PayPal is preparing to launch a Groupon competitor in the first  quarter of 2012, according to Bloomberg. The eBay subsidiary hopes to tap into its base of 103 million accountholders.

From what I’ve seen so far, this doesn’t seem like a credible competitor. The daily deals business doesn’t play to PayPal’s strengths. If it tries to compete with Groupon on Groupon’s terms, it will lose.

Among the challenges:

1. Daily deals are sold,  not bought. Groupon and LivingSocial have built small armies of salespeople not because they want to, but because they have to. Self serve for small businesses hasn’t worked — even when Groupon has tried it with Groupon Stores and Groupon Now. PayPal would have to build a similar army. Self serve will happen eventually, but not in the next couple of years.
2. Customer service is not PayPal’s strength. Groupon and LivingSocial have made great customer service (for consumers) a hallmark of their products. PayPal’s reputation with consumers and merchants has a lot of room for improvement.
3. PayPal has historically been risk averse. Groupon is taking on way too much risk in their business model. But PayPal will likely take on too little risk, making the offer unattractive for both consumers and merchants.

This is not to say that PayPal’s entry won’t hurt Groupon. The biggest area for concern is the pressure that PayPal will put on the revenue share that Groupon gets for deals. This has already dropped dramatically — from 42 percent in 2Q to 37 percent in 3Q.

PayPal (like credit card companies) has built its business on taking small amounts of money from lots of people; Groupon has built its business on taking large amounts of money from few people.

For its payment services, PayPal charges about 3% of the transaction amount. If PayPal offers deals for 10% or even 20%, that will put a lot of pressure on Groupon. That’s especially true for large national, online and retail deals.

One strength that PayPal has is its acquisition of Where earlier this year. Where gives the company a strong mobile team, a mobile ad network and a mobile user base that had 4 million monthly active unique users at the time the acquisition was announced.