Payment Startup LevelUp Thinks It Has Found A Way To Charge Merchants A 0% Credit Card Processing Fee

If you walk into a store in Boston, there's a good chance you'll see a sleek white box near the checkout counter.

That box is a QR-code scanner made by LevelUp, a Massachusetts-based startup that offers one of the cheapest ways for merchants to handle credit card payments on the market.

Currently, LevelUp works with 14,000 stores and it charges merchants a 2% credit card processing fee. Square, by comparison, charges 2.75% per online purchase or swipe. Square loses money by charging this rate, whereas LevelUp says it recently started breaking even on its 2%.

Today, LevelUp is announcing something unique: It's actually dropping the 2% it charges merchants per transaction to 1.95% rather than increasing it. LevelUp says it will continue dropping the transaction fee for merchants to match its internal break-even point until the percent finally dwindles down to nothing.

How is that possible?

LevelUp considers itself an advertising company masked as a payment company. Here's how it works.

On the consumer end, you download the app and enter your credit card information one time. LevelUp turns that credit card information into a scannable QR-code, which is accepted by 14,000+ partnering stores. Rather than pulling out a credit card to pay, a customer opens the LevelUp app and places the QR code to the scanner and the transaction is complete. A study put together by Sweetgreen, a salad chain that uses LevelUp, showed paying with LevelUp takes seven seconds and it's faster than using a credit card.

On the backend, LevelUp assesses the size of the purchase. If it's a small purchase, it will likely wait 30 days to see if you return to that same store and make another small purchase before charging the merchant. It bundles the purchases together so the 1.95% is only charged once. This money-saving strategy is used by Apple when you purchase $1.99 songs on iTunes too.

LevelUp is able to offset the low transaction fee by monetizing on stores' repeat business. LevelUp allows merchants to run retargeting mobile campaigns to people who have used its app to pay for a purchase. For example, when it's raining, a store can ping a LevelUp customer to invite them in. Or if it's lunch time, they can offer a coupon to lure them back to the store.

Anytime a customer uses one of these LevelUp promotions to pay the merchant, LevelUp takes a 25% fee. Seth Priebatsch, the 20-something who founded LevelUp, says 10% of all its daily purchases come from this redeemed credit. More than 1.5 people use LevelUp and the company doesn't spend any money on marketing. Because it's the the payment processor, LevelUp collects all customer data and can share insights with merchants.

Levelup is a startup that has pivoted a number of times. It began as a Foursquare-like mobile game, Scvngr. It raised a lot of money at a valuation exceeding $100 million, then it switched gears and launched LevelUp.

When asked why he doesn't want to have two revenue streams - advertising and payment processing fees - Priebatsch said he didn't think it was in the best interest of merchants or consumers. He's confident that overtime, LevelUp can make enough money through advertising alone to sustain itself.

Here's a chart that shows how LevelUp got to break-even on the 1.95% over time. Priebatsch expects to reach 0% in the next few years if things keep trending this way.