SCVNGR, by its nature, is a social-based location game. It has partnerships with brands and universities, but, as CEO Seth Priebatsch will admit, it does not inherently lead to sales at the register. Location-based social game mechanics are not inherently transactional. That is where the company's newest product, LevelUp comes into play. Take merchant offers, location, game mechanics and make then transactional and you have an idea what LevelUp is trying to do in the mobile payments space.

SCVNGR takes a lot of heat for not having a direction. Yesterday article on SCVNGR's "path" got some sneers from the Boston startup community because the "path" is apparently that there is no path. LevelUp is the path and it dives deep into the fundamental nature of payments, merchants and how people interact with money.

How Does LevelUp Work?

Levelup is a mobile payments system at its core. It currently has 100,000 users across four cities (Boston, New York, Philadelphia and San Francisco) with 600 merchants signed up. The basic payment structure is that LevelUp provides the merchants with an Android smartphone with a QR code reader and consumers with the LevelUp app that has a personalized QR code that effectively acts as the interface to their wallet. The QR code can be changed depending on tip amount to the merchant and also completely wiped and replaced if its security is compromised.

Users tie their debit/credit cards to the QR code in LevelUp's app. The security behind that is what could be considered a triple-blind token system. No actual payment information is being stored on the device (unlike the Google Wallet, for instance) and there are three steps from the phone to the bank to obfuscate where the payment is actually coming from.

Then there are the deals and game mechanics. When merchants sign up, they are prompted to give buyers a credit. So, Moe's Pub down the street gives a $5 credit to first time buyers with LevelUp. When that credit runs out, the rest of the payment is transferred to the credit or debit card. The more times that people pay with LevelUp, the more opportunities for credit to be accumulated (hence, the notion of leveling up to a new offer).

The average LevelUp user spends about 5.7 times the credit that is given them, at least in the early stages. That number is probably skewed by heavy users and early adopters. About 45% of users return to pay full price at the merchant and users on average use LevelUp about twice per week. The location system comes in by seeing on a map in the app what merchants close to you are using the service and what kind of deals they have.

"With LevelUp being transactional, we wanted to make it as fundamentally simple as humanely possible," Priebatsch said. "Frankly you should never have to do anything other than just pay with it and good things should happen to you and that should make you want to keep using it."

Pain Points & Groundswell

LevelUp has a certain type of groundswell that other local mobile payments options do not. In that way, LevelUp's closest kindred spirit is more likely to be Dwolla than it is something like Square or Google Wallet. It makes sense that Priebatsch and Dwolla CEO Ben Milne exchange emails on a regular basis, according to Priebatsch. There has been talk of SCVNGR being acquired but it is more likely that the company will eventually make partnerships with other ground-swell mobile payments companies like Dwolla.

What LevelUp and Dwolla have done is created a local ecosystem of merchants willing to use mobile payments in their communities. This is the bottom-up approach and, as of yet, is proving to be as effective than the top-down approach taken by companies like Google and PayPal.

What are the pain points for mobile payments? For the consumer, it is having the app and the ability to tie it to a payments process. LevelUp cuts down on the pain points by having the ability to tie the wallet to a debit/credit card through its triple-blind token system and using QR codes. According to Priebatsch, QR codes are not necessary to the process. Any interface (like NFC) will do but the QR code is working for now and LevelUp can work with any device that can project a black and white image. Pain points on the merchant side are tied to infrastructure and processing fees.

LevelUp works to cut down those pain points. The receiver (the Android phone given to merchants) is given to merchants and the processing fee is one of the lowest in the industry. This is hugely important to Priebatsch and at the heart of what LevelUp is trying to accomplish.

"The three guiding elements of LevelUp are going to be simplicity, therefore with hopefully 200 million scale, transactional which is sort of the guiding element of the whole thing and game mechanics which is just sort of the thing that we do with everything," Priebatsch said. "The transactional part was really different and SCVNGR probably is not and will not be transactional just because of how it is built. So, we need something that is transactional and if there is something in the location-based space that can hit 200 million scale, man it has got to be freaking simple."

Interchange Zero

This is where Priebatsch starts to get deep into the nature of payments and the notion that money is nothing but a form of information that transfers from one point to another. Priebatsch's grand plan, that translates well to a five to 10 years down the road for the company, is to bring the payments process down to "interchange zero" where the cost of moving that information from Point A to Point B is next to nothing.

Here is the philosophy, according to Priebatsch:

"When [the Internet was invented] it was a transition that took information from flowing with friction to information flowing frictionless-ly. It used to be that if you wanted to transfer a movie to me you would put it in a bag and I would have it. The Internet changed that and created a whole series of new economies. Money is just another form of information and as we digitize money it becomes more and more indistinguishable from actual information. And all things that are inherently information and flow over networks can eventually be made to flow more efficiently.

People will eventually make the flow of money more and more efficient, and the cost of transferring information, or money as information, will eventually converge to zero. This concept is something that we describe as "interchange zero". And as money flows frictionless-ly, all sorts of great things happen around that. You get to pay less at the store because the business does not have to pay interchange on top of their prices.

The really fascinating thing with that, is that a new monetization model needs to be found for the payments industry because somebody needs to make the $50 billion dollars a year to actually support the whole thing. And I believe, and I have a game mechanics background, that the way that that money is going to be replaced, as the idea of me paying you to just move money back and forth goes away, the way that people are going to make money on payments is taking the information inherent in payments and applying a series of game mechanics. To create a series of actions which get consumers to spend more and come back more often. And this help the business make more money off of each transaction. So the payment, as a utility, will be frictionless, and the money will flow to the company, enterprise, person, organization who can add the most value to the transaction."

Recipe For Success?

You can see how the concept of SCVNGR is deeply ingrained in to LevelUp. At the same time, LevelUp is a completely separate product and the future of SCVNGR, even if Priebatsch is still high on the potential for SCVNGR to succeed. The company is navigating in deeper waters than just a location-based social game.

But do the ingredients add up to success? Deals, location, transactions with a touch of game mechanics and some real world economic theory. Can it work? Will it work? Let us know your thoughts in the comments.