Groupon may not have its own mobile wallet, but it has a strong foundation to build on: The 110 million downloads of its daily-discount app, plus the merchants using its Breadcrumb mobile point of sale system.

The traditional approach in this young mobile payment market has been to enable in-store sales through scanners that pick up Near Field Communication signals or QR codes on a phone's screen. Square is one of the few companies that opted for a cloud-based wallet, but after multiple attempts (and multiple product names, including Card Case, Pay with Square, Square Wallet and Square Order), the company seems to have given up on this approach.

The failure of a particular mobile payment model typically hinges on it doing too little to entice consumers or merchants. Some systems launch alongside a rewards program or a novel pricing structure designed to offset the cost of payment acceptance, but the most successful mobile payment apps have built on a program that was already popular. For example, Starbucks attributes the success of its app to the strong preexisting adoption of its rewards program and stored-value cards.

Groupon's approach, though still under development, is more in line with that of Starbucks. It is taking its successful discount-services app—which fueled the company's $7.6 billion in revenue last year—and expanding the app's capabilities for in-store payments to the Breadcrumb hardware that the company also sells.

The merchants who have thus far deployed Groupon's Breadcrumb tablet-based point of sale systems have been the same kind of small shops—restaurants, coffee shops and bars—that have historically been attracted to the Groupon advertising model. Groupon's hope is that its popular app will drive business to existing Breadcrumb merchants and will give non-Breadcrumb merchants a reason to switch to the Groupon hardware.

Groupon has not released sales figures on how well Breadcrumb has done, beyond a comment from Seth Harris—Groupon's vice president of POS and payments as well as the founder of Breadcrumb—that Groupon is "happy" with initial sales. Groupon purchased Breadcrumb in May 2012.

For mobile payments to work, the product has to satisfy a number of consumer needs, Harris said. First, the consumer has to know that making a mobile payment is even an option. Second, the consumer needs to be comfortable with the mobile payment method. Third, the consumer needs to already be set up with the mobile app at the moment of desired purchased. And fourth, the consumer needs to have a reason to use the mobile wallet, such as a price discount.

"That's one of the hardest parts, getting consumers to actually download this app," Harris said. Groupon addresses this by working through its own app, which has millions of users, he said.

And this approach goes beyond that. By creating backend connections between its existing app and its physical POS system, Groupon could theoretically address all four mobile payment roadblocks. By leveraging the 110 million already-downloaded copies of the Groupon app, merchants that can accept these mobile payments can be flagged, potentially driving more purchases to those merchants. That would raise awareness of a mobile payment option while also making the mobile payment seamless and comfortable: Just click here and the system will handle the rest.

Given that everything in the Groupon app is based on providing a discount, the consumer would already have an incentive to use the app for a purchase.

Harris said that his team has explored a variety of physical proximity mobile payment mechanisms—including NFC, Bluetooth beacons and geofencing—but that a direct mechanism connecting the existing app with the POS is the easiest and the best for customers.

In 2012, Groupon used a similar strategy to introduce a Groupon-branded mobile card reader. Rather than start working with independent sales organizations or other partners to distribute its hardware, Groupon relied on the internal sales force it already had in place for working with merchants.

Groupon was also one of the launch partners of Apple Pay, but only for in-app transactions. That would allow Apple's Touch ID authentication system to be used for in-app purchases, though Groupon's Breadcrumb POS units do not yet support Apple Pay in-store.

Groupon may indeed have a good shot at making mobile payments work in a way that has eluded others, said Thad Peterson, a senior analyst tracking payments at the Aite Group.

"It's all about the value proposition. I think it is a great example of the disappearance of payments into commerce," Peterson said. "The concept that the discount is baked in is a powerful incentive. It's an enhanced value proposition for both sides of the platform, for both merchants and consumers."

The core distinction between Groupon's approach and that of Square is that Square has always been merchant-focused while Groupon has been consumer-focused, Peterson said. That leaves Square without the popular-consumer-app part of the equation. Square might be able to get by partnering with someone like Shopkick, but until then, Groupon will have an excellent window of opportunity, he said.

A consultant who tracks the payments space closely, Double Diamond Group CEO Todd Ablowitz, was more pessimistic about Groupon’s mobile chances. Although he said that leveraging Groupon’s huge installed base is powerful, it needs to be married with an equally powerful POS deployment.

“If there are too few (Breadcrumb customers), you won’t get meaningful results,” Ablowitz said.

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