Can PayPal Out-Coupon Groupon?

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PayPalThere's a new daily deals player, and it's a company that's near and dear to your virtual pocketbook.

PayPal is telling Bloomberg that it plans to launch a mobile coupon site next quarter, working with some of the country's biggest merchants to send out timely and relevant deals to folks who want them.

The flash sale model makes sense on paper. It's a win-win-win proposition as the merchant attracts new business, the customer gets a sweet discount, and the middleman website gets to split the prepaid voucher revenue with the merchant.

But eBay's (EBAY) popular payment platform is more than a bit late in taking on market leaders Groupon (GRPN) and LivingSocial. In fact, it's hopping on the bandwagon at a time when many dot-com darlings -- including Facebook and dining reservations specialist OpenTable (OPEN) -- have chosen to jump off.

And now that Groupon is public, we know that it has been profitless in its brief corporate tenure. Analysts see Groupon turning a profit next year, but that's not going to make this niche attractive to companies just starting out.

How PayPal Will Be Different

There's no point in reinventing the half-priced wheel: Online deal aggregator Yipit claims that Groupon and LivingSocial already control 73% of the market, and there are countless local and national players fighting for the remaining scraps. If PayPal is just going to be another source for a cheap mani-pedi or 53% off a Thai dinner, eBay's fast-growing subsidiary isn't going to last long in this game.

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The plan, apparently, is for PayPal to tap into smartphone GPS features, and to use its knowledge of your shopping habits to better offer easily accessible deals that may actually be of interest to you.

In other words, this seems as if it will be more in the mold of the Groupon Now and LivingSocial Instant programs that those sites are gradually introducing into major markets.

The discounts may not be as great, but it's not as if some of the major merchant partners that will likely be working with PayPal on this can afford the traditional daily deals model, in which a retailer is selling bucks for quarters after the deal websites take their roughly 50% cut.

But if you've used PayPal's mobile payment platform to buy doughnuts in the past, why wouldn't you want to know if a shop two blocks away from your current location is willing to sell you a box of jelly doughnuts at 20% off?

The Huge Advantage

PayPal had 103 million active registered accounts as of the end of September -- people who already have their personal banking information tethered to PayPal for payments and withdrawals. They're also comfortable with -- and ideally, trust -- PayPal.

This is going to be a huge potential user base, even if only a small fraction of the accounts opt in.

However, that's not even PayPal's real meaty advantage. The eBay subsidiary can't be dismissed here because a lot of folks have idle cash sitting in their PayPal account. Whether the funds are just a payment they received and forgot to transfer to an interest-bearing account or money they've deliberately kept in it in case a buying opportunity comes around, a lot of PayPal users may view this as found money. If people can rifle through their virtual pockets to pay for an already discounted PayPal mobile coupon, this service is going to get popular in a hurry.

All that's left is to see if PayPal can secure enough relevant merchants offering compelling discounts. Given eBay's broad reach of sellers big and small through its namesake online marketplace, that shouldn't be a problem.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any stocks in this article. The Motley Fool owns shares of OpenTable. Motley Fool newsletter services have recommended buying shares of OpenTable and eBay, as well as writing puts in eBay.


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