Credit card processing fees are such a common part of the consumer-merchant retail experience that we hardly give them any thought. So we tend to forget that it costs merchants money every time we pay with our credit cards, or that the extra cost is then passed along to us in the form of a higher price.
Starting today, LevelUp, a service from Cambridge-based SCVNGR that lets you make mobile payments via a QR code linked to your debit or credit card, is eliminating processing fees for its merchants, making it the first payments company to nix charges that cost merchants $50 billion each year. SCVNGR’s Chief Ninja Seth Priebatsch refers to the concept as "Interchange Zero," and says it’s the next step toward building an ecosystem in which payment companies’ worth is measured only by how much value they can provide to their merchants beyond simply helping them make transactions.
"Right now, the competition is over who’s the most entrenched or who’s the cheapest," Priebatsch tells Fast Company. "But eventually, who gets to move money will be about who can create the best value to add to the business, which isn’t a bad thing at all."
The logic behind Interchange Zero is simple: Decades ago, processing fees were a necessary evil because they covered material costs to lay the physical lines that connected merchants to payment networks and develop anti-fraud technology. Then innovators in the mobile payments sector started to crop up, from PayPal to Square, and figured out how to lower processing costs even further. But the payment companies kept interchange rates between 1 and 3 percent, meaning they continued to profit without providing extra value to merchants. That’s where Interchange Zero comes in.
But eliminating transaction fees also happens to zap one of LevelUp’s major revenue sources, because it’s no longer charging merchants a flat 2% transaction fee on the $2 million it currently processes each month. So how can LevelUp conceivably expect to stay afloat? Priebatsch says the answer is LevelUp’s suite of merchant campaigns, including customer acquisition and loyalty programs. Now, when a merchant uses a LevelUp campaign—say a store offers $10 for every $100 you spend—LevelUp will make 35 cents for every dollar of credit redeemed through that campaign. That way, a large part of LevelUp’s revenue is its ability to help its merchants make more sales.
Priebatsch’s hope is that others in the mobile payments industry will follow suit, eventually making the idea of charging merchants to move money a thing of the past. Of course, if the idea of Interchange Zero does catch on, LevelUp will have to create more sophisticated campaigns to keep competitive. For example, Square recently added an in-app punchcard feature to its Pay With Square app; Starbucks just launched mobile payments on Android. Currently, 66% of LevelUp customers return within 30 days. That’s impressive, but "66 isn’t 100," Priebatsch says, which is why LevelUp is constantly devising new solutions for merchants that push the boundaries of a typical rewards program. Right now, they’re testing a campaign that offers special incentives to drive customers to stores when it’s raining, when sales tend to suffer.
LevelUp is also partnering with banks to create custom loyalty programs for certain cardholders. Sovereign Bank noticed its cardholders using LevelUp were active purchasers, but few in numbers. So last month, LevelUp ran a campaign that gave Sovereign cardholders $5 in free credit as an incentive to link their card. And it expects to have similar partnerships with about two to three dozen banks by the end of the year, Priebatsch says.
The question is how many businesses will be interested in adopting the setup LevelUp offers. It’s a natural fit for small businesses, which make up the majority of LevelUp's 3,000-strong merchant network, but you're not likely to start waving QR codes around at Walmart or Costco anytime soon. But Priebatsch says LevelUp is about to sign its first retailer with more than 500 stores, and they now serve more transactions at a given partner business than American Express in a 30-day period.
"Now we’re able to start approaching everyone but the top merchants in the country and have serious conversations with them," he says. "Of course, not all of them will say yes."
[Image: Flickr user WSDOT]