Groupon Inc. (GRPN:US), the largest daily- deals website, is introducing a credit-card reader to vie with products offered by Square Inc. and EBay Inc. (EBAY:US)’s PayPal service and boost revenue from small businesses.
The company will charge U.S. merchants that use its coupons lower fees than Square and PayPal, according to a statement today from Chicago-based Groupon. The reader is also compatible with Apple Inc.’s iPhone and iPod Touch.
Groupon, which has been testing the service in San Francisco, is seeking new sources of revenue as diminished demand for daily deals causes sales to fall short of analysts’ predictions. The new service, Groupon Payments, is designed to make the company more appealing to existing clients and potential new ones.
“For the small merchants, credit card transactions have always been extremely expensive,” said Sameet Sinha, an analyst at B. Riley & Co., in a telephone interview.
Existing Groupon customers that use the reader will pay transaction fees of 1.8 percent plus 15 cents for cards from Visa Inc., MasterCard Inc. and Discover Financial Services, For American Express Co. cards, fees will be 3 percent plus 15 cents. Card readers offered by Square charge 2.75 percent per transaction, while PayPal has a 2.7 percent fee.
Groupon rose 14 percent to $5.34 at the close in New York. The stock (GRPN:US) has declined 74 percent so far this year.
The company makes money by selling discounts -- known as Groupons -- from businesses such as restaurants and nail salons. It then splits the revenue with the retailers.
“We talk to a lot of Groupon merchants and the one thing that came up again and again was that they felt like they were paying too much for credit-card processing,” Mihir Shah, vice president of mobile and merchant products at Groupon, said in an interview. “We set out on this mission to slash the complexity and cost of collecting credit cards.”
Businesses that use Groupon’s card-reader without offering deals through its website will be charged a 2.2 percent fee plus 15 cents per transaction for Visa, MasterCard and Discover. The American Express fee will be 3 percent.
The company has tested the service with dozens of merchants in the San Francisco Bay Area, a person familiar with the matter said in May.
Groupon can afford to charge a lower rate because its business already supports a large sales staff and other costs associated with rolling out a payment product to hundreds of merchants, Shah said.
“We already have the sales force, we have the distribution advantage, we have the relationship with the merchant,” Shah said. “All we have to do is turn on the service.”
Groupon is giving away card readers that are made by Roam Data Inc. and plug into the headphone jack of Apple devices, Shah said. It will sell more advanced readers made by Irvine, California-based Infinite Peripherals Inc. for $100 apiece, he said.
Merchants using Groupon Payments will be able to analyze transaction history, check daily sales reports and review revenue trends. Groupon said credit card payments will be deposited overnight in vendors’ bank accounts, faster than the typical delay of two to three business days.
“Now the merchants can track the time of purchases and what time the customers walked through their door, how many people were with them and what they bought,” Sinha said. “That’s incredibly valuable data.”
Such data has the potential to backfire if it also shows merchants that offering discounts through Groupon is ineffective, Sinha said.
“If you give people more transparency,” he said, “you may discover it doesn’t work.”
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