Groupon's Big Deal

After pioneering the daily group coupon deal concept and making a mint off it, Groupon (NAS: GRPN) began to experience the sincerest form of flattery. Soon there were boatloads of imitators trying to undercut Groupon, all hungry for a piece of that lucrative deals pie. Now, the original dealmaker is striking back in a new venue -- according to VentureBeat, it is trialing its own mobile payments system that will undermine competitors by charging substantially lower fees and is tossing in a free Apple (NAS: AAPL) iPod touch for merchants, just for good measure.

If the system gains traction, it could become problematic for eBay's (NAS: EBAY) PayPal, which, like Groupon, has many challengers. PayPal Here, like VeriFone (NYS: PAY) Sail, charges a 2.7% fee for each transaction, while Groupon's take is a mere 1.8%, albeit with a $0.15 transaction charge. None of the others in this space tack on a charge, but Groupon will still be cheaper, as the article's author notes. Square, which has been given a run for its money by PayPal Here, charges 2.75%, and would be the most disadvantaged.

Groupon's free card reader is innovative, too, as it wraps around the iPod instead of plugging into the top like an appendage. Perhaps that's why the company feels inclined to give away the iPod as well. Most likely, though, this largesse is a direct swipe at Square, which has a special relationship with Cupertino and has been selling its product in Apple retail locations and in its online store for the past year.

Fool's take
Groupon isn't inclined to comment just yet, so much of this, such as the fee structure, is speculation. Time will tell whether the mobile payments space has room for yet another player, but Groupon's move does jibe with its acquisition of FeeFighters, which allows merchants to compare fees among credit card processors. That purchase, along with its new service Groupon Scheduler, clearly points to the company's plan to expand merchant services and explore avenues other than daily deals.

Can Groupon be successful here? PayPal really seems to rule the roost in this sector, and I think Groupon will have a hard time dislodging it from its premier spot. PayPal has partnered with 15 large retailers as it brings its offline payment products directly into stores, and has recently teamed up with VeriFone to extend its presence in the retail space even further.

The testing of this new product is reportedly being limited to the San Francisco Bay area, and there's no word as to when it might be expanded upon. I believe that Groupon's initial undercutting of competitors' rates will help it get its foot in the door, but what happens after that? Surely the company won't be able to subsidize the service forever, at which time it will have to stand on its own merits if merchants no longer find a cost advantage. It will be a while yet until this is known -- but, in the meantime, there's that free iPod.

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At the time thisarticle was published Fool contributorAmanda Alixowns no shares in the companies mentioned above.The Fool owns shares of Apple.Motley Fool newsletter serviceshave recommended buying shares of eBay and Apple.Motley Fool newsletter serviceshave recommended creating a bull call spread position in Apple. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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