We’re seeing the latest example of that today with news that LevelUp is integrating its payment services into a new mobile banking app for First Trade Union Bank, which operates largely in New England. It’s the first time that LevelUp is powering mobile payments for a bank though it’s hoping other financial institutions will follow suit. The new app, which will debut early next year, will allow First Trade users to pay for things with their phone at 4,000 merchants and get exclusive offers from their bank.

Openness leads to opportunities

The deal is made possible by LevelUp’s white label app, which it introduced earlier this year. Customers can integrate LevelUp into their existing apps or turn to LevelUp to do the integration or create a new app. First Trade is just the second customer to announce it’s using LevelUp’s white label tool, but Priebatsch said many more are in the process of integrating with LevelUp for next year.

LevelUp also released its own API to allow point of sale makers to integrate LevelUp as a payment source. It is now integrated with three of the top POS makers including Micros, Positouch and Dinerware POS Systems, which cover 30 percent of all POS systems. It also incorporated NFC alongside QR codes for people who want to pay with a tap of their phone.

By opening up, LevelUp is able to be used through multiple apps, which widens its reach for consumers. It also means it can get inside stores quickly by tapping existing hardware. LevelUp can also offer merchants their own LevelUp dock for accepting payments. The POS integration was a key part in getting LevelUp installed at the KFC Yum! Center arena in Louisville, Ky, which utilized its Micros point of sale systems to deploy LevelUp.

Priebatsch said LevelUp is fine being flexible if it means it can scale up over time the way Android has. Android has become a world beater in part because it’s open to manufacturers, carriers and developers who can build on top of the operating system.

“We aren’t the app; you can have a white label app. We aren’t the POS; we work with POS makers.  We are the payment method but we’re not the processer on the back end,” Priebatsch said. “We’re trying to be Android, so we can partner with everyone.”

Competing with Square’s iPhone approach

If LevelUp is the Android of mobile payments, Square would be the iPhone, said Priebatsch. Square has been lauded for its focus on design and a seamless user experience. And some of that comes from keeping much tighter control on the product by not opening up an API or building all of its services in house. Keith Rabois, Square’s COO told me in an interview earlier this year that one of Square’s strengths is building the whole experience, so it can be optimized to reduce friction for users.

“If you craft an experience end-to-end, it just works out of the box,” Rabois said.

We’re still early in the process and no one knows which approach will win out. Square has gotten a bigger boost with its own Square Wallet app thanks to a big partnership with Starbucks, which is also an investor. It’s the first partnership Square has done though others are likely to follow.

But Rich Miner, a partner with Google Ventures and an investor and board member in SCVNGR, the company behind LevelUp, believes that Priebatsch’s method is the way to go. This shouldn’t be surprising considering Miner founded Android, before selling it to Google. But he believes that LevelUp’s approach allows it to appeal to a wider customer base of medium and larger businesses who are trying to incorporate mobile payments and may not have the knowhow.

Race to ubuiquity

But, LevelUp has a long way to go to replicate Android’s success. The company has just 500,000 users and is handling about $5 million a month. That’s still not a mainstream hit. The challenge, Priebatsch admits, is for LevelUp to scale up quickly in the next few years. ”People only have so much patience they give to LevelUp before they expect to it to be ubiquitous. I think we have two to four years before we have to deliver to our users a damn near universal experience,” Priebatsch said.

Priebatsch is hoping the LevelUp POS integrations can power it to a big year in 2013 and hopefully to profitability by the end of the year. He’s also hoping LevelUp’s decision to kill interchange fees for businesses who run marketing and loyalty campaigns will also build momentum in the next year.

But, as with Android, there are disadvantages to being open. It’s harder to ensure a consistent and quality experience across every LevelUp transaction. And as we’ve seen with Android browsing and shopping data, having the most marketshare doesn’t necessarily lead to the most usage. But it’ll be interesting to see how LevelUp and Square compete with their different approaches. With mobile payments so new, it’s good to throw different ideas up on the wall and see what sticks.

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When visitors to the center arrive for a basketball game on Thursday, they will be able to whip out their LevelUp app and pay at 200 food and beverage concession stands. LevelUp was able to integrate quickly at the arena because it struck a deal last month with point-of-sale maker Micros, which supplies the venue’s point of sale hardware. Users can just flash their LevelUp app’s QR code, which is tied to a stored credit or debit card, and employees will scan the app using their existing hardware or with LevelUp’s scanners.

“This is not a pilot. This is: leave your wallet at the door or at home and wherever you want to buy something, you can buy it with your phone,” said LevelUp’s Chief Ninja Seth Priebatsch.

This is LevelUp’s biggest deployment to date and will be a prime test for the system. Centerplate, the hospitality company that manages the KFC Yum! Center, also oversees dozens of other big venues all around the country. If all goes well, LevelUp could be deployed in many more big event locations. Centerplate is taking advantage of LevelUp’s free interchange fees, which means they don’t pay the traditional transaction fees on purchases through LevelUp. They instead will run paid user acquisition and loyalty campaigns through LevelUp. So a new user will be able to get a $2 credit toward their first purchase while existing users can get discounts for purchasing larger amounts of food and beverage.

Priebatsch told me the arena deal is significant because it demonstrates the work LevelUp has done to build out its mobile payment system. The company last month announced it had integrated with three of the top point-of-sale systems: Micros, Positouch and Dinerware POS Systems, which cover 30 percent of all POS systems. LevelUp is also working to integrate with nine of the top 10 POS systems.

The significance of that is that it allows merchants to easily offer LevelUp as another payment type, alongside cash and credit cards. KFC Yum!, for example, was able to integrate LevelUp within one day, said Priebatsch. Merchants can also see their LevelUp transactions recorded with all of their other transactions and they can access LevelUp’s loyalty analytics data inside their POS system.

LevelUp, which is currently deployed with 4,000 merchants at more than 7,000 locations, is also looking to try out new services at the KFC Yum! Center. For instance, it could use its transaction data to sense when sales activity is low and then send users an offer through their app to get them to come back to the concession stand. Or it could direct people to certain stands that are less crowded at peak times.

Priebatsch said a mobile payment deployment inside of a big venue also opens up different use cases. Instead of users stopping by for a quick visit at a quick-serve restaurant, LevelUp can now contemplate how it can engage someone over a visit that lasts a few hours. The beauty of a mobile payment system is that it can help merchants understand what their customers are doing. And if they’re still on the premises, business owners have a chance to engage them more than once with an offer or a message.

That’s why I think it makes sense for big venues like stadiums and amusement parks to give mobile payments a shot. It’s not so much about making the actual payment experience easier. But they have a potential communication channel to their customers while they’re on site.

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Businesses will be able to integrate a new LevelUp SDK in coming months into their existing apps. Or they’ll be able to turn to LevelUp, which can build them a custom app powered by LevelUp in 8-12 weeks.

LevelUp has been signing up businesses including Sweetgreen, a small chain of restaurants in the Washington DC area. Sweetgreen had been looking to join LevelUp’s payment network but wanted to have its own app for users to download.

LevelUp’s chief ninja Seth Prietbatsch said white labeling LevelUp lets businesses with a strong brand or good relationship with their customers strengthen that through their own app instead of diverting them to the LevelUp app. Businesses can still take payments from customers who want to use the existing LevelUp app.

If LevelUp builds a merchant app from scratch, it can cost $40,000 to $50,000. But Priebatsch said he believes the bigger opportunity is in letting businesses connect to LevelUp through its SDK and APIs.

The move helps LevelUp strengthen its hand against its various mobile payment competitors. Right now, most rivals expect consumers will pay with one app. But for merchants that want to own more of the customer experience, those tools don’t always work well. Restaurant mobile payment system TabbedOut also introduced its own SDK earlier this month for restaurant chains.

Priebatsch said LevelUp is in a good position to offer a white label app because it has built its own payment infrastructure and doesn’t have to rely on anyone else to implement it. And its QR-code based system, with rotating security tokens that expire quickly, is safe and easy for merchants to use in their own apps. A white label tool also helps introduce more merchants to its payment model, in which it charges nothing for interchange fees and only makes money from running marketing campaigns.

A white label tool will only appeal to merchants with enough money or locations for their own app. But it does address some concerns of businesses, who don’t want to hand over their customer experience to someone else. That’s part of the motivation for big retailers like Walmart, Target and others who have banded together to launch their own payment system called MCX. I wouldn’t be surprised if we see more white label payment apps hit the market as mobile payment players try to cater more to retailers and merchants.

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The new LevelUp docks, which will go to new merchants first and then will replace existing hardware over the next few months, will be offered for free. LevelUp has almost 5,000 merchant locations where it handles payments and loyalty.

Seth Priebatsch, LevelUp’s chief ninja, said the move to support NFC was guided in part by the possibility that Apple was preparing to include the short-distance wireless technology in the next iPhone. But while that appears to be less likely these days, Priebatsch said LevelUp is still interested in supporting a variety of forms of payment including NFC, which he expects will pick up momentum in the coming years. The NFC dock will also be able to be upgraded to Bluetooth 4.0 in the future if that becomes a popular method of payment.

“Do I think NFC will be consumer hit in six months? Definitely not. But in three to five years? Absolutely,” he said. “But whether we prefer QR code or NFC, I just want users to use what they use.”

LevelUp’s implementation of NFC differs from other systems like the Isis network developed jointly by AT&T, Verizon and T-Mobile. Instead of storing financial card information on the NFC secure element on the phone, LevelUp will only use the technology to initiate a transaction. LevelUp will use a rotating token to complete the transaction so no financial data is exposed. Priebatsch believes that’s safer because it doesn’t rely on the secure element. And it means that LevelUp is less likely to be blocked by the carriers or manufacturers, something Google has struggled with on Google Wallet.

Users will be able to pay in two ways. When they arrive at a LevelUp dock, they will be able to tap their phone, which will open up their LevelUp app with the price of the transaction listed. The users can then complete the transaction by scanning a QR code on their phone or they can tap again to finish the purchase with NFC.

Priebatsch said he understands that NFC does little to optimize the actual payment experience over cash or credit. But the value is in the entire package for both consumers and merchants, he said. Consumers can get discounts on first-time visits or incentives to come back and pay through LevelUp. And merchants have a way to reach out to new and existing customers.

This is the latest move by LevelUp to make a splash in the mobile payment space. The company announced recently that it would eliminate interchange fees charged to merchants on transactions and rely on revenue from marketing campaigns. Priebatsch said 97 percent of its merchants are now running campaigns with LevelUp and for every $1 spent, businesses are generating $18 in trackable revenue. The company just added 800 new merchants in August. 

NFC for payments is still a ways off from being a mainstream tool. And for LevelUp, it doesn’t offer that much more convenience over the traditional method of paying with a QR code. But the move allows LevelUp to prepare for the future and get some mileage out of the “NFC” buzzword. But until more NFC-enabled phones are on the market and people become educated about how to use NFC at the point of sale, this won’t be that big of a deal for a while, if ever.

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A barista taking your coffee preference via an iPad isn’t new. But the simplicity of touch-screen based checkout systems could be a major revelation for grocery owners used to paying tens of thousands of dollars for point of sale (POS) systems and the required training for them. So far, just a small chain in Pittsburgh, Pa. called Marty’s Market has Revel’s iPads installed on all five checkout lanes. But the company is expecting many more stores to get on board because of its pricing and the familiarity of the iPad.

Revel’s iPad system for grocery stores costs $2,000 per software license — one for each grocery checkout lane — and a $100 service fee per month per license. In return, stores get Revel’s cloud-based grocery inventory and payment system. On top of that, a store can also order accessories — iPads, scanners, scales, coin dispensers, receipt printers, and more. The “iGrocery store” concept isn’t just referring to an iPad — Revel also sells an iPod touch that integrates with its system so employees can scan items when ordering new products.

Shoppers can pay with standard methods — cards, cash, coupons, EDT (food stamps) — but also with services from mobile payment startups Dwolla and LevelUp, which let users make a quick transaction via a smartphone. There’s also a “kiosk mode” that can turn the iPad registers into self-checkout stands.

Cracking the grocery business

There are a couple reasons Revel thinks its solution stands a chance of cracking the grocery business. First, grocery POS systems haven’t changed much in about 20 years, and NCR, the cash register behemoth, can charge multiple thousands of dollars for the systems and their upkeep, Revel points out. Second, those systems are often complicated and require weeks of training for new checkers, and third, Revel thinks the iPad’s ease of use makes it a natural cash register.

“If you try to [install] a point of sale system you’re talking like two weeks of employee training, but with iPad … you walk right up to it and, within a couple minutes you’re running orders,” co-founder and CTO Chris Ciabarra said in an interview Monday. “That’s a huge selling point when I go out and pitch companies.”

Grocery employees can come and go, and employers have to spend money and time to train new people each time they’re hired, he said.

Apple’s sold 85 million iPads to date, but it’s the 400 million iPad, iPhone and iPad touch sales combined that make it pretty hard to find potential U.S. grocery store employees that aren’t at least familiar with Apple’s touchscreen devices.

Moving up to grocery stores is a pretty big step for two-year-old Revel Systems because installing cash registers at a grocery store isn’t as similar as you might think to restaurants. The company had to seriously beef up its software’s capability.

“The load of groceries is a lot more, there are a lot more SKU numbers, some have over 10,000 SKUs, other systems [like restaurants] have like 300,” said Ciabarra. ”The database is a key thing” because it has to handle so many networks (EDT, coupons, etc.).

Getting into an entrenched market like the cash registers business is going to be tough. But Revel Systems isn’t starting from scratch. The cloud and mobile are going to continue to disrupt payment systems, and Revel already has its foot in the door. It needs to get a national chain to buy into its system, but that’s obviously easier said than done.

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LevelUp said it will not charge its 3,000 merchants interchange fees to process credit card payments and will swallow the cost. The company said instead of passing on interchange fees to move money over existing payment networks, it will look to make its money from merchants by helping them bring in new and existing customers. In essence, LevelUp feels like it can make more money by providing offers, loyalty and analytics than by facilitating pure payments.

It’s a big move that could shake up the emerging mobile payments market. Competitors such as PayPal, Square, Google and Isis are adding more value-added services themselves but they’re still looking to profit from the payment transaction itself. But Seth Priebatsch, LevelUp’s chief ninja, said transactions are a commodity that won’t hold up over time.

“The fact that we can move money, that’s not interesting. The fact that we can drive new customers and track them when they come back, that’s real value,” said  Priebatsch. “The amount of money we’re making on our campaigns is trending up and we stepped back and said if it’s stable right now we should just skip the middle part of this game and stop charging.”

For the last couple months, LevelUp has charged its merchants 35 cents on every dollar of credit provided to consumers during a campaign. So for instance, in a campaign to bring in 500 new customers, a merchant may offer $2 free credit for a first-time visitor. LevelUp will earn 70 cents for that transaction. Priebatsch said merchants typically bring in $18 for every dollar spent on a campaign. And of new customers who come in through LevelUp, 64 percent come back within 30 days and 40 percent of all new customers complete a loyalty progression with 30 days.

That’s how LevelUp believes it can be valuable enough to charge for these services. By letting merchants push offers to specific sets of customers and providing analytics that track how well the offer does and how often the user comes back, LevelUp is making enough money to support this new Interchange Zero approach. LevelUp, again, is paying the interchange fee but it’s acting like Google, which offers free search because it can make it up on advertising. For merchants, the removal of interchange fees means an average of $500 in savings a month, said Priebatsch.

But how can LevelUp afford to pay the existing interchange fee? Priebatsch said it is able to move money through interchange networks more efficiently using special algorithms and it has less fraud than competitors because of its barcode scanning and token payment system. The company is building out special relationships with banks to further decrease the cost of fees. Over time, Priebatsch said the cost of moving money over the interchange fees has also gone down, but the fees haven’t.

It will be interesting to see how competitors react. It’s still early in the race but merchants are hearing all kinds of pitches on payments, offers and loyalty programs. A service that does away with processing fees and only charges based on real business performance could stand out in the market. Merchants may feel more confident about trying LevelUp because they will only be paying to drive in customers and sales.

This fits into the larger discussion about mobile payment business, which many are realizing is much about about the services around payments than the action itself. Providing an alternative to credit cards or cash has limited appeal to consumers and merchants because the current methods of paying aren’t terribly broken. It’s really in the extra features where payment systems are able to sell themselves.

This will have an impact on not just payment providers, but also new offers and loyalty-focused startups. The reality is that these businesses are all coming together and competitors will need to be able to offer all these elements plus analytics, customer relationship management and other business services as well. LevelUp is showing that in this local scrum, the real value proposition may be in leading first with offers and loyalty and just throwing in payments for free.

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LevelUp was originally created by SCVNGR as a daily deal competitor to Groupon , but repositioned itself in October as more of a loyalty app with its own payment system. The new direction has helped LevelUp attract 200,000 users, who are spending $2 million a month with the app. That’s up from 100,000 users and $1 million in spending reported in March. The service is now used by 3,000 merchants in eight markets. The new money will help LevelUp expand its footprint across the nation.

Here’s what SCVNGR’s chief ninja Seth Priebatsch had to say about the funding: “Our vision is to make LevelUp the first interchange zero payment network. That means we’re working to bring the cost of moving money down to nothing and enabling businesses to re-invest that cost into growing their businesses, by  attracting new customers and bringing them back more often.”

LevelUp, which has raised $32 million so far, is still growing but it offers an interesting option for merchants. It gives them a way to attract new users with small discounts and offer loyal users rewards for coming back. And with a Starbucks-like barcode payment system built in, it can close the loop on offers so merchants know the effectiveness of working with LevelUp. That gives LevelUp a pretty impressive package of services it can deliver to merchants, who are being offered all number of payment, loyalty and offer tools from Square, PayPal, Groupon, Google Wallet and many others.

Now, it looks like LevelUp is pushing even harder on its payment angle and is hoping to differentiate itself by being ultimately cheaper for merchants. Groupon is also testing out a new payment service that will offer a 1.8 percent transaction fee with a 15 cent transaction charge. Lower transactions fees could ultimately help merchants in the long run but it’s also confusing for now, seeing so many options in the market.

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Turns out there’s been a fair amount of demand among a variety of merchants for just such a system, and LevelUp is starting to capitalize on that. The company, part of Boston-based SCVNGR, said it is now doing $1 million of transactions a month through its payment system, which now has 100,000 users. Users are using the payment system two to three times a week on average, the company says. Payment volumes have been doubling in the last six weeks, and merchants are climbing on board, with 1,400 signed up, including 400 in February alone. Another 600 retailers are set to come on board this month, according to LevelUp.

One million dollars is small in the grand scheme of things, and LevelUp still has more growing up to do. It’s only available in eight markets (Atlanta, Boston, Chicago, New York, Philadelphia, San Diego, San Francisco and Seattle). It’s going to face a lot more competition from Google Wallet, Isis, PayPal, Visa, Square and others.

But it is showing that a start-up can make some noise in this crowded field of mobile payments, and it’s providing a lesson in how a payment system can work when it’s integrated into a deals and loyalty program.

LevelUp’s growth shows that there are going to be other viable mobile payment systems beyond things like Google Wallet and Isis, both of which rely on near field communication.

I talked to Seth Priebatsch, “chief ninja” at LevelUp, who pointed out the similarities between Starbucks’ payment system, and said that’s been the biggest driver of sales to merchants. Many businesses have wanted to embrace a simple mobile payment and loyalty system, but Starbucks wasn’t offering its solutions to other businesses. Starbucks said recently that users loaded $500 million into mobile accounts in December and conducted more than 26 million mobile transactions last year.

“Starbucks is our best sales person,” Priebatsch said. “They have closed more deals for us than we could have done ourselves.”

Priebatsch said in the more than 2,000 store locations where LevelUp is used, some merchants are seeing more transactions through LevelUp in the first 30 days than through American Express. LevelUp offers a loyalty and analytics platform that allows merchants to reward first-time and repeat customers with discounts. The LevelUp payment system has interchange fees of 2 percent, compared with rates of about 3 percent for most credit card transactions.

When a user goes to pay, the LevelUp app creates a one-time QR code that the merchant can scan with an iPhone or Android app on their phone. Or they can use a new T-Mobile terminal that houses a dedicated phone that scans LevelUp QR codes. Consumers can conduct transactions through a LevelUp app on the iPhone or Android devices or through a mobile web version or a separate payment card.

The next step for LevelUp is to open up the system to even bigger players. It released an API today that allows point-of-sale makers and software companies that service POS terminals to integrate LevelUp into existing terminals. And Priebatsch said LevelUp is working with more than 10 point of sale terminal makers and software providers and will have some announcements soon.

The integration will make LevelUp available to a modest 3-5 percent of terminals by this summer, but it gives LevelUp an opening to compete in much bigger retail chains. He said LevelUp will be able to compete across the board, against Square for smaller merchants and Google Wallet and Isis for larger merchants, without forcing them to make big hardware upgrades.

LevelUp is interesting because it started with deals and discounts and later integrated payments. Many of the emerging wallets have evolved the other way around. Either way, it’s clear that you’ve got to have more components than just an alternative to a credit card swipe. Consumers need discounts to lure them in and merchants need more ways to engage customers.

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