Banks Can Eat Groupon's Lunch

All the recent bad press aside, you can't deny Groupon credit for discovering an underserved market of small businesses. However that's not to say the company is best suited to continue serving it.

Big players like Facebook and Yelp that entered the daily-deals space hoping to catch a piece of the action with the strength of their user bases have quietly exited the space after initial results that were disappointing. Amazon is finding out that it is not easy to win in the deal space either. I won’t even mention the Groupon clones, of which there seems to be a new one every day. Leading publications including The Wall Street Journal have declared that daily deals are now a commodity product.

In the middle of this over-populated landscape of players, might it even be prudent to suggest that banks stand to win in this space? There are a few reasons to believe that it might be.

Groupon’s customer acquisition costs have been skyrocketing in the face of increasing competition. Between the first quarter of 2010 and the first quarter of 2011, the customer acquisition cost rose 485% to more than $30 per email address. If customer acquisition is getting so expensive for the leader in the space, it is easy to imagine how the smaller players are getting squeezed. Expect to see a number of quiet deaths among the newer, smaller deal-a-day players and a lot of consolidation among the modestly successful ones.

A bank, on the other hand, already has a large base of members and does not need to incur these acquisition costs. The customers are already engaged in a variety of rewards programs with these banks and a bank bringing new offers to its customers is not a big departure from the existing social contract.

Further, the banks can offer these deals through a variety of channels, including email, online banking, and ATMs. The ATM in particular is an underutilized marketing channel (if it is utilized at all) given that the bank has a captive customer and location information.

The bigger banks have thousands of merchant relationships they can use to source deals without incurring the huge cost of a large sales force. Many of their existing touch points with the merchants can be leveraged to procure new deals.

From our conversations with merchants, we know that many are excited by the prospect of being able to make the best offer they can while making sure that they aren't going to their existing customers who would have paid full price otherwise. This cannibalization of existing customers is a big reason for the reluctance of bigger merchants to jump into the daily-deals space.

With banks losing revenues in the face of legislative action restricting fees and other noninterest income, the banks are truly hurting and looking for new streams of revenue. Banks have always had access to vast transaction data but haven’t figured out how to monetize it yet. Raising checking account fees on your customers may not be the way to win over customers or legislators. Understanding customers' preferences and delighting them with offers that are relevant may be a better way.

If I had a dime for every person who complained about the irrelevant offers on Groupon, I'd be a millionaire. Groupon can send me a 99% discount for laser liposuction (today's Groupon deal in Norwood, Mass.) but I won't do it. And while we are it, please hold the nail salons, too, will you? I’m male, and not particularly vain (I don’t think). If such steeply discounted deals, coming as they are from dozens of these deal-a-day websites are indeed a commodity, why would you go to one site instead of the other? Targeting might be one reason. If there were a deal site that took the time to tailor my deals in light of my gender, my restaurant preferences and my dislike for laser liposuction, I'd go there.

Banks are ideally positioned to do this targeting. They have access to customers' transaction data, which they can use on an anonymized basis to target deals. Every purchase on your card is a preference you have expressed. Amazon.com is trying to use its knowledge of your preferences to send you targeted deals via email and Kindle, and some have called Amazon the most fearsome Groupon competitor for that reason. But it pays to keep in mind that 80% of the average person's disposable income is spent within 20 miles of home. Knowing that someone shopped at Saks Fifth Avenue and Burberry says more about her than knowing that she reads Jane Austen and is shopping for a toaster. From one website (no matter how huge), you can only find so much about general purchase patterns. Given that so many of these deals are with restaurants and entertainment spots, a purchase history based on bank data can be used to find people who like to go out for Italian food or bowl on weekends. This is not something Amazon can do.

If deals are indeed a commodity and you have a few thousand of them to match up against a few million customers, you can try a Hail Mary pass and send me another liposuction deal or you can use technology to figure out which offers best suit each customer. Without targeting, you can delight neither customers nor merchants. The competitive advantage in the deals space will come from relevance and not just from volume.

Most innovations fall under one of two categories – cost-based innovations, where someone figures out how to build a cheaper mousetrap (one that catches almost the same number of mice at a fraction of the cost) or performance-based innovations, where someone builds a better mousetrap (that catches more mice or bigger, badder mice) at a higher cost.

Once in a rare while, there is an innovative opportunity to build a mousetrap that is both cheaper and better. The banks are sitting upon such an opportunity now. What will they do about it?

Venkat Rangamani is the chief technology officer of Micronotes Inc., a digital marketing company in Cambridge, Mass. He can be reached at venkat@micronotes.com.