M-Commerce: Redeeming Redemption

Jane Adler

With the daily-deals goldmine close to played out, companies like Groupon are hoping to use payments to streamline redemptions and kick revenues into high gear. But how many followers will they have?

In the minds of many consumers these days, the daily deal is so 2011. If you’re offers kingpin Groupon Inc., what do you do?

Get into the payments business.

Take Groupon’s launch last September of a new payments system for retailers. Groupon joined a handful of mobile-acceptance providers, such as Square Inc. and PayAnywhere LLC, that seek to make transactions easy for the retailer.

Groupon offers a dongle that attaches to a smart phone to swipe payments. After a pilot program in San Francisco, the system was rolled out nationwide. Originally designed for iOS phones, the Groupon merchant app was updated in January for Android phones.

Groupon’s push into payments comes as the Chicago-based company seeks new ways to strengthen its merchant services and produce added revenue streams amid questions about the long-term viability of the daily-deal business model.

The payments initiative also blazes a trail to the merchant point of sale, where software can streamline the process of managing redemptions, a function some experts point to as a source of frustration for both customers and merchants.

“Groupon Payments automatically connects the card swipe with the deal voucher to create a seamless Groupon redemption experience for both the merchant and the customer,” says Gene Alston, vice president and general manager  of Groupon Payments.

But Groupon’s payments initiative also raises questions whether other daily-deal companies, such as LivingSocial Inc., will soon follow suit.

As the daily-deal companies chart a way forward, big changes are under way on the loyalty and mobile side of the payments business. Providers aim to capture consumer data to customize offers and boost sales. The big banks, already armed with consumer data, are muscling their way into the loyalty and discount offer space by making acquisitions and forming alliances with deal companies.

Redemption Complaints

The objective is to integrate merchant-funded incentives into the payments infrastructure. The ultimate goal: a single transaction swipe or tap that picks up the value of the reward or deal being offered.

“Payments and consumer offers is an area of great experimentation,” says Peter Krasilovsky, vice president at BIA/Kelsey, a research firm based in Chantilly, Va. It’s hard to predict which models will be successful and when the market will settle out, he notes, adding, “We are all going to find out together.”

Despite concerns about the health of the daily-deal business, the market is still growing. According to BIA/Kelsey, the U.S. market for discounted prepaid sales, such as those provided by Groupon and Living­Social, should hit $4.4 billion in 2013. The market is expected to reach $5.5 billion by 2016.

But the daily-deal industry is undergoing a period of rapid change. The initial consumer excitement over prepaid deals has worn off somewhat. According to the trade magazine Daily Deal Media, 798 daily-deal sites shut down in the last half of 2011.

At the same time, merchants continue to complain about redemption problems and not knowing whether the deals generate repeat business.

A 2012 survey by Susquehanna Financial Group and daily-deal aggregator Yipit showed that half of businesses that had offered a deal of the day were not planning to do so again in the next six months. Merchants were most concerned about luring new one-time customers back into their stores.

Not surprisingly, the big daily-deal sites are diversifying. Groupon Goods sells products online at a discount, and Groupon Getaways offers travel packages. LivingSocial also has an online shop and vacation deals.

Groupon continues to grow, but at a much slower pace than when it announced its initial public offering about two years ago. Its stock price stood at $5.28 a share on Jan. 29, 2013, about 70% less than the closing price a year prior.

Groupon reported third-quarter 2012 revenue of $568.6 million, compared with $430.2 million a year earlier. The company posted a quarterly net loss of $3 million.

Privately held LivingSocial, Groupon’s big competitor, isn’t turning a profit either. With a 29% stake in LivingSocial, Amazon.com reported in a regulatory filing that Living­Social had a net loss of $650 million in 2012, compared to a net loss of $499 million in 2011.

However, LivingSocial more than doubled its annual revenue in 2012 to $536 million. In remarks during a Jan. 29 conference call, Amazon chief financial officer Thomas Szkutak characterized the Living­Social business as an “interesting” and “long-term” opportunity. Both LivingSocial and Groupon announced layoffs in November.

“Every daily-deal company is looking for a way to expand their revenue,” says Martin Tobias, chief executive at Tippr.com LLC. The Seattle-based company runs a daily-deal site with 3 million subscribers in 25 cities. But, Tobias says, the company’s main business is selling white-label e-commerce software to companies that want to provide offers and daily deals. Some of Tippr’s clients include broadcasters NBC and Fox.

Tippr.com isn’t looking to get into the payments business, says Tobias, who questions whether daily-deal companies can wedge themselves into payments. “The banks won’t let that happen.” he says.

Inching Into Offers

Groupon markets its payments product to its network of 250,000 merchants. “We’ve been happy with the adoption (level),” says Groupon’s Alston, a former PayPal executive.

Alston declines to provide the number of merchants that have signed up for the payments product. He adds, however, that Groupon Payments is processing transactions, though he won’t provide the number of transactions being handled or the dollar volume.

Groupon Payments is focused on merchants with a physical location that have already run a Groupon promotion, notes Alston. “That’s our sweet spot,” he says. Some shops use Groupon Payments for 100% of their transactions, he adds.

Body by X Skill Development & Training Center LLC—a fitness center in California—is fairly typical of Groupon Payments’ customers. The fitness center used a Groupon daily deal last May. The prepaid offer generated 300 short-term memberships, and the conversion rate to full-time memberships and other services has been running at about 25%, according to Nadia McClinton, owner of Body by X, Corte Madera, Calif.

Several months after running a deal, Body by X enrolled in Groupon’s pilot payments program. “We’ve been happy with the payments product,” says McClinton. She likes the fact that payments are settled the day after a transaction.

McClinton also likes the portability of the Groupon dongle. “I can take my phone to the fitness floor to settle bills with customers in a few seconds,” she says. McClinton, who previously used Square for payments, likes Groupon’s rates too. “Square’s rates were too high,” she gripes.

Square charges 2.75% on swiped transactions. Merchants can process up to $250,000 per year for a flat fee of $275. Groupon charges merchants a flat rate of 1.8% on Visa, MasterCard, and Discover when swiped, and 2.3% when keyed in, plus 15 cents for each transaction. American Express pricing is based on industry category.

“Our rates are very competitive compared to Square and PayPal,” says Alston. He adds that Groupon marks rates up “a little bit over interchange costs,” though he declines to provide specifics. The payment dongle is free to the merchant.

Interestingly, payments provider Square is inching into the offers business. In October, the San Francisco-based company launched Square Directory, a Web-based search engine that connects consumers and merchants.

With more than 250,000 merchants, the directory allows merchants to share their location, menu, and item descriptions, a photo, contact information, and details about rewards and loyalty programs. Square also has a free wallet application that consumers can open to view which local businesses are offering reward and loyalty programs.

Square retailers can customize discounts and other reward programs. Square does not, however, offer a daily-deal program.

Square card readers are available in more than 30,000 retail locations. The company announced in January that its readers are on sale in all 7,000 Starbucks stores. The reader costs $10 but new customers get a $10 rebate, making the reader free. Starbucks has invested $25 million in Square, which currently processes more than $10 billion in payments a year, and now is Starbucks’s acquirer.

‘A Better Experience’

Last May, Groupon rolled out its own loyalty program, Groupon Rewards. Consumers save their credit card information to a Groupon account, and when they shop at a participating merchant, the rewards are unlocked after spending a certain amount determined by the merchant.

LivingSocial currently has no payments vehicle. The Washington, D.C.-based company won’t discuss whether or not it has any plans in the payments space, according to an e-mail from a company spokesperson.

Smaller daily-deal sites aren’t jumping into payments just yet either. Northeast Ohio Fulfillment Center LLC (Neofill), Hartville, Ohio, runs HalfOffDeals.com, a daily-deal platform. Neofill also provides its platform to broadcast stations nationwide and handles transaction processing and fulfillment. First Data Corp. provides payment processing.

HalfOffDeals is currently upgrading its mobile application, according to Mark Lewis, chief operating officer at Neofill. The company recently purchased PetesDeals.com, a daily-deal company in Lexington, Ky. Neofill also plans to launch GoFishDeals.com, a daily-deal site targeted at the faith-based industry. Asked whether the company has considered payments, Lewis says, “We haven’t seen the return on investment in that area.”

GrubHub Inc., Chicago, an online and mobile restaurant take-out ordering service, works with 17,000 restaurants in 400 cities. The company has no plans to enter the payments business, according to a company spokesperson.

But both LivingSocial and Groupon are pushing deeper into the restaurant business—another example of how daily-deal companies are broadening their offerings. LivingSocial announced last March the rollout of “Takeout & Delivery,” an online order-processing service for restaurants.

Last year, Groupon purchased Breadcrumb, a point-of-sale software for table-service restaurants. The POS solution allows local merchants to take orders at the table using wireless technology and to process payments through an iPad—adding to the list of mobile devices that can process Groupon payments. Breadcrumb also allows restaurants to keep records and generate their own reports.

Groupon has been rolling out business services to its merchant base since the end of 2011. “The goal is to provide an entire merchant ecosystem that includes payments, scheduling, rewards, and point-of-sale processing,” says Groupon’s Alston.

Prior to the launch of its payments product, Groupon surveyed merchants. “We found a lot of apathy and frustration with their existing (payments) providers,” says Alston. “Payments is very competitive. But giving merchants real value and making it simple is what we are focused on.”

Groupon has an online payments center that allows merchants to view live transaction history, check sales reports, track deposits, and analyze revenue trends. Groupon Payments also has a live support team to answer questions seven days a week.

In January, Groupon announced the launch of a merchant-impact report, offering shopkeepers insights into how their Groupon deals perform. Other features include marketing analytics about the total number of Groupon subscribers who received a merchant deal via Groupon, as well as information on which subscribers are purchasing offers, broken down by geography, gender, and age.

It also shows the percentage of customers new to a business or reactivated through Groupon. The report includes a profit calculator to estimate the cost effectiveness of each promotion, including payments from Groupon, overspend above the value of the Groupon, revenue generated by returning customers, and the merchant’s cost.

“We can provide a better experience,” says Alston.

Some question whether merchants will select Groupon as a platform to run their business. Fitness-center owner McClinton likes Groupon’s suite of business products, and she likes the fact that live customer-support representatives are available by phone. While she doesn’t pay for the services, she also says she’s unlikely to run another daily-deal promotion any time soon.

Meanwhile, the big banks and other payments players are right on Groupon’s heels.

JPMorgan Chase & Co. is buying daily-deals company Bloomspot Inc. MasterCard Inc. announced in September that it was buying Truaxis Inc., a company that targets offers to consumers via online banking and mobile applications.

Bank of America Corp. has a service called BankAmeriDeals giving cash-back rewards after receiving online offers. Capital One Financial Corp. purchased Bundle Corp., an aggregator of consumer data.

“What we see is an effort to integrate daily-deal programs and merchant-funded incentives into the payment stream,” notes Madeline Aufseeser, senior analyst at research firm Aite Group LLC.

The daily-deal business model has run its course, she adds. Merchants are interested in understanding their customers and their spending habits, rather than making a one-time sale from a daily deal. “By converging rewards and discount into the payments stream, you have rich data to track consumer behavior,” says Aufseeser.

Who’ll be the ultimate winners and losers? It’s hard to predict, says Aufseeser. With lots of different types of companies testing the payments and offers space, it will take some time for the market to shake out. But Groupon’s payments business with its suite of retailer support products could work, notes Aufseeser. “They have a good shot with the types of merchants they have,” she says.