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Groupon’s Move into Mobile Payments: Hail Mary or Savvy Strategy?

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What do you do if your stock is trading 75% below the IPO price set less than a year ago? If you're Groupon, you look to break into a new market. And that's exactly what the king of online daily deals announced yesterday. The company launched Groupon Payments, a mobile payment system that can be used for any credit card transactions, not just Groupon deals. That announcement pushed Groupon shares up almost 14% yesterday to close at $5.34 but by mid-morning on Thursday they had retreated to $5.08.

"Groupon is casting around for other businesses," says The Daily Ticker's Henry Blodget. "They've gone into direct sales of goods, a rapidly growing business for them. Now they're coming out with this big new business: payments. The idea is to become the operating system for local commerce."

Blodget says Groupon had no choice but to start something new because it had already saturated the daily deal market.

[Related: Groupon Slumps as 'Daily Deal Fatigue' Overshadows First Quarterly Profit]

The company's new payments business lets merchants swipe credit cards through customers' iPhones or iPads. Groupon says its merchant fees are the cheapest in the industry. Merchants pay 15 cents per swipe plus an additional transaction fee that depends on the credit card used: 1.8% for Visa, MasterCard and Discover and 3% for American Express. Square charges 2.75% for all swipes.

"Square is cheaper at the really low end; Groupon is a little cheaper at the high end," says Blodget, adding that Groupon's new business "is going to be a tough sell." EBay's PayPal is another competitor.

The payments market, like the daily deal market, may also become even more competitive on price.

"Lower prices should appeal to local merchants," says The Daily Ticker's Aaron Task, "but I wonder at some point does that whole business continue to shrink in terms of the price because….somebody will want to offer it for almost nothing, just in order to have the transactions."

[Related: Groupon Blows It Again, Restates Earnings As Customers Demand Refunds]

It's too soon to tell if Groupon Payments will be a game changer for the company. But one positive for Groupon in the past few weeks has been its stock price. Groupon shares are trading close to fair value and revenues are topping $1 billion, Blodget notes.

"Right now it looks like the business is real and valuation has come way down, but casting around for new businesses is not a major positive," he adds.

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