise Growth, at AmEx, said while talking about Bluebird at a telephone news conference.

“We see this as an expansion of our assortment to help a broader set of Wal-Mart shoppers with an alternative to checking and debit services for less, with better capability, better functionality, and what we would say is better convenience for customers to manage their everyday finances,” said Daniel Eckert, Wal-Mart’s vice president of U.S. financial services.

ATM withdrawals are free for Bluebird cardholders with direct deposit when they use their cards at the 22,000 ATMs in U.S. Bancorp’s surcharge-free MoneyPass network. Otherwise, withdrawals cost $2, as do out-of-network transactions, in addition to possible fees from ATM owners.

Bluebird offers remote deposit capture and sub-accounts that will enable a parent, for example, to provide a card to a child in college. Customers can apply for and manage their cards online, and the program includes a smart-phone app. They also can link other bank accounts to Bluebird accounts and will be able to deposit cash at Wal-Mart stores.

Wal-Mart’s current financial products include the Walmart MoneyCard, a general-purpose reloadable prepaid card managed by Green Dot Corp., which gets 64% of its revenues from its Wal-Mart programs. Despite Wal-Mart’s assurances that it was committed to the MoneyCard, fearful Green Dot investors drove the company’s stock down 20% on Oct. 8, the day Bluebird was announced.

The Surprising Resilience of Debit Card Rewards

Hold the obituaries for debit card rewards. It’s true that, of the 100 largest issuers of debit cards ranked by debit purchase volume, 37 now offer a rewards program, down from 52 three years ago. But 19 issuers with $10 billion or more in assets still offer a program, despite a year’s experience with the debit-interchange caps imposed by the Durbin Amendment, according to new research from First Annapolis Consulting, Linthicum, Md.

“We would have expected to see a larger drop among the regulated issuers,” says Casey Merolla, senior manager at First Annapolis. The Durbin price caps, which were codified in June 2011 by the Federal Reserve, took effect in October 2011 for issuers with $10 billion or more in assets and roughly cut debit interchange fees in half.

In response, the number of large banks offering rewards programs fell from 37 in 2009, or nearly by half. But more sub-$10 billion institutions are now attaching rewards to their debit cards. Eighteen now offer programs, up from 15 three years ago, according to First Annapolis, which reviewed the Web sites of the 100 largest issuers. Without having interviewed the smaller banks, the researchers can’t be sure why more are now offering rewards to debit card holders. But the firm conjectures it has to do with the opportunity to fill a void left by larger competitors. “That’s our basic assumption,” says Merolla.

When the Durbin caps took effect, experts widely predicted the deep interchange cuts would force most if not all regulated issuers to eliminate or at least drastically cut back on giveaway programs, which include a variety of offers from points to cash back to encourage usage. “As part of the [bank] P&L, debit interchange was a significant revenue item,” notes Merolla.

Before Durbin, most banks used the rewards to stimulate usage of signature debit, on which they earned more interchange income than on PIN-authenticated transactions. But the Fed’s pricing rules make no distinction between the two types of debit. Many regulated banks offering rewards now may use them to encourage PIN debit instead, since the rate of fraud loss on these transactions is significantly lower than on signature debit, according to a recent study released by the Pulse debit network and research firm Oliver Wyman.

Many larger banks may also be sticking by rewards out of sheer institutional inertia. “It’s hard to walk away from programs, to pull back and take them away,” observes Merolla, after years of supporting them and promoting them with cardholders.

But those retaining the giveaways aren’t necessarily neglecting the bottom line. Many of these banks are using rewards as an enticement to move customers into accounts that carry new fees or that require certain minimum balances or usage thresholds added since Durbin took effect, the First Annapolis researchers say. “There are some issuers using [rewards] as a broader relationship play to move some customers upstream,” says Merolla. Just 15 of the current rewards programs are linked to free checking accounts, or accounts without these kinds of restrictions.

Of the programs offered, points programs proved to be the most popular, having been adopted by 22 of the 37 banks. These programs offer points in return for usage; cardholders can then redeem the points for merchandise. Cash back is next, with 12 issuers, followed by miles programs, offered by three. The review also found seven issuers offering merchant-discount programs, such as Visa Discounts and MasterCard Marketplace, but the researchers did not consider these programs to be traditional debit rewards for the purposes of the study.

Oh, the Money That Can Be Made from Mobile

Banks scrounging for cash as regulations crimp revenue might be interested to hear that mobile banking could earn quite a wide range of fees.

Indeed, banks that add new services to their mobile offerings, ranging from in-store bar-code scanning to expedited payments to gift card issuance, can earn fees from consumers as well as merchants. Other new, fee-generating services financial institutions can let customers perform on mobile devices can include account opening, delivery of offers, person-to-person payments, remote deposit capture, credit scores, insurance quotes, and cross-sell opportunities.

All that is according to Drew Sievers, chief executive of Larkspur, Calif.-based mobile-software vendor mFoundry Inc. and Matthew Wilcox, senior vice president and director of marketing and interactive services at Salt Lake City-based Zions Bank, an mFoundry client. Both men spoke at a retail-banking technology conference in Washington, D.C., last month.

Sievers said mFoundry is already seeing demand from financial institutions for at least some of these services. “Expedited bill payments we’re seeing requested a lot,” he told the audience at the Bank Administration Institute’s Retail Delivery trade show. “Consumers will pay to move a payment faster, and it makes a lot of sense on a mobile phone.” Wilcox estimated banks can earn an average of $20 per payment for expedited service, which lets consumers make last-minute bill payments to avoid late fees, finance charges, or other penalties.

Account-opening is proving to be another popular feature. “We have requests from almost every one of our clients to put this on their platform,” said Sievers. The fee for this service can average $15 per transaction, said Wilcox. Similarly, delivery of offers and rewards for merchants can be lucrative for banks, with the potential of $15 per offer when generated from within a merchant app, Wilcox estimated. “We’re going to do this with every client we’ve got,” said Sievers, who said mFoundry now serves about 800 financial institutions and has about 11 million active users.

Other fee estimates, according to Wilcox, are $6 for each P2P payment, $8 to generate a credit score, $12 per gift card, $15 for each insurance quote, and $7 per referral within a mobile cross-sell program for outside providers.

To provide the technical underpinnings for such new services, mFoundry last month introduced a new mobile-banking platform called Fin.X. The new platform includes links to Safeway Inc.’s Blackhawk prepaid network for gift card issuance and Dwolla, a Des Moines, Iowa, startup that lets consumers pay merchants and each other.

Other vendors on the system include processor Fidelity National Information Services Inc., ATM maker Diebold Inc., and Micronotes Inc., a provider of cross-sell technology to financial institutions.

Both speakers, however, warned bankers to “decouple” mobile enrollment from online banking. While most banks still limit mobile usage to customers who enroll in online banking, Sievers said this process only drives potential mobile users away. “When I’m kicked into online enrolment when I only want mobile, [the reaction] is like shopping-cart abandonment,” he noted.

Sievers also cautioned the audience not to become enamored of general-purpose, open-loop mobile payments, which he estimated is years away. While mFoundry provided the software for Starbucks Corp.’s wildly popular mobile-payments application, this deployment depends on barcodes rather than near-field communication (NFC) to trigger transactions and is a closed-loop system tied to the coffee chain’s proprietary loyalty card.

NFC, a contactless protocol that lets mobile users perform transactions at the point of sale, has been plagued by delays, merchant reluctance, and business disagreements among banks and wireless networks. Referring to these troubles, Sievers called mobile payments “an exercise in ocean boiling.”

Further, general-purpose mobile payments doesn’t generate net new transactions for banks, since it simply replaces a plastic card with a virtual equivalent, he argued. “It’s a form-factor switch,” he said, that may defend existing revenue but doesn’t generate new revenue.

Indeed, in describing the revenue potential in offers and rewards, Sievers said these non-payment media, which NFC-based mobile-payments platforms like Google Wallet and the carrier-led Isis venture have included in their systems, are “the last refuge in mobile payments for somebody who realizes he can’t make money in mobile payments.”

Correction

In “Looking to Go Mainstream,” October, the surname of Mark Cerminaro, senior vice president for sales and marketing at Rapid Advance, was misspelled. Digital Transactions regrets the error.