The Path to Interchange Zero

LevelUp is engineering the next payment network. We're different from the old-guard in three ways. First, we're all about paying with your phone. Second, we believe that businesses and developers should have access to their data to improve the customer experience. Third, and most importantly, we believe that moving money should be free.

Today, businesses pay $50 billion each year in payment processing fees. Each time you swipe a card, the business pays 3-5% to Visa, Mastercard or American Express. This "processing tax" is paid by the business but gets passed along to customers, meaning you pay extra on everything from your morning coffee to your Amazon order.

To pay with LevelUp, you link a card. This means that we still experience (and thus charge) a payment processing fee. But, there's a lot that we can do (that local businesses can't) to lower this cost. As our cost decreases, we pass along those savings to our businesses, which they pass along to customers in the form of discounts and loyalty rewards.

We're on a mission to drive the cost of moving money to zero. Track our progress here.

More Details

What is Interchange? How are costs calculated?

Interchange is a term to represent the fees that are charged to businesses when they process card payments from the four major card brands (Visa, Mastercard, American Express, Discover). Interchange is generally comprised of two fees: Swipe Fee, a per transaction fee that generally amounts to $0.20-$0.30 cents; and Variable Fee, a fee that is a percentage of the value of the transaction. This ranges from .05% (debit cards from major banks) up to 2.3% (American Express Platinum).

There are often other fees tacked on by processors (First Data, Heartland, Elavon) and banks (Chase, Bank of America, Wells Fargo) along with the chargeback fees that are passed back to businesses.

All in, the cost of moving money (interchange fees) averages out to 3-5% per transaction. On low dollar transactions (coffee, cupcakes, smoothies) it can be upwards of 10% because of the swipe fee.

What is bundling?

Bundling is a method of grouping transactions together to achieve lower overall costs. Interchange fees are comprised of a swipe fee ($0.20-$0.30 cents per transaction) and a variable fee (.05% - 2.3% of the transaction value). By grouping transactions together, you pay fewer of those swipe fees, which, especially on small transactions, is very important.

Apple is actually one of the most famous examples of a company leveraging "bundling" to lower interchange. When you purchase a $0.99 cent song from Apple, they're very loath to pay $0.30 cents of that purchase to Visa. So, based on your past purchasing behavior, they'll wait anywhere from 8-30 days to charge you, hoping you make another purchase so they can amortize that 30 cent swipe fee across two, or more, song purchases.

LevelUp employs this same strategy when you pay with LevelUp. We always pay businesses right away, but after we get to know you, we'll only bill you once a month to reduce the swipe fees we, and thus our businesses pay. That reduction in fees is where a lot of the savings on LevelUp come from.

Why are debit cards cheaper? (What is the Durbin Amendment?)

You can thank the great Senator Dick Durbin for that! In 2010, the Dodd-Frank Act was enacted which contained several elements of card regulation called the Durbin Amendment.

Prior to 2010, credit and debit cards carried similar interchange costs. But, credit and debit cards are not similar. Credit cards carry real risk for the banks. They are underwriting credit to consumers. So it's not crazy for them to charge a high variable fee on each transaction. But debit cards carry zero risk. The money is either in your account or not. Because debit and credit cards "look" similar and businesses can't easily tell the difference, the card brands chose to price them similarly.

Dick Durbin cried foul on this behavior and forced debit cards to be priced more fairly, basically lowering their variable fee to a max of .05% and their swipe fee to $0.21 cents.

This change, combined with LevelUp's bundling algorithm, dramatically reduces our merchants costs, which is why you'll sometimes see extra special rewards for linking a debit card.

Do the card companies hate you?

We don't think so. Visa, Mastercard, American Express and Discover make money in lots of ways including charging interest to customers and providing other services. We believe that the time of interchange has simply come to an end and that they'll continue to find ways to provide value to their customers and charge for it.

So, you guys were subsidizing interchange for a long time — was that expensive?

Yes. We subsidized millions of dollars of interchange while we were fine-tuning the model. But, we also make money off of campaigns that merchants run on LevelUp. And, we were like 95% confident in the math.

Also, LevelUp has raised over $50 million from folks like Google Ventures, Deutsche-Telekom, the founders of Discover Card, Highland Capital and Balderton Capital to ensure that we had the funds to experiment at a big scale.

Is LevelUp a non-profit?

Not on purpose! (Har har.) LevelUp provides payment processing at cost (hopefully eventually at zero) and we've pledged to never monetize simply off of moving money. But we do make money. We just believe that companies should make money by providing clear value, not just charging a tax on moving a dollar from point A to point B. LevelUp makes money by providing a rich campaign engine to businesses, that they can use to run loyalty campaigns, customer acquisition campaigns and more to engage their customers and drive revenue. When a customer redeems a reward from a campaign, we earn a fee of 25% of the redeemed campaign.

So, say Jim's Coffee is running a "Make It Rain" campaign to drive in customers on rainy days when he knows he's got capacity. When it starts raining, LevelUp knows (we track the weather) and we fire off a $2 incentive to his customers to invite them in. When customers come in and redeem that campaign, by paying with LevelUp, we'd earn $0.50 cents.

All campaigns are optional for businesses, so they only choose to run the ones that consistently produce revenue for them and grow their business. So we absolutely do make money, but we believe we've found a way to monetize that aligns incentives between customer, business and payment network.

What can I do to help?

Use LevelUp whenever and wherever you can. Businesses will appreciate it and you'll save time and money. If you're a business, sign up. If you're a developer, build LevelUp into your app.

And, keep your eyes peeled for news about the payments space. At some point in time, the big financial institutions are going to lobby to make life more difficult for startups like LevelUp. Follow us on Facebook and Twitter because we'll probably need your help in explaining to a senator or two why competition in the payments space is good for everyone, even the big incumbent banks.