SCVNGR's LevelUp expected merchants would prefer its Interchange Zero pricing for mobile payments, but many clients told the company they would prefer to pay a 2% transaction fee.

Prior to July 2012, LevelUp charged a 2% transaction fee, but the company scrapped this pricing when it introduced Interchange Zero. Under that model, merchants do not pay a fee for each payment but they pay a 40% fee when new customers redeem onboarding offers and when repeat customers redeem rewards. Based on merchant feedback, LevelUp reinstated its 2% fee as an option in June and about half of its customers use it today.

Interchange Zero "was good for both sides, however it was limiting our partners' ability to grow their business by using more campaigns," says Matt Kiernan, marketing manager at LevelUp. "This doesn't make much sense anymore; we need to make it more flexible and not so limiting."

Now that the company offers both pricing options, most merchants are choosing to pay the 2% transaction fee on top of a 25% advertising fee for specific campaigns, he says.

Any new merchant that signs up for LevelUp is pushed to the transaction fee model, says Kiernan. Existing merchants are not forced to switch over right away, but the company has been promoting the transaction fee pricing, he says.

LevelUp's mobile wallet app invites consumers to spend at certain merchants by providing discounts and offers. When it is time to pay, the app displays a QR code that represents the consumer's linked bank or credit card account. The merchant uses a scanner to read the code, and the system delivers a digital receipt.

Last year, many payments industry experts were skeptical of LevelUp's pricing model, saying its growth would level off as each merchant's new customers became regulars.

The new pricing model is a response to customer demand, says Seth Priebatsch, "chief ninja" (CEO) at SCVNGR's LevelUp.

"As we added more and more campaigns, many merchants wanted to experiment with more varied campaigns," Priebatsch says. "The a la carte option became the most popular, so it's front and center on the site."

LevelUp can collect consumer data to inform specific offers, such as a discount on breakfast to customers that typically come to a restaurant only for lunch. It can also detect a drop-off in spending and suggest an offer to get the customer to come back to the store.

The company is still looking to keep transaction pricing low. LevelUp aggregates its merchants' transactions to save on its own processing fees – and eventually lower the rates it charges merchants.

"As we get more effective at bundling we'll be lowering our processing fee and in turn the processing fee we put on our merchants," Kiernan says. While Kiernan couldn't give a timeline for the cuts, the company is paying less in transaction fees on a regular basis by a small rate, he says.

LevelUp has approximately 5,000 merchants using its platform, says Kiernan. The company has been focusing heavily on providing white-label applications for larger merchants, he says.

LevelUp has created a white-label application for sweetgreens, an organic salad shop, and Dunn Brothers Coffee which rolled it the app out to its 80 locally-owned cafes. Last year, LevelUp signed up its first banking customer, powering First Trade Union Bank's FT Pay mobile app.

Recently LevelUp launched a "connected apps" technology, allowing merchants to tap into its mobile payment system for online commerce. 

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