Optism™

LevelUp, the mobile payments division of SCVNGR, sent a cannonball shot last week across the bow of mobile payments and credit card companies by waiving credit card processing fees for retailers during mobile payment transactions. This could be a highly disruptive moment for the traditional payments industry by potentially reducing the $50 billion dollars that credit card companies currently charge retailers and providing retailers new opportunities via mobile payments to deliver added value to consumers. So far, other mobile payments players like Google Wallet, Square, PayPal, ISIS, Inuit, VeriFone and Dwolla have not followed LevelUp’s lead.

How Does LevelUp Work?

LevelUp's mobile payment app for the iPhone and Android has already been downloaded by 200,000 users. Once consumers download the app, they register, add their credit card information and choose their target city. The company has a roster of 3,000+ retailers in 30 US Markets (New York, Boston, Chicago, etc.) and is hinting at an overseas expansion. LevelUp charges 35 cents for each dollar discount the retailer provides consumers in the marketing campaign. A consumer purchases goods and services, paying for them by flashing a QR code from the LevelUp mobile app. The consumer can also add a tip to the mobile payment.

For example, a pizza parlor can offer a consumer a $2 discount, so the $10 pizza can be purchased for $8. The campaign cost the pizza parlor $2.70 ($2.00 + (2.00 x 35%)) and LevelUp gets 70 cents. This is similar to a Groupon for the retailer, but the cost is much less and is highly targeted. LevelUp also offers customer loyalty campaigns for the same cost, where existing customers receive a discount once one spends a certain amount of money, i.e. 10% off after you spend $50.

How Does LevelUp Do This?

Interchange is the service that payment companies provide to retailers to process payment transactions. The service typically costs between 1.5% and 3% per transaction. Seth Priebatsch, CEO of SCVNGR calls LevelUp's new feature, “Interchange Zero”, which eliminates the interchange fee. Until last week, LevelUp was charging retailers 2% per transaction. Mr. Priebatsch said LevelUp was able do this because the interchange rates his company pays are “astonishingly low” and because his technology uses algorithms that move money through networks more efficiently. In addition, LevelUp has special relationships with many banking institutions. Mr. Priebatsch hopes that other mobile payment companies will follow suit and 0% interchange becomes the norm not the exception. He says, “The long-term effect is that people will do what we’ve done — find a way to make money in this space that offers value beyond moving money,” he said. “We need to give the business something above and beyond just the ability to accept payments.”

Conclusion

For retailers, LevelUp allows them to run highly targeted marketing campaigns based on location and preferences. LevelUp analyzes the activity of consumers which will allow it to provide retailers with consumers who are more likely to accept the campaign. While LevelUp does not ask for preferences during sign-up, one would expect more opt-in options which would allow LevelUp to direct even more targeted campaigns for retailers. For consumers, they will get lower prices as the transactions fees are reduced and retailers could potentially pass the savings along. We applaud LevelUp for changing the paradigm and focusing on providing value to consumers.