Word on the Digital Street
Word on the digital street is Groupon is considering entering the payments space. Keywords like “Extremely aggressive” and “reaching” have been used to describe their pricing in recent bids to gain entry, and here’s why.
Groupon already has a major deficit of trust among many small business owners. Add that to the payments arena’s own existing deficit of trust among merchants, coupled with the sheer exhaustion they feel around being solicited by yet another payments provider and you have a challenging recipe at best, at worst an epic fail.
Reports say that Groupon intends to enter the market with a rate of 1.8% and a 15 cent transaction fee for transactions processed through their terminals. PayPal, Verifone’s Sail, and Square all charge around 2.7% with no transaction fee. AmEx transactions generally run a little higher in the traditional merchant space with Groupon coming in at around 2.7%.
Square and PayPal don’t charge extra, while Verifone charges 3.7%. Unlike the other players, Groupon is offering merchants an iPod Touch in addition to a Card Reader to for free (PayPal, Verifone, and Square only provide the readers for free).
None of the above pricing is “Extremely aggressive”. Each of them is getting a near premium in Basis Points; a Basis Point or bip is equal to 1/100th of a percentage point. The number of basis points that a processor charges above interchange is its margin. Most merchant processors only dream of selling at a margin of 30 – 40+ Basis Points plus a transaction fee.
PayPal, Square, Groupon
What PayPal, Square, and now Groupon have done, is figured out a way to make payment processing insanely profitable by selling what I call “Brand Driven Merchant Processing” with no credit check to the mainstream which is both “Extremely aggressive” and smart!
Banks and merchant processors have been trying to figure this out for ages. It’s been hard for them because the average merchant in the traditional space has over time and through experience become keenly aware of what they’re paying in merchant fees with the large majority of them expecting rates at near cost.
PayPal realized a while ago there was a huge market opportunity in the non-traditional micro-merchant space. Traditional Processors turned these folks away because of their limited volume. PayPal however saw an opportunity.
What Does This Mean For Groupon?
It all depends on their positioning. If Groupon is trying to enter the traditional merchant space (which it seems they are based on their giving away the iPod Touch) they are insane and have a battle ahead of them.
Why? Because at the end of the day the payment processing game in its purest form is currently a race to zero with a few dollars along the way, and unless you’re banking on a new sucker being born everyday it’s not sustainable. I personally think the “Sucker Ship” has sailed, or at the very least is on its way out of port. Only time will tell for sure.
The Cost of a Merchant Account: $99 Application Fee, 4 Tier Pricing, and a $9.99 per month Statement Fee.
The Cost of a Credit Card Terminal: $325 – $1200.
Figuring out that Smartphone’s and Tablet’s with a free Card Reader, a Mobile App, and 3G Wireless could create a new market and breath half-life into an old one. Priceless!
What do you think companies like Groupon, PayPal, Verifone, Square, or your start-up can do to revolutionize the payments industry and take it in a new and innovative direction?
Randy J. Mitchell
Randy J Mitchell is a Technologist | Futurist | & Social Entrepreneur and the Founder of Plisten™ http://plisten.com - Plisten centralizes and amplifies the Voice of the People, and removes the most noted barriers that prevent Brands and Politicians from engaging and listening. He currently resides in Atlanta, GA with his lovely wife and their two children. You can find him on the web at http://twitter.com/