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LevelUp cuts fees again but goal of total elimination remains elusive

LevelUp has cut back its processing fees from 2 percent to just 1.95 percent, bringing it one step closer to achieving its goal of reducing the investments that retailers traditionally pour into mobile payments.

While offering retailers lower processing fees for credit card transactions is one reason why some alternative mobile payments offerings have grown quickly, LevelUp takes this merchant-focus a step further by asserting that it makes zero profit from interchange fees, but the company’s goal of one day eliminating the charges completely could be difficult to achieve.

“It is difficult to believe that LevelUp is in fact breaking even on interchange as they indicate,” said Jordan McKee analyst at Yankee Group, Boston. “The more likely scenario is that it is taking a loss in hopes of recouping lost revenue through marketing activities.”

“The fact that it has taken two years for LevelUp to cut its rates by five basis points indicates how difficult of a process this is,” he said. “Although it has been innovative in finding ways to cut costs — such as bundling transactions and promoting the use of debit — achieving interchange zero is a lofty goal at best.”

Is cash really king?
LevelUp is the three-year-old mobile payments brainchild of Boston startup Scvngr.

The fee reduction move by LevelUp is more symbolic than anything, per Mr. McKee. The reduction is not big enough to make much of an impact for retailers, but does indicate that LevelUp is committed to meeting merchants’ needs.

Credit cards are seemingly the most popular way to pay, as they provide increased flexibility, boost sales with their wide range of payment options, and as mobile payments increase in popularity, could trump cash-only practices.

As the payment realm moves further away from paper in preference for mobile and electronic options, so does the realization by small businesses that growth depends upon convenience, and consumers now expect that merchants to accept credit cards as well as digital payments.

Getting technical
LevelUp claims that its revenues are derived from marketing-related activities such as customer acquisition campaigns instead of from interchange fees.

For example, a local bakery may decide to increase business by offering a $5 incentive to the first 100 new customers.

LevelUp assists the shop with advertising by providing in-app targeting options.  For each new customer that redeems the credit from the bakery through the LevelUp app, LevelUp generates $0.35 per dollar of used credit.

In this situation, LevelUp would pocket $1.75 per new customer acquired by the bakery.

If the bakery decides to try out a repeat business venture, it can use LevelUp to create a loyalty campaign and allow users who spend a certain amount via the app to unlock and redeem a credit. Again, LevelUp will earn a percentage on each dollar of credit redeemed.

LevelUp’s QR code mobile pay app claims to be used by 1.5 million consumers, and can be used at 8,000 businesses nationwide.

LevelUp is not the only mobile payments network promising to save merchants money. Google Wallet, Paypal and Square all offer some advantages one way or another.

LevelUp tries to differentiate itself by finding ways to bring customers in and add value to merchants through five core elements:

Customers, merchants, point-of-sale system integrations, relationships with credit card processors and options for software developers to build on the platform.

Interchange Zero
Interchange Zero is a phenomenon coined to describe the day when the cost of moving money reaches zero.

If actually achievable, it could dramatically reduce the reported $50 billion dollars merchants spend annually on payment processing fees.

While analysts remain skeptical of the probability, LevelUp disagrees.

“Yes, I think our mission of Interchange Zero is very possible,” said Matt Kiernan, marketing director at LevelUp, Boston.

“We’ve built our business model around driving new customers to businesses & driving more spend from existing customers,” he said. “Our business model doesn’t necessarily require revenue from processing fees for us to be successful”

Final Take:
Michelle is editorial assistant on Mobile Commerce Daily, New York