Groupon’s IPO Hints the Risks and Opportunities for Prepaid

by Ben Jackson 0

In its S-1 filed on June 2, Groupon reveals thatas of March 31, it has 83.1 million subscribers and 56,781merchants. This is a telling division and hints at some of therisks and opportunities for prepaid cards loyalty and discountbusiness.

Perhaps the fundamental question about Groupon, and other socialdiscount sites, is whether or not these deals are worthwhile forthe participating merchant. Clearly Groupon and its buyers benefit,but the cost benefit analysis for merchants is different. Thisquestion came into sharp focus after the Gap and Amazon bothparticipated in group marketing deals.

Ostensibly, what Groupon offers to merchants is exposure. Shoppersget a chance to try out a product, service, or location at adiscount. The merchant hopes that this translates into a repeatcustomer. The risk is that the group buying customers may be onetime visitors who take advantage of a great offer and never comeback.

Regardless of the terminology used, Groupon, Living Social, and thelike are offering prepaid deals for these merchants. But everymerchant can only have so many customers who are there on thesedeals and remain viable. What that ratio is varies from business tobusiness, but once the number starts approaching half of thecustomers, the merchant will be at risk.

What Groupon suggests to me is that there is a viable market formerchant funded discounts and an opportunity for RestrictedAuthorization Networks (RANs).

First, Groupon promotes the idea of the merchant funded discount toconsumers by offering extreme versions of them. However, for largermerchants, there is nothing preventing them from running specialson their closed-loop cards. These cards, especially given theevidence around over-spending by gift card holders, offer theopportunity to sell at a discount to current customers without thediscounts being so steep and without the money being held byGroupon until redemption.

Second, RANs could combine discounts from several merchants andreduce the amount of discount the merchant is required to provide,while at the same time targeting both existing and potentialcustomers. You could use cards that are good at adjacent merchantsto target certain psycho-graphics with the promotional message thatcustomers can try something new and if they don’t like it, canspend any remaining balance at a merchant they know and love.

Groupon’s IPO will likely affect the shape of the prepaid market,indirectly, if nothing else. But the effects of that will bedetermined to a large extent by how the market reacts.