Does LevelUp’s “Interchange Zero” Benefit Merchants?

by Mercator Advisory Group 0

Mobile payment solution provider LevelUp hasbeen registering new users, both consumers and merchants, at abreakneck pace. There are currently more than one million consumersand 5,000 merchants using the system, and that number continues togrow. For consumers, LevelUp offers the convenience and security ofmobile payments, as well as an incentives program tied directlyinto the payments process. For merchants, the benefits include freeadvertising (the merchant’s name appears in every LevelUp app),strategic assistance with promotional campaigns, and reduceddiscount fees (LevelUp offers merchants a flat transaction rate of2%).

In the summer of 2012, LevelUp began offering merchants the optionof using its Interchange Zero program. Merchants that enrolled incustomer acquisition and loyalty campaigns could opt to reducetheir transaction fees, normally around 2.5% with a traditionalcredit card program, to zero. Instead, the merchant pays LevelUp 40cents on every dollar consumers earn and use from the incentivesprogram.

For many merchants who have long bemoaned being charged to acceptpayments, this seemed like a great alternative. As LevelUp phrasesit, “just moving money” is free. But does this program actuallysave merchant’s money overall? Is paying 40% on occasionalincentives cheaper than paying 2-3% on every transaction?

To develop an idea of what Interchange Zero actually costs, Iperformed the back-of-the-envelope calculations shown below.Scanning LevelUp’s website, I noted the customer acquisition andloyalty campaigns provided by ten random merchants in Boston.


The goal of these calculations was to determine approximately whatpercent of total income for the merchant was paid to LevelUp as afee. These calculations are admittedly imperfect for a few reasons,but chief among them is that they assume each customer will do theprecise amount of business with the merchant required to earn anduse their first loyalty-based credit, no more and no less.Obviously, this isn’t the case, as some consumers will only visitthe merchant once, and some will visit daily for years. That said,without spending significant amounts of time researching LevelUpcustomer spending habits, this seems like an effective estimate ofthe average consumer.

For these ten merchants, the mean fee paid to LevelUp was 5%, witha median of 4.9% and a range of 3.2% to 6.9%. All of these, eventhe lowest fee among the ten merchants, were higher than the 2-3%fee typically paid by merchants to acquirers. To the question ofwhether or not Interchange Zero is less expensive than traditionaldiscount fees, it seems safe to say the answer is no.

However, it is not necessarily accurate to compare the InterchangeZero fee directly to traditional discount fees. As LevelUp explainsto its merchants, they only pay a fee when their campaigns driveresults. In other words, when using Interchange Zero, merchantsonly pay LevelUp when they do business with new users (redeemingthe initial credit) or loyal users (redeeming the earned credit).Whereas discount fees are paid in exchange for completingtransactions, Interchange Zero fees are paid in exchange forLevelUp helping to attract new and loyal customers. Yes, the feesare higher, but they are being paid in exchange for a service,rather than a convenience (allowing customers to pay with cardsinstead of cash). Whether that service is worth the premium is adecision for the individual merchants.