Interchange is the invisible but pesky linchpin of the whole payments ecosystem. It’s the amount of money that credit card issuers charge merchants for swipes, typically a percentage of a transaction, and it funds banks’ and payment processors’ support of the infrastructure for these payments. Merchants like low interchange fees, naturally, and so low interchange fees encourage merchant adoption, which in turn encourages consumer adoption, which in turn keeps the whole system afloat … a system which certainly isn’t designed to reward merchants or consumers.
LevelUp, the mobile payments provider, would like to change that: it’s offering o% interchange fees for transactions conducted over its service.
LevelUp thinks it can make the money back in other ways, according to The New York Times‘ Bits blog.
Currently the app is available at just 3,000 merchants nationwide, according to the story, but LevelUp aims to use its no-fee transactions to drive more merchants to accept the platform. The application works by using scannable QR codes, displayed on users’ phone screens, which when scanned, can access a users’ credit or debit card. So although no card is “swiped,” the transactions are still subject to “swipe fees” because it uses the existing network.
LevelUp thinks it can make the money it will spend on merchants’ interchange fees back, through its promotion platforms. Businesses that use LevelUp offer incentives to turn LevelUp users into first-time customers.
Let’s say we have a restaurant, a taqueria called MyBankTaqueria, and we use LevelUp. We can offer a $3 credit to entice nearby LevelUp users into their first visit. Then, in order to create customer loyalty (at least among our LevelUp using customers) we can create a punchcard-esque milestone reward program — once you spend $100, we give you $10 off, or whatever. LevelUp enables these transactions and promotions, so it charges us (and all merchants) $0.35 per dollar of credit that MyBankTaqueria gives out. This is sort of counterintuitive. So, say our taqueria gained a loyal customer by giving away $13 in credits, that means we also have to give LevelUp $4.55 for their service, which enabled us to give away the money in the first place — almost $18 in all to hopefully gain a loyal customer at MyBankTaqueria.
For LevelUp this is a great deal, actually. At 2 percent of every transaction (widely cited as the average interchange fee), MyBankTaqueria would likely need to do about $225 in transactions to spend $4.55 on interchange, but in the LevelUp promotion, it pays that much for half that amount in payments — but only from one customer. And so the flip-side is this: the $4.55 MyBankTaqueria spends might be higher than interchange in this one instance, but it’s targeted. LevelUp users who never fill their “punchcard” are totally free. MyBankTaqueria must pay LevelUp a premium for the loyalty it enables (hopefully) but doesn’t have to pay much at all if it doesn’t work.
It’s an elegant solution, but it just trades interchange for something else: a marketing budget. And marketing is something we have enough of.
There are plenty of companies trying to figure out a way to lower interchange and make non-cash payments move more freely — check out Dwolla, which seeks to circumvent the current payments ecosystem entirely — and loyalty programs aren’t exactly a panacea. Though LevelUp doesn’t want to fix the payments ecosystem, it just wants to seamlessly integrate its marketing platform into it, and it’s willing to pay for that — it might save you a buck or two on your first visit! It’s certainly a novel way to shift the burden of payments acceptance, but it’s far from revolutionary — even if zero interchange sounds revolutionary.