LevelUp, a Boston-area payments startup, has raised another $9 million for its astonishing idea of making payments absolutely free.Last month, the company stopped charging merchants the usual percentage fee for payments processing. And today, founder Seth Priebatsch unveiled a plan to give away the hardware they need to take payments, too.
Deutsche Telekom’s venture-capital arm, T-Ventures, is the latest investor to join. Google Ventures, Highland Capital, and Balderton Capital are among its prominent other investors.
LevelUp launched a year ago in beta and has since signed up 3,000 merchants and has 200,000 consumers using it a month. Instead of having customers swipe a credit card, LevelUp’s app generates a QR code—a more sophisticated version of the classic barcode—that merchants scan, and LevelUp charges a credit or debit card linked to the customer’s account.
In June, LevelUp stopped charging transaction fees. It’s still paying Visa, MasterCard, and the rest for taking credit cards, and it’s eating those costs.
LevelUp generates revenue when merchants run campaigns to attract new customers and reward loyal ones. It takes a 40 per cent cut of first-time purchases and reward spending.
For example, here’s a Ben & Jerry’s offer: Get $2 off your first purchase and after you spend $50, get another $5 off. LevelUp will make an 80-cent fee on the first discount and $2 on the $5 loyalty discount.
Merchants don’t have to run campaigns. In that case, LevelUp is essentially giving them credit-card processing for free. But Priebatsch told us 98 per cent of his business customers opt to run some kind of profitable promotion.
The company currently has 162 employees in the U.S. and is shooting for 200 by the end of 2012. Its 3,000 merchant customers are primarily food and beverage businesses, including big names like Quiznos and Ben & Jerry’s.
Its 200,000 customers spend $2 million a month, with 30,000 to 50,000 new users a month. Those are real users making a transaction, Priebatsch said.
A key proof point of LevelUp’s popularity: The average user makes two to three LevelUp purchases a week. That’s the same as the average rate of credit-card purchases in the U.S., he said.
But only 40 per cent redeem a reward—and since LevelUp only makes money when a campaign’s successful, that puts pressure on its margins.
Priebatsch claims he’s obtained favourable interchange rates from banks and payments networks because of LevelUp’s security measures. The QR code system means that LevelUp doesn’t actually pass the credit-card number to the merchant.
One advantage LevelUp has is that merchants don’t have to replace their whole point-of-sale system with LevelUp; they can use it alongside regular credit-card systems.
But the company’s facing tough competition in the broader payment space from Google Wallet, PayPal, Square, Swipely, and a host of others.
Here’s a screenshot of how it works: