Groupon Crashes Traditional ISO Business with a Move into POS Terminals

The acquiring business, already fraught with rivalry, became even more competitive on Wednesday with an announcement from daily-deals giant Groupon Inc. that it will supply traditional point of sale terminals to merchants as part of a new initiative under its payments division.

The Chicago-based company, which last year jumped into the mobile-acceptance business with an app for mobile phones and tablets, says that starting now it is offering the Vx520 terminal from San Jose, Calif.-based VeriFone Systems Inc. to merchants that don’t want to use a dongle or a tablet. It is buying the devices in bulk and reselling them for $150 apiece. The company will also reprogram existing VeriFone and Ingenico point-of-sale devices to work with Groupon’s software.

The company, which has been testing the new hardware program with “beta” merchants, is also offering its existing point-of-sale pricing, 1.8% plus 15 cents for Visa, MasterCard, and Discover. As a promotional offer, processing for the first $5,000 in credit card transactions is free. And Groupon is carrying over from its mobile service such features as online applications and online transaction reporting.

While the new program places Groupon squarely in what is a traditional bread-and-butter business of independent sales organizations, Sean Harper, Groupon’s director of product, says the company is responding to merchant demand. Some stores the company talks to want many of Groupon’s payments features, such as the pricing and online applications, but don’t want to deal with replacing cash registers with tablets and card readers, he tells Digital Transactions News.

“A common thing for a merchant to say is, ‘A lot of that stuff is a no-brainer but moving my whole business over to an iPad for a POS, I’m not sure I’m ready for that,’” says Harper.

He says the terminal program will create a base of merchants for Groupon that will be ready to move up to tablet-based services later on. “That shift in technology is inevitable,” he says. “It’s just a question of when.”

Groupon, which formally calls its payments division Breadcrumb Payments by Groupon, will not disclose how many merchants it serves currently for POS payments or how many it projects it will sign up for the terminal-based program. Nor will it say anything about the beta merchants, other than to say they are scattered around the country. Though it appears to be a beneficiary of the new program, VeriFone would not comment for this story.

Scott Holt, vice president of marketing at Roam Data Inc., a Boston-based, Ingenico-owned company that makes dongles for Groupon as well as other payments providers, calls the new service “an interesting play.” He says it will allow Groupon to win business from a core of merchants that are not interested in mobile POS. “There’s still that merchant that likes having a countertop device that does one thing,” he notes.

Adil Moussa, principal at Omaha-based Adil Consulting, agrees the new service will be a “way to get in the door to talk to merchants.”But it could be symbolic of something larger, he adds. Groupon is among a cadre of payments outsiders capitalizing on the shortcomings of incumbent players, he says. “It looks like companies outside of the payment industry are actually doing what companies in the payment business failed to do: provide real value-add to merchants because they understand what merchants care about and how much they are willing to pay for those value-add products,” he says in an e-mail message.

Moussa recently issued a report on small merchants in the United States, with an analysis of their POS usage. His survey revealed 68% of small merchants use conventional POS terminals, but 22% are using app-based devices.

Still, Groupon could run into some flack, besides competition from established ISOs. Moussa says many small merchants are unaware of how much they actually pay for card acceptance, and so may balk at Groupon’s pricing, believing their fees are lower “Many merchants believe they pay way less than they actually do,” he says.

And Roam’s Holt says Groupon may have a hard time moving merchants that are cemented into existing acquirer contracts. Harper says, however, that the company can rely on the annual turnover of merchants going off contract. This movement, he estimates, accounts for anywhere from 15% to 30% of merchants every year.

In any case, what’s important to Groupon isn’t so much POS technology as it is transaction volume, both as a business in itself and as a way of supporting the core daily-deals business. Says Harper: “It’s important transactions flow over Groupon’s pipes. We’re flexible about how they get there.”