Groupon Gambles Big on Mobile Payments

Groupon is making a big move into a new business — mobile payments — Wednesday, launching "Groupon Payments."

Groupon payments swiper case and dongle that works with iPhone and iPod Touch.
Source: Groupon
Groupon payments swiper case and dongle that works with iPhone and iPod Touch.

The deal-a-day company, whose stock has plummeted over 80 percent since its November 2011 IPO, is getting into a crowded business.

With Wednesday's announcement Groupon is taking on established players like American Express , plus successful startups like Square, which Visa backs, along with PayPal and Google , which are also getting into the mobile payments space.

Groupon Payments allows merchants to swipe credit cards — not just for Groupon payments, but for any credit card transaction. This is an extension of the company's "Merchants" app for small businesses to manage Groupon deals on Apple iPhones or iPod touches. A credit card swiper, similar to Square's dongle, attaches to accept payments. Groupon says it accepts "all credit card payments at a lower rate than other providers."

Here's the breakdown: Groupon's system costs merchants 15 cents per swipe, plus fees — 1.8 percent for MasterCard , Visa, and Discover cards, 3 percent for American Express.

In contrast, Square charges a flat 2.75 percent fee of each swipe. (AMEX fees vary depending on the volume of transactions).

(Read More: Apple Shuns Mobile Payments With iPhone 5.)

Groupon also plans to lure merchants by processing payments overnight, rather than the two- to-three days most credit card companies take. Plus, businesses get analytics on their transactions.

And Groupon clearly isn't just doing this for the fee — especially if it plans to undercut all rivals on price. As it delivers merchants analysis of their transactions, Groupon gets details of how consumers shop.

Reports that Groupon was testing a payments service first surfaced in May — the company tells us that they tested the service with some 150 San Francisco Bay Area merchants. The mobile payments idea resonates with some comments he made in a letter to shareholders on May 7, CEO Andrew Mason writing that he wants Groupon to become the "operating system for local commerce." (Read More: 'Clearly a Lot of Concern' About Groupon: Analyst.)

But the question is whether Groupon is jumping into a new arena where there are many experienced, deep-pocketed rivals. Groupon interacts with merchants for some of their deals, but can Mason convince them to go with Groupon for all transactions? Are merchants satisfied enough with the Groupon experience for it to draw that kind of committed user base?
(Read More: Investors Question if Mason Is the Right Person to Run Groupon.)

Based on Groupon's precipitous slide investors seem convinced that Mason needs to take some drastic steps to turn things around. (Read More: 'Clearly a Lot of Concern' About Groupon: Analyst.)

The company has clearly invested a lot in developing the technology, and it'll have to invest to market it to merchants. We'll see if Mason reveals when he expects to start making money on the venture. (Read More: Can Groupon Convince Wall Street It's Half Off?)

—By CNBC's Julia Boorstin

Stay Tuned:We'll be talking to Andrew Mason about his mobile payments strategy in an exclusive interview on CNBC's "Power Lunch" Wednesday.

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