LevelUp’s Plan to Supercharge the Mobile Payments Market: Make It Free

Every time you use plastic to pay for a cup of coffee or a pack of cigarettes, look closely, because you can probably see the merchant cringe.

That’s because, for every transaction, they usually pay the payment processors 2 percent or more. On small purchases, that can often be the retailer’s profit.

But, starting today, LevelUp is providing merchants an alternative that will charge absolutely nothing. It is calling the program Interchange Zero, because when both merchants and consumers use LevelUp, it won’t cost a single cent to accept a payment.

On the consumer-facing side of LevelUp’s business, consumers must pay using a mobile application on their phone that is tied to their debit or credit card. This makes LevelUp one of dozens of companies also competing in the hotly contested mobile payments space.

LevelUp CEO Seth Priebatsch says he’s been talking about charging zero interchange fees for the past eight months, but only now has figured out a way to roll it out. “Once you go to zero, you can’t go back,” he said, noting how confident he is in making the move.

But getting both merchants and consumers to adopt the mobile payments has been challenging for others, including Google Wallet, PayPal and Square, which are all arguably in the very early stages. Others, including Groupon and Apple, are also contenders, and, oh yeah, don’t forget about Visa, MasterCard and American Express, which all have healthy businesses based on charging interchange rates.

Crazy as it sounds, Priebatsch believes that his Boston start-up, which is a division of Scvngr and raised a modest $12 million in its most recent round, has an honest chance against them all.

That’s because he is leapfrogging everyone else by going directly to zero.

“It’s a commodity. Everyone is competing on price,” he said.

Up until now, LevelUp was charging about 2 percent per transaction. Under that model, it had signed up 3,000 merchants, and said that roughly 200,000 active users were spending about $2 million a month on its network. Going forward, rather than making money on interchange, it plans to sell services to merchants with the aim of getting new consumers in the door and keeping them coming back.

For instance, a common promotion that a merchant could offer would be offering $2 off a purchase. When redeeming the offer, LevelUp earns 35 cents for every dollar off. In this example, the merchant would have paid $2.70 to acquire the customer, which becomes a whole lot more economical if there’s no interchange. Priebatsch believes that by offering such promotions, they can sustainably bring interchange to zero. Currently, 98 percent of the businesses using LevelUp are running campaigns.

“We don’t need it [interchange] anymore. We’ve found ways to add value that can fully subsidize it,” he said.

It also helps that LevelUp is trying to come up with creative ways to limit the amount of interchange it pays.

Priebatsch didn’t go into details on how, but he said that the company has built proprietary algorithms to route money more intelligently, which saves it 50 percent compared to when LevelUp didn’t have the technology. The company also worked aggressively to reduce fraud in the system, and says it has 99 percent less fraud than a standard credit card because merchants never see a consumer’s 16-digit code, but instead scans a QR code.

But even if merchants like it, will consumers be willing to adopt mobile payments?

Priebatsch is insanely optimistic on that front, too, believing that merchants will do most of the legwork for LevelUp, because if they save money, they can ultimately pass it along to the consumer. So far, that’s penciled out, with LevelUp reporting that 85 percent of users are signing up for the app inside of a store.

LevelUp is not the only one moving fast on this front.

Dwolla is working hard to build its own network that limts interchange; Google Wallet plans to subsidize its network with advertising; and PayPal believes that it can continue to charge as long as it offers other perks and services to the merchant.

For more information, here’s the whole release:

LevelUp Becomes First Payments Solution to Achieve ‘Interchange Zero’
“Merchants Will Never Pay a Processing Fee Again,” says CEO Seth Priebatsch

Boston — July 12, 2012 — Accepting credit cards costs merchants a total of $50 billion every year. In fact, payment processing fees are the single largest ‘invisible tax’ on businesses in the American economy. This hurts consumers, too. That $50 billion comes out of your pocket in the form of higher prices anywhere you swipe your card.

Luckily, that fee is going away forever.

As of today, any merchant accepting LevelUp as a form of payment will join the Interchange Zero revolution and stop paying processing fees forever.

What is this “Interchange Zero” thing?
Interchange Zero is the revolutionary — and now, real — idea that it shouldn’t cost merchants a single cent to accept a payment. No ifs, ands, or buts. Instead of making money just for moving money, payment providers should add value above the transaction in ways that help businesses thrive and grow, such as customer acquisition and customer loyalty campaigns.

Priebatsch first broached Interchange Zero as a burgeoning shift in the payments industry last fall at Fast Company’s Innovation Uncensored conference. He’s written on the topic in Inc. Magazine and this spring at SXSW Interactive, Priebatsch addressed the crowd about this inevitable payment revolution.

And now it’s finally here.

OK, this is cool. But why is interchange a dying business?
Fifty years ago, interchange — the movement of money — had reason to be costly. For example, physical lines were laid to connect merchants to the network and large fraud risks had to be covered.
But this day in age, those lines are already laid and heavy-duty security innovations have lessened the real value of interchange. Yet, as these real costs went down, the interchange rate stuck around. What a swindle!

“The process of moving money is now becoming a commodity, a de facto service. We’re entering an era in which merchants should get — and will eventually only pay for — value above and beyond the transaction,” said Seth Priebatsch, Chief Ninja of LevelUp. “LevelUp is skipping this ‘race to the bottom’ happening between the major payments companies and leading the way by providing real value beyond the transaction.”

Today: 0% payment fee. Forever.
Today, LevelUp is taking the bold step of dropping its interchange to zero. Entirely. Forever. From here on out, LevelUp will only make money by providing value beyond the transaction.
LevelUp provides that value with campaigns. The first two are built to solve big problems:

Customer Acquisition campaign: On LevelUp, businesses easily create a compelling incentive to bring new customers in the door. LevelUp will promote it. By bringing in new customers, LevelUp is providing real value. The consumer saves. The merchant wins a new customer. No other payment processor does this!

Customer Loyalty campaigns: Businesses create awesome loyalty campaigns on LevelUp. In doing so, LevelUp motivates customers to come back more often to unlock the loyalty incentives. More visits per week is real value. The consumer is rewarded. The merchant is busier than ever!

OK this is pretty sweet. But how does LevelUp make money?
When merchants choose to run a campaign on LevelUp, LevelUp earns 35 cents for every dollar of credit redeemed through that campaign. That means LevelUp is only making money when real value — which is determined by the merchant when they set up their campaign(s) — is created.

That’s it?
That’s it. So businesses, stop paying interchange! Like, now. Accepting your customers’ money should be free. And with LevelUp it is. Zero percent means zero percent.

Now, take that money, and reinvest it in campaigns that actually grow your business. If they don’t work, improve them. Or stop running them. All the data is yours, all in real-time.

And one last thing…
“Google gave away access to all the world’s information for free. They could have charged per search, but they didn’t. They chose to make money only when they added real value for an advertiser by driving a consumer to a website with a click,” added Priebatsch. “We’re doing the same thing with payments. We’re going enable the frictionless flow of money and only make money when we add real value for merchants — in this case, by driving a new customer to a business with a transaction.”

Britannica might not have liked Google giving away access to information for free. But consumers and businesses sure did. We don’t think everyone will like Interchange Zero. But businesses and consumers sure will.

To join the 3000+ brick-and-mortar merchants already on LevelUp, please visit TheLevelUp.com/business.

About LevelUp

LevelUp is a revolutionary new way to pay. Users pay with their phone, saving time and money. Businesses pay 0% payment processing fees and re-invest those savings into growing their businesses by attracting new customers and bringing them back.

LevelUp is a part of SCVNGR which is backed by Google Ventures, Balderton Capital, Continental Advisors, Highland Capital and Transmedia Capital.

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