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Emerging Payments

Groupon's New Mobile-Pay App Is Only the Beginning

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Groupon is the latest of many companies to provide merchants with a card reader that clips to smartphones. But the daily-deals company is not simply selling a me-too device — it is planting the seeds of a bigger payments strategy.

"We consider ourselves a payments company," says Gene Alston, Groupon's vice president and general manager of payments. "Our first solution integrates with merchants' Groupon mobile app, but like any other payment service we intend to open it up to more options for acceptance, especially for these high-volume merchants that may have different requirements."

Alston came to Groupon a year ago after working at PayPal for seven years as its head of corporate and business development. He would not provide details or a timeline for the next phase of Groupon's payment-acceptance plans.

Groupon's card reader

Groupon's card reader

Price is a major selling point of the new reader, which Groupon tested in the San Francisco Bay Area earlier this year. Groupon's fees are 1.8% for swiped Visa, MasterCard and Discover credit and signature-debit transactions or 2.3% for keyed-in transactions, plus a 15-cent per-transaction fee. For American Express cards, Groupon charges 3.0% for swiped card transactions and 3.25% for keyed-in transactions, plus a 15-cent per-transaction fee.

Groupon keeps its rates low because it relies on its existing sales force instead of an independent sales organization.

"By and large, because of our distribution model, we're able to take the rates that we negotiate with the bank directly and pass those on to the merchants without markup," Alston says. "We don't have an ISO sales force or an outsourced sales force, so it's really a direct relationship with the merchant."

Groupon's bank partner is Wells Fargo. Roam Data and Infinite Peripherals provide the readers.

Groupon is open to other distribution models, such as working with ISOs, but only if its merchant clients express interest, Alston says.

Groupon is also testing a version of this system for non-clients, who would pay a higher rate of 2.2% plus 15 cents for Visa, MasterCard and Discover swiped-card payments and 3% plus 15 cents for Amex. For keyed-in card payments, non-clients would pay 2.5% plus 15 cents for Visa, MasterCard and Discover and 3.25% plus for Amex.

Groupon began designing its mobile-payment product based on feedback from merchants that use its smartphone app.

In talking to those merchants, "we learned a lot about how confusing and complex their existing systems are and how antiquated they were, and how much merchants were paying" for card acceptance, Alston says.

To qualify for the low-fee mobile payment product, a merchant must have either run a Groupon offer or be in the process of setting one up. Groupon does not require that merchants continue running Groupon campaigns after the first one, Alston says.

"We want to make it simple because we also think our demand generation services stand on their own," he says. "For us, if someone's part of the Groupon network, then we'll honor that price going forward."

Groupon also promises overnight availability of funds from card payments, which it says merchants will prefer to their current process of waiting several business days. Other companies, such as Fiserv, are also advertising faster availability of funds with their mobile-payment devices.

Price and speed are important to merchants, says Aaron McPherson, practice director for payments and security at IDC Financial Insights.

"Most businesses are pretty cash-pinched so anything that gets money in their accounts faster is going to be very attractive," he says.

On pricing, Groupon is likely saving some money by charging the same fee for credit and debit payments, McPherson says, but Groupon also faces a lot of pricing pressure from competitors.

Square, PayPal, Intuit, Fiserv and many other companies offer similar card readers. Transaction pricing is going down — Fiserv claims its new SpotPay reader is a better deal than Square for any merchants handling more than $700 a month in sales. Square is also addressing price with its recent introduction of a flat-fee option that is cheaper for some small merchants.

"It sounds like it could get pretty bloody in the next year or so as Square and Intuit and Groupon and PayPal and all of these guys are just duking it out," McPherson says. "I would imagine that some of them are going to get sunk."

One prominent casualty in payments is Google Checkout. Like Groupon, Google offered a low price on its payment service by tying it to an existing product. It soon raised its rates and eventually discontinued Checkout and moved users to its mobile payment product, Google Wallet.

Google Checkout, an online payment service, "was free if you were a Google AdSense user, but then they discontinued that," he says. "They weren't able to keep it going."

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