Daily-Deal Leader Groupon Makes Its Play for Mobile Payments

The crowded mobile-payments space for small merchants just got more cramped as daily-deal leader Groupon Inc. announced its new Groupon Payments service for merchants using Apple Inc.’s iPhone and iPod touch devices to accept credit and debit cards.

Groupon is coming in with low card-acceptance prices and aiming to leverage its existing loyalty services for merchants.

Wednesday’s announcement follows what Chicago-based Groupon calls a successful payments experiment in San Francisco that began in February. Groupon’s merchant acquirer is Wells Fargo & Co., which employs First Data Corp. processing systems.

Groupon’s discount rate for swiped transactions is 1.8% of the sale plus 15 cents for Visa, MasterCard and Discover transactions, and 3.0% plus 15 cents for American Express sales. Any merchant that has ever offered a Groupon deal or has committed to doing one is eligible for that pricing. Non-Groupon merchants can use the new payment service but will pay higher charges in what the company says is a pilot program: 2.2% for Visa-MasterCard-Discover sales and 3% for AmEx, all plus 15 cents.

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

While its success is by no means assured, Groupon could quickly gain scale as a payments provider because of its existing suite of services that include its famous e-mails promising 50% off at local merchants. The company also has a host of other services that aim to reinforce customer loyalty to merchants, including featured daily deals, deals from national merchants, and Groupon Now! instant offerings available online and through mobile devices. The company says it has 250,000 merchant relationships worldwide, although it didn’t disclose its U.S. merchant count. An investor filing says Groupon had 36.9 million active consumer customers in the first quarter.

Gene Alston, a former PayPal Inc. executive who is now vice president and general manager of payments at Groupon, tells Digital Transactions News that when he joined the company a year and a half ago, Groupon already had an application that enabled merchants, many of whom already had merchant accounts, to process Groupon discounts on mobile devices and reduce their paperwork. As Groupon talked with merchants after launching that app, “we found that merchants were struggling with their antiquated payment services,” he says.

Hence, the test in San Francisco and Wednesday’s announcement. The mobile app now includes the new payment service.

“Our core business delivers a lot of value to merchants,” Alston says. “We think of payments as a situation where we can save merchants a ton of money and make a little money ourselves.”

Groupon’s pricing for its existing merchants puts the company about equal with or below other mobile-payments providers seeking transactions from small businesses, including Square Inc., Intuit Inc.’s GoPayment Service, and PayPal.

Some observers say Groupon faces tough sledding because of slowing growth in merchants willing to offer heavily discounted deals, and because of the ease with which competitors can copy its model. Alston says the new payments service isn’t meant to compensate for any weakness, but instead fill a merchant need. “Our core business is still strong,” he says. “This is adding value. This adds to that by saving merchants money.”

While mobile payments has many competitors, Groupon is a natural to enter the field, says senior analyst Rick Oglesby of Boston-based Aite Group LLC. “Overall, I think it all makes sense,” he says. “Groupon brings on a tremendous amount of value to merchants due to the volume of eyeballs they attract.”

Alston says Groupon has expansion plans for the payment service, though he wouldn’t give details. The company in late May bought New York City-based software startup Breadcrumb, whose application lets restaurants run transactions on Apple’s iPad tablet computer.

Alston also says the company is aware that many merchants use mobile devices running Google Inc.’s Android or other operating systems, but he can’t say if or when Groupon would adapt the new service to systems other than Apple’s.

Earlier this week, Square disclosed a new round of financing that financial publications pegged at $200 million, valuing the fast-growing processor at about $3.5 billion.

nn