SCVNGR's LevelUp is reducing its mobile wallet's transaction fee from 2% to 1.95% in its continued attempt to shave interchange costs.

LevelUp has experimented over the years with business models that reduce or eliminate transaction fees. It earlier introduced a model called Interchange Zero, but had to bring back a standard per-transaction fee after merchants found the conditions of its no-interchange model too limiting.

"LevelUp's vision is 'zero interchange,' the idea that moving money from consumers to merchants should be free and business should be paying for other value," says Matt Kiernan, marketing manager at LevelUp. "This reduction is a first step and we will continue to reduce fees as we can." 

The company is using a transaction aggregation model and analytics to slice its own transaction costs, which can be as high as 5% for credit card purchases. It's bundling consumer transactions instead of billing consumers individually for each payment.

"If you make a payment on LevelUp we don't charge you right away, we may wait until you make a group of transactions to bill you, so we pay the credit card company once instead of a number of times," Kiernan says.

There is some risk to this, since LevelUp pays the merchant within 24 hours of the transaction. "There is no situation where the business is waiting for a payment," Kiernan says.

iTunes also uses a similar aggregation model, and MasterCard has used aggregated payments to bill MTA commuters in New York as part of a long-term initiative to automate transit payments.

"There is certainly some risk in that environment," says Todd Ablowitz, president and founder of Double Diamond Group, a payments consultant, noting that Starbucks also uses an aggregation model, though its closed loop cards are prepaid.

To manage the risk, LevelUp takes transaction size and consumer history into account when determining how many payments to allow before charging the consumer. "Large purchases result in smaller bundles, but again it depends a lot of a user's previous history," Kiernan says.

LevelUp is also working to cut its costs by promoting debit card use.

LevelUp's mobile payment system works through an app linked to a credit or debit card account. The app generates a QR code that merchants scan at the point of sale. Consumers view a receipt and can track how much they saved by redeeming offers. LevelUp has typically charged a 2% per-transaction fee and receives 25% of the payment when a consumer redeems a marketing offer.

LevelUp is not reducing its fees for marketing offers, Kiernan says. "Those fees are tied to campaigns, which businesses don't have to run," he says.

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