This Payment Service Makes a Lot of Sense
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With the recent news that Groupon (NASDAQ: GRPN) is launching its own payment service, some people I'm sure are skeptical of the company's ability to compete in such a challenging market. However, from the details the company has released the service appears to be a serious threat in the payments industry. Though the industry is dominated largely by multi-billion dollar companies, pricing is extremely important as any small business owner knows. If Groupon can manage to leverage its connections to the thousands of small businesses that offer Groupon deals, this lower priced offering could be a big win for the company.
If you haven't heard, Groupon will allow merchants to swipe credit cards through a dongle that can be attached to either an iPhone or iPod touch. The company cites three major benefits to using its service over the competition. First, the cost to accept MasterCard, Visa (NYSE: V), and Discover is 1.8% of the transaction plus $.15 per swipe. The merchant also can accept American Express with a 3% transaction charge and the same $.15 per swipe cost. By point of contrast, Square charges a flat 2.75% transaction fee with no additional charges. Square has the advantage of being backed by Visa, which certainly has deeper pockets and better connections than Groupon. However, for small business owners that primarily accept major credit cards, the Groupon pricing model certainly has to be attractive.
Second, Groupon will provide next day funding for payments versus the 2 to 3 business days that most credit card processors take. This is also an important factor for business owners, as cash flow availability is paramount in these tough economic times. Last but not least, Groupon will offer business analytics on these transactions, which of course the company can use to find out what people are purchasing. Even if this model is only moderately successful, it both diversifies Groupon's revenue stream, and gives the company purchase insights that it would not have had otherwise. With the ability to pitch both Groupon deals and mobile payments simultaneously, what's left to stand in the company's way?
In truth, the biggest deterrent to Groupon being successful with this new venture is the size and reach of their competition. EBay (NASDAQ: EBAY) and their PayPal unit is expanding their physical presence with traditional retailers, with companies like Home Depot and Abercrombie & Fitch already onboard. As proof of the popularity of PayPal's brand, consider that in the company's most recent quarter, new users grew by 13%, and transaction volume increased 20%. While Square is clearly being undercut by Groupon's pricing, their primary backer Visa, is offered through thousands of merchant service providers that can customize their rate quotes based on the individual business. In many cases, merchant service providers are willing to accept a lower percentage for a big, or more active new account. While Groupon's 1.8% transaction charge seems reasonable, there are many merchant service providers that will be able to undercut this pricing. If this Groupon payments model becomes too successful, there's no reason Square's couldn't adjust its pricing accordingly. Given these challenges, what makes Groupon different enough to succeed?
One of the big differences between a company like Square and Groupon, is the fact that Groupon deals with small business owners every single day with their daily deals offerings. As of the company's last quarterly earnings, there were about 38 million people signed up and active members of Groupon. In addition, the company's gross billings increased 38%, and in the last couple of quarters the company served over 100,000 merchants during these three month periods. One of the most difficult challenges for any merchant service provider is, getting a business owner who is willing to talk. This is a clear advantage for Groupon as they are already engaging business owners to discuss a Groupon deal. In many cases the business owner will already be examining the financials of the Groupon, so why not look at one more thing and compare their merchant pricing?
What also seems to have been lost in the shuffle of the Groupon story is, the fact that the stock sells for just 13.5 times 2013 projected earnings. With over 20 analyst on the trail, and expected growth in earnings at around 30%, this new mobile payments venture would seem to make the stock even more attractive. It has been easy for many people to make fun of Groupon and their daily deals, but bundling daily deals and mobile payments just makes sense.
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