Groupon tests payments rival to PayPal, Square

By Alistair Barr

SAN FRANCISCO (Reuters) - Groupon Inc is testing a payments service that lets merchants accept credit cards at what could be a knock-down price, according to two people familiar with the matter.

The move puts the world's largest daily-deals company in direct competition with eBay Inc's PayPal, and start-up Square Inc, partly owned by Visa Inc.

Groupon started in 2008 by offering heavily discounted deals on local goods and services. However, Chief Executive Andrew Mason and Chief Financial Officer Jason Child have grander plans for the company to become the "operating system" for local commerce, as Mason put it recently.

While Groupon's goals have been met with skepticism by Wall Street analysts, the company recently unveiled a slew of new products and services for local merchants, including a scheduling system and a customer-loyalty program.

Groupon's nascent payment service comes with an Apple iPod Touch, and a case that wraps around the back of the device, which allows merchants to swipe credit cards, the people said. They did not want to be identified because the service has not been officially announced, and is in an early testing phase with some Groupon merchants.

PayPal, Square and other payment companies like VeriFone Systems are offering so-called dongles that plug into the top of mobile devices such as iPhones and iPads.

However, Groupon went with a wrap-around case for its test because dongles have the potential to snap off, the people said.

Groupon is aiming for fees that are competitive with PayPal and Square, although the company has yet to finalize the fee structure, the people added.

Groupon may have flexibility to charge lower fees because it could subsidize the payments service from money it makes providing other services to merchants, they said.

PayPal's service, known as PayPal Here, charges a fee of 2.7 percent of the purchase price for all types of credit and debit cards - including those issued by American Express Co.