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Mobile payments provider LevelUp repeats an "interchange zero" mantra to its merchant customers at every opportunity. The Cambridge, Mass.-based company wants to lower transaction fees to a point where merchants pay nothing each time a consumer purchases goods or services via the LevelUp mobile app.
LevelUp today moved one step closer to this vision and dropped its payments processing fee to 1.95 percent from 2 percent. While the change appears insignificant, the company maintains the new fee is more than a symbolic gesture.
"It's a small move, but when you take that savings and extrapolate it across the amount of transactions that are happening at all these businesses, it's quite significant," Matt Kiernan, LevelUp's marketing director, told Mobile Payments Today.
LevelUp's reduction comes three months after it revived the transaction-fee model based on feedback from merchants that participated in the company's Interchange Zero program.
Under that model, merchants paid LevelUp 40 cents on every dollar consumers earned and used from loyalty programs. Some merchants believed paying 2 percent was the better deal, so LevelUp reinstated the option. Merchants also pay an advertising fee for certain loyalty campaigns.
LevelUp admits the real costs of its transactions were closer to 5.4 percent at one time. For almost three years, it ate the difference it paid the card companies to process the LevelUp transactions. The company is now breaking even on those transactions because it has improved its processing efficiencies to lower its costs, according to Kiernan.
LevelUp uses a processing model similar to what Apple does with iTunes purchases. When a consumer uses LevelUp, the company does not immediately charge their linked payment card. Instead, transactions are grouped together and only charged once a month to lower LevelUp's fees, and the company then passes that savings to merchants.
"As we improved our bundling algorithms and moved more of our customers from immediate billing to weekly billing to monthly billing, we've reduced our expenses," Kiernan said.
But how low can LevelUp go without cannibalizing itself in an effort to deliver on a promise it made three years ago?
The company does earn revenue when merchants pay fees for loyalty campaigns. LevelUp also provides its system as a white-label program for those who want it. Kiernan maintains there is nothing to stop the company from eventually reaching zero.
"Our business model revolves around the campaign the merchants run in order to drive new customers to come back in and merchants don't have to run them. They are optional," he said. "When merchants do run them, they are happy to pay a small fee. We're only making money off the reward that's brought back into the business, never on the full amount. And that is very attractive to our partners.
"There is still a lot of new campaign infrastructure that we are building out that will enable merchants to run more targeted campaigns against their customer data."
Jordan McKee, an analyst for Boston-based Yankee Group, wonders whether LevelUp's vision is sustainable. He believes the reduction is more symbolic than anything else.
"They've been talking about interchange zero for a while," McKee said. "[This cut] isn't going to make anyone jump for joy. The majority of their partners aren't going to see that appear on their balance sheets in a meaningful way. It's part of this vision they have of trying to drop interchange down to zero."
In addition to the fee cut, LevelUp continues to urge its users to link a debit card to their account to help merchants keep transaction costs low.
LevelUp earlier this year launched its City Pass campaign. Merchants funded $4 credits to their businesses as part of the initiative. In turn, LevelUp emailed users who were not already visiting those merchants and offered them the credits if they linked a debit card to their account. The company also occasionally pings its users with emails about how linking a debit card to their account helps the merchant save on transactions costs to offer more rewards.
"Their end goal is to try to get as many people as they can to switch over to debit," McKee said. "If they can get a sizable percentage of their user base using a debit account, then inevitably they can charge a lower rate."
LevelUp maintains a high profile in the Boston area, but is still lacks a significant national presence. The company has managed to capture some business in New York and Chicago. The KFC Yum! Center in Louisville, Ky., outfitted its concession stands and bars with LevelUp readers. The arena offers patrons $2 off their first purchase using the LevelUp app and $10 when they reach $100 worth of concessions.
LevelUp is limited to small businesses at the moment, despite its partnerships with merchant services providers such as Heartland Payment Systems. Consumers can use the app to pay in a variety of coffee shops, restaurants and specialty food stores, but the company does not have agreements with any chains. That is both a blessing and curse for LevelUp.
"LevelUp is helping out the small guys, and no one else is giving those folks the attention," McKee said. "So maybe down the road, LevelUp continues to transform more into this wallet platform provider that goes after the SMB community.
"The hope for them is that by continuing to drop interchange, that's going to make merchants' ears perk up and they're going to sign up with LevelUp and do something around loyalty where LevelUp gets their revenue."
McKee said there is also the Google factor to keep in mind as something that could quickly bring LevelUp more national recognition. Google Ventures is one of seven companies invested in LevelUp.
"LevelUp pitches themselves as a marketing company, and Google makes most of its money from advertising and marketing, so maybe LevelUp becomes part of Google one day," he said. "It's not that farfetched a scenario."
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