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Groupon Payments – Life Saver or Death Knell?

Groupon Payments

by on September 28, 2012

Stop the presses – it looks like Groupon is finally going to do something about its steadily sinking ship. After the company missed the mark for the third consecutive quarter last month, posting $568 million in earnings instead of the expected $573 million, we had pretty much written Groupon off as an inevitable loss. As if to prove our point, last Monday the company’s stock value slid another 10% on the news that merchants were losing interest in the daily deals game. However, all of that is apparently in the past now, because this week Groupon announced its plan to revive the business with a brand new service – credit card payment processing.

As part of its plan to woo small business owners back into those daily deal campaigns that lost so many of them a fortune, Groupon is now offering to process all of their credit card transactions at a discount. The service is known as Groupon Payments, and it’s supposedly the cheapest mobile processor on the market.

Groupon Payments uses a downloadable app in conjunction with an attachable card reader to process payments, much like Square and PayPal Mobile. Unlike Square and Paypal Mobile, though, Groupon Payments charges much less than the going rate for its services: a 1.8% fee plus 15 cents for all Visa, MasterCard and Discover transactions, and a 3% fee plus 15 cents for all American Express transactions. That’s a steep discount compared to the 2.75% fees charged by other mobile processors.

The only problem is that it’s difficult to envision Groupon actually profiting from the service with rates like that. Mihir Shah, Groupon’s VP of mobile and merchant products, is reluctant to comment on the new service, and that seems to confirm that the company will be operating its payments division at a loss, at least for a while. “I wouldn’t comment on profit or loss,” he told CNN. “It doesn’t make sense to do that. But I can say that we want to make a real business out of this.”

The notion of taking a major loss to drum up sales is something Groupon is very familiar with, since that’s the strategy behind the Daily Deals campaigns that made it famous in the first place. Merchants would sell a voucher or a coupon for a product at less than face value through Groupon’s site. The merchant would lose money – in some cases a lot of money – but the deal would attract a ton of buyers who would then return as regular customers to the business.

Or at least that’s how it was supposed to work. In reality, most of the people who bought the vouchers would show up for their free cupcake or half-off massage and then never return, if they even bothered to redeem their vouchers at all. The campaigns pissed off the merchants, lost Groupon a ton money and got the company sued for false advertising. Though the company has managed to keep itself afloat and even go public, it’s been running about as efficiently as a rusty steam engine.

And now Groupon is using this same failed strategy to seduce small businesses into using its payments app. It’s even offering to process Daily Deals for free, because hey –  maybe merchants have forgotten how terrible those are.

Forgive us for being skeptical, but from where we’re sitting, it seems like this can end in one of two ways. In the best-case scenario, everyone hops on the Groupon Payments train at first, and then 90% of them hop back off once the company raises its rates. The end result? Groupon loses money. In the worst-case scenario, nobody bothers with Groupon Payments at all and business continues as usual. Again, Groupon loses money.

Maybe we’re wrong. Maybe Groupon knows something we don’t. Perhaps this will actually end up making the company attractive to investors again. Maybe it’ll raise shares from $5 back to the $20 they were worth when the company went public.

Maybe, but probably not.

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