SCVNGR's LevelUp has begun a campaign to urge users of its mobile wallet to fund payments from a debit card instead of a credit card. The end goal is to get its transaction fees as low as possible, while filling a void left by merchants who switched away from another pricing model it boldly called Interchange Zero.

"Customers who link debit cards to LevelUp rather than credit cards help us maintain—and ultimately reduce—our 2% processing fee for local businesses," says Matt Kiernan, marketing manager at LevelUp.

LevelUp typically charges a 2% fee per transaction, and it gets 25% of the payment when consumers redeem an offer from the merchant. But LevelUp's own transaction fees can be higher than the 2% it collects from merchants—it pays 2.5% to 5% for credit card transactions, whereas debit card transactions cost it 1.5% to 2%, Kiernan says.

LevelUp has tinkered with its fee structure several times before. Prior to mid-2012, LevelUp had a 2% transaction fee and required merchants to pay 35% of the transaction amount for a redeemed offer. It dropped to introduce Interchange Zero, a pricing model with no transaction fee but a steeper 40% fee for redeemed offers and a requirement that they run at least two offers at all times. LevelUp found that merchants did not like this restriction so in June 2013 it reinstated the 2% fee with a 25% redemption share and no requirement for merchants to run offers.  Interchange Zero remains an option for merchants who prefer it.

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. After paying, consumers see a receipt and can track how much they saved by redeeming offers and how close they are to redeeming the next one.

To improve its pricing for merchants, LevelUp wants to attack its own transaction costs. "The more we can drop the costs to 2% or lower, the closer we can get to dropping our transaction fees," Kiernan says.

To this end, LevelUp is sending emails to consumers alerting them to how much money they earned back in rewards for their credit card payments and promising bigger rewards by using a debit card for LevelUp payments instead. Consumers who link a debit card get a monthly email, called "City Pass," with offers from local business.

 "It's a motivation for consumers to look at the debit card," Kiernan says.

LevelUp did not release its statistics on current debit usage or trends. It also does not have hard-set goal for when it can drop its processing fees below 2%, Kiernan says. "Generally speaking, when our algorithms & bundling techniques enable us to start paying at 2% or less, we'll be in a good spot to then lower that fee for merchants," Kiernan says.

Thus far, most merchant aggregators have been using debit cards as a way to earn extra margin, so LevelUp's pitch to use debit to cut fees is unusual, says Rick Oglesby, a payments analyst. "But it's inevitable as competition increases, that post-Durbin debit interchange will become part of the competitive pitches that these companies are making to merchants."

The challenge for LevelUp is it has to make its debit-based offers better than what the consumer gets for using a credit card, says Ben Jackson, a senior analyst at Mercator Group.

To LevelUp's benefit, many consumers are drifting toward debit card use anyway, he says.

"The idea that LevelUp will make debit valuable to use in the store is an important tool for them, especially if you think about how debit is becoming an increasingly preferred method of payment for consumers," Jackson says.

LevelUp is also running a promotion tied to its seven millionth transaction, a threshold it is expecting to reach shortly, Kiernan says. LevelUp will give the consumer who makes the milestone payment a free Pebble smartwatch and $250 of LevelUp credit.

BeautifulLab has created a LevelUp app for the Pebble smartwatch, letting consumers pay at merchants by displaying the LevelUp QR code on the smartwatch's screen. BeautifulLab used LevelUp's application programming interface to build the app, and Kiernan says LevelUp hopes to see more apps like it in the future.

LevelUp is also experimenting with uses for Google Glass, an eyeglass-like headset that is still in limited release.

"We're not focused explicitly on wearables," Kiernan says. "The excitement is more about the mindset that is developing now. There is a bunch of new technology out there…and the best thing we can do is provide a platform and let the best stuff rise to the top."

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