(Reuters) - Groupon Inc, the world's largest online daily deals provider, launched a payment business on Wednesday and entered a crowded field where it will compete aggressively on price with eBay Inc's PayPal and start-up Square Inc.
The service, called Groupon Payments, lets U.S. restaurants, salons and spas, retailers and other businesses that run Groupon daily deals accept credit card payments at a lower rate than other providers. In a typical local deal, a customer could pay $20 for a voucher worth $40 of goods and services.
Groupon will charge 1.8 percent for MasterCard, Visa and Discover cards, on top of a 15 cent per-swipe fee. For American Express cards, it charges 3 percent plus the 15 cent fee.
Groupon's daily deals competitors include LivingSocial, Google and Amazon.com Inc, which owns part of LivingSocial.
Groupon aims to reach a size where it will become the "operating system" for local commerce, as Chief Executive Andrew Mason put it earlier this year.
Despite skepticism on Wall Street, Groupon has rolled out a slew of new services for local merchants, including a scheduling system, a customer-loyalty program and now payments.
"They are making the right moves, but it's a highly competitive market," said Rick Oglesby, a payments industry expert at consulting firm Aite Group.
Groupon shares jumped 13.9 percent to close at $5.34 after the announcement. The stock has lost about three-quarters of its value since the company went public last year.
Rocky Agrawal, a local commerce consultant who has criticized Groupon and bet against the stock, said Groupon Payments "fills some of the holes in Square's model. Nice job."
The payments business has become highly competitive in recent years. Square, a start-up backed by Twitter co-founder Jack Dorsey, has won small merchants as customers by offering easy credit card acceptance through a small swipe device that plugs into smartphones.
PayPal launched a rival service earlier this year called PayPal Here.
PayPal's service 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. Transaction fees for processing AmEx cards are often higher. Square charges 2.75 percent per swipe.
Square's service can be "significantly more expensive" than Groupon for high dollar transactions, Agrawal added, noting that on a $1,000 Visa transaction, Groupon would charge $18.15 and Square would charge $27.50.
Square works better for merchants who accept small payments. On a $5 Visa transaction, Square would charge 13.8 cents, while Groupon would charge 24 cents, Agrawal estimated.
If merchants' average transaction is $16 or more, Groupon is a better deal. If it is lower, Square is usually a better deal, he added.
"If you run a coffee shop or food truck where the average transaction is $8, it is a no brainer to go with Square," Agrawal said. "Unfortunately for Square, they lose money on all of those transactions."
Groupon Payments is designed to encourage merchants to run Groupon deals and use the company's other services. Merchants that don't run Groupon deals will be charged a higher rate of 2.2 percent to accept MasterCard, Visa and Discover, plus the 15 cent fee.
"They're not looking to make a lot of money from this," said Sameet Sinha, an analyst at B. Riley & Co.
Aite's Oglesby called Groupon Payments a "loss leader."
Groupon CEO Mason told CNBC that the payments service will help the company sell more coupons. Each new business does not need to be "wildly profitable on their own," he added.
"We will use payments to help merchants save thousands of dollars a year and make them want to have a relationship with Groupon and run more deals with Groupon," Mason said.
The new service may help Groupon attract more merchants cheaply, Sinha added.
Groupon already has hundreds of thousands of merchants in its databases and the company's massive sales force can offer the payments service to merchants while they are arranging daily deals, Sinha explained.
Bill Cotter, owner of Cowabunga Creamery, an ice cream store in San Carlos, California, has used a test version of Groupon's payments service since March.
Cotter likes the service because it is cheaper than the system he was using before, which included service from Citibank, a unit of Citigroup, and a card reader supported by First Data Corp.
Cotter has never run a Groupon daily deal, arguing that his profit margins are already too low to risk losing money on such a promotion.
However, he said that if he is required to run a Groupon deal to keep the payments service, he would probably do that.
Groupon's payments service has two goals - to make money and enhance the relationship with merchants, according to Sean Harper, director of product management for Groupon Payments.
Groupon can cut pricing on payments for local merchants and still make a profit, Harper said, noting that Groupon's size means it gets favorable rates from payment networks such as Visa and MasterCard.
The company also has a distribution advantage because the Groupon sales force can cross-sell the payments service to local merchants that they already know. Distribution and sales is a big cost that rivals typically have to suck up, Harper added.
Still, Harper said Groupon is willing to accept lower profit margins than existing companies in the payments business.
"That's because incumbents' margins are too high," he said. "There's a reason why merchants are upset with credit card processors. They are being charged too much."
(Reporting Alistair Barr in San Francisco and Nivedita Bhattacharjee in Chicago; editing by Jeffrey Benkoe, Sofina Mirza-Reid, Richard Chang, Andrew Hay and Gunna Dickson)