One of the basic tenets of the modern financial system is that it takes money to move money. In its most basic form, that means that when you make a transaction with your debit or credit card, the processing companies, such as MasterCard, Visa or American Express, are taking some of that money for themselves - usually between 1.5% to 3%, depending on the type of transaction. The concept, called interchange, has been a thorn in the side of retailers for decades. One startup that focuses on mobile payments has achieved the dream of eliminating these transaction fees once and for all.
Boston-based LevelUp (created by SCVNGR) focuses on mobile payments for local merchants. LevelUp is an app that can be used to make payments by allowing merchants to scan QR codes tied to customer payment information. Through the app, merchants can offer loyalty programs and deals for customers.
LevelUp’s dream has been to completely eliminate the transaction fee for its clients. Called “interchange zero,” LevelUp has been working toward this goal for more than a year. Today, it finally has succeeded.
“We are planting a major flag by becoming the first payments company that doesn't charge a processing fee for moving money. Like 0% flat. Forever,” said Seth Priebatsch, founder of SCVNGR/LevelUp.
Eliminating interchange could be one of the most disruptive forces that the financial system has seen in more than a century. As a base concept, interchange zero goes deeper than the evolution of digital payments and plastic credit cards. Those were just mediums to represent money. But transaction fees are a backbone of the ways in which many billion-dollar financial companies do business. As of 2009, transaction fees were a $48 billion boon for the processing companies and a source of stable, unquestioned income.
Adding Value to the Transaction
Priebatsch says he believes that interchange is a valueless service - just a fee to move money from one point to another. It benefits the transaction companies by providing them significant revenue sources that, in turn, keep them in business. But interchange fees don't help the consumer or the retailer.
LevelUp's approach is different: It makes money by driving customer acquisition and loyalty to the merchant. When a merchant offers a deal (say, $5 for a first-time purchase), LevelUp makes 35 cents on the dollar for every deal redeemed. It is a form of advertising and marketing that is similar to what many other payment companies offer. Yet, those companies, in addition to making money from the deals, also charge a transaction fee.
“Our campaigns are so value accretive for the business that we're making more money by providing value than we would by simply charging for the interchange underlying [a transaction]. And the businesses are happy to pay it because, unlike standard payment processing, we actually provide value,” Priebatsch said.
Make no mistake: Somewhere in the system, interchange is still being paid. What LevelUp is essentially doing is subsidizing the cost of the transaction fee for the retailer. LevelUp has built its business to make the amount of interchange as low as possible.
“We do have some interchange costs when a consumer links a card, but that's not a 100% complete story, as LevelUp has also done some pretty innovative things to actually drop our interchange incredibly low," Priebatsch said. "These range from algorithms to more effectively move money, to transaction steering, to special relationships with banks. I can't talk about all of them, but trust me, I'm paying an interchange rate that would make your jaw drop,”
On the Way Out?
Priebatsch says that, across the financial industry, interchange will trend towards zero for everybody: “It will be too cheap to meter.” Recent federal regulations are also in favor of the approach that LevelUp is taking, with both the Dodd-Frank Act and the Durbin Amendment to that bill taking aim at interchange fees to increase competition among payment processors. The legislation means that it is difficult for the large banks and financial companies to lobby against approaches like the one LevelUp is taking.
LevelUp sees its approach as an opportunity. “Half the companies want to destroy us. The other half want to work with us,” Priebatsch said.
In the end, the move to interchange zero could be a net win for the economy and help usher in a new era of how payments are conducted. Businesses will be able to save valuable percentage points on their bottom line, and digital payments will start being accepted at more locations. It may take a couple of years for real changes to be seen on a large scale, but one startup is putting the pressure on companies thousands of times its size to change the status quo.