Will mobile payment fees reach zero?

LevelUp allows customers to use their iPhones to scan a code on a business’ iPhone, instantly paying for items at no extra cost. (SeongJoon Cho/Bloomberg)

To challenge the power of large credit card processing companies charging up to 3 percent for each customer’s credit, debit or gift card swipe, several start-ups have developed smart-phone compatible card readers charging less per swipe than their larger card-processing counterparts.

In 2010, Square, Inc. launched its plastic phone attachment credit card reader – which charges 2.75 percent per swipe. In 2012, eBay’s PayPal launched PayPal Here, a card reader charging only 2.7 percent per swipe. Square has countered this by allowing small businesses processing up to $250,000 worth of payments each month to pay a flat fee of $275 per month—which could be as low as 0.11 percent of a small business’ revenue.

Last month, a company called LevelUp sought to outdo its competitors by jumping straight to a zero-percent charge for money interchange. Though it used to charge businesses 2 percent per transaction, LevelUp has decided to pay for the transaction fee itself – sparing businesses from paying any processing fees.

Businesses using LevelUp must download the app onto their smartphones, as must their customers. Customers can then link their account to their credit cards, and, at the point of sale, use their smartphones to scan a business’s’ QR code (a black and white square image) to pay for items.

“We eventually think the cost of moving money will go to zero,” said Seth Priebatsch, LevelUp’s “chief ninja,” — the company’s title for chief executive. The most successful mobile payment method will be the one to add the most value to small businesses, he predicted.

LevelUp was the first mobile payment method to offer free interchange, and has since created a new revenue model in which it only makes money when its users — small businesses — team up to with it to launch marketing campaigns.

Businesses using LevelUp are encouraged to launch “Loyalty Campaigns” or “Customer Acquisition Campaigns” that LevelUp would help promote in exchange for a cut of the proceeds.

For example, during a customer acquisition campaign, a restaurant might offer $2 off a purchase, and LevelUp would promote the deal to members. In exchange, it would collect 80 cents per customer that takes advantage of the offer.

In a loyalty campaign promoting by LevelUp, a restaurant might offer customers a $10 reward for having spent $100—and when customers spend the reward, LevelUp receives 40 cents for each dollar they spend.

LevelUp also gives the businesses the analytics from these campaigns, which can be used to design more effective marketing.

Square’s Square Register app allows businesses to offer discounts and deals, but does not charge for campaigns outside the per swipe fee.

For the past month, Rachan Malhotra, who owns Rolls on Rolls, a food truck often stationed in Farragut Square in Northwest Washington, has been trying out LevelUp. So far only 10 customers have downloaded the app. He’s had better luck with Square, whose system does not require customers to carry anything more than a credit card.

Malhotra hasn’t offered any campaigns through LevelUp or Square yet, and said he doesn’t plan to. For Malhotra, mobile payment is really about cutting down on credit card processing equipment — he said he disliked the idea of storing a bulky register in his truck — and less about saving on fees, though cost was certainly a factor.

Though LevelUp only encourages and doesn’t require businesses to run campaigns (meaning a business could use LevelUp only for the free money transfer, and not pay any fees), 3,100 small businesses in the United States are currently using LevelUp, and at least 95 percent of them have tried campaigns. Priebatsch said the average business has pulled in $18 for every $1 investment into the marketing campaigns. LevelUp has approximately a quarter of a million active users — this includes businesses and customers who have downloaded the app, and most use the app two to three times a week.

However, Richard Crone, chief executive of Crone Consulting, a San Carlos-Calif. independent advisory on mobile payments, warned small businesses against using apps promising free or inexpensive processing. While they’ll save money on swipe fees, small businesses could be offering valuable data about their customers and business history up to intermediaries, who can then find ways to profit off it, he said.

That data could potentially be worth more to the small businesses, Crone said.

Given the tendency toward mobile payment, most small businesses only have two options: “to aggregate [data], or be aggregated,” Crone said.

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