Groupon, the world’s largest and most beloved online daily deals program announced, recently, that they are launching a new credit card program. This program sounds like a great idea, but has stiff competition from PayPal and Square.
In a time when the credit card industry is going through major reform and new digital alternatives are quickly on the rise innovation will always bring about new ideas. Groupon, for example, helped to usher in a new era of bulk buying, one in which “members” are no longer required to buy in bulk and pay in bulk at a warehouse or big box store. Instead, Groupon grants its members access to their community buying power by offering discounts on local and national products and services so long as enough people opt in. Usually in a local deal, a patron would pay half price for a product or service from a local merchant. This is a system that quickly worked for them and has been since adapted by many others.
Now Groupon is at a new horizon and they are looking to change the bulk buying system again. This time, though, they are introducing a new payment business designed to take advantage of the global purchasing power of Visa, MasterCard, Discover and American Express. This payment system will work similar to co-branded credit cards by giving credit card users access to Groupon’s special deals with a simple card-based transaction. Of course, this is a business venture so Groupon will charge a service fee of 15 cents per swipe and 1.8 percent for all Visa, MasterCard, and Discover Card transactions. An American Express swipe will charge 15 cents plus 3 percent.
In direct competition with like-minded industry giants LivingSocial, Google, and Amazon (who is actually part owner of LivingSocial), Groupon has its sights set on growth. In fact, they want to reach critical mass so that they can set the standard for a new kind of local commerce operating system. Their hope is to create a centralized system for scheduling, customer-loyalty programs, and with this new iteration a foundational payment program.
According to Alte Group consultant Rick Oglesby, an expert on the payments industry,
Groupon is making all the right moves, but it’s a highly competitive market.
Even such, Groupon’s market shares grew by almost 14 percent to $5.34 once they made the announcement regarding their new payment system plans. This is particularly good for them since their shares have plummeted by nearly 75 percent since going public last year.
If competing with LivingSocial, Google, and Amazon weren’t enough, Groupon must also face competition from the already established mobile payment services. PayPal leads this charge, but newcomer Square is quickly gaining ground. PayPal’s new service, “PayPal Here,” charges a service fee of 2.7 percent for all credit and debit cards. Square charges just a little more: 2.75 percent. While these numbers may appear to make PayPal and Square much simpler, you should note that Square’s overall percentage charge is much higher than what Groupon plans to charge. Thus, Square works better for small-transaction merchants. A $5 credit card transaction, for example, would charge a 13.8 cent fee through Square and 24 cents through Groupon. On the other hand, a $1000 transaction would charge a Square user $27.50 and a Groupon user $18.15.
This disparity is confusing for everyone but Groupon assures that their aim is encourage merchants to promote and take advantage of Groupon deals through their provided credit card service. They will charge a higher fee for companies who do not run a Groupon deal, which appears to benefit everyone involved. Some small business owners have tried this new service and so far the outlook is good, but time will tell to what extent Groupon will be able to take their system.
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