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Groupon Inc. (GRPN - Analyst Report) recently announced its entry into the mobile payments market with the launch of Groupon Payments – a service that enables businesses to accept credit cards via Apple Inc.’s (AAPL - Analyst Report) iPhone or iPod Touch.

Although the company is capable of processing the transactions of any credit card, it is currently focusing only on businesses that offer deals through Groupon. It is also allowing other businesses to use the payment service under a test program, but is charging premium rates for it.

The target clientele is small businesses that do not accept credit cards to either avoid paying high transaction fees or due to lack of access to the required technology. Now they will be able to overcome these problems with Groupon Payments, which will benefit from the growing use of smartphones. The company has tested the technology in the San Francisco Bay Area.

However, Groupon will face tough competition from eBay Inc.’s (EBAY - Analyst Report) PayPal and Jack Dorsey-owned Square, both of which offer credit card usage via smartphones by means of a card-reader attachment. However, the company will have an advantage in terms of processing speed since it aims to process transactions overnight, compared to other companies that take as long as three days.

Groupon will also have benefit in terms of pricing as it is charging substantially less than the competitors. PayPal charges 2.7% fee, while Square charges 2.75% or $275 per month. Meanwhile, Groupon will charge only 1.8% fee plus 15 cents for each swipe using a card issued by MasterCard Incorporated (MA - Analyst Report), Discover Financial Services (DFS - Analyst Report) or Visa Inc. (V - Analyst Report). However, it will charge 3% plus 15 cents for every transaction using American Express Company’s (AXP - Analyst Report) cards, which is higher compared to peers.

Groupon is launching the service to widen its product portfolio and increase its prominence among customers who have too many options to choose from. Competitors, such as LivingSocial and Inc. (AMZN - Analyst Report), are attracting customers by offering discounts and deals. Thus, the new service will offer Groupon an additional source of revenue and help in attracting more customers.

The announcement raised investor confidence in the stock and share price surged 35 cents or 13.9% to close at $5.34 on Wednesday. This comes as marginal respite to Groupon, which is dealing with plummeting share prices since its IPO of $20 per share in November last year.

Groupon currently carries a short-term Zacks #3 Rank (Hold).

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