How LevelUp aims to shake up mobile payments

If you follow any of my coverage, then you know I have a healthy interest in mobile payments.

When people think mobile payments, they think about the act of paying for goods by waving a smartphone at the cash register. But I'm more interested in the implications that come from the capability. You're seeing it now with the introduction of Google Wallet, which wants to use payment history to better serve discounts and advertisements. It's what comes next that is so exciting.

But as we're seeing with Google Wallet, as well as other attempts to bring mobile payments to the market, adoption is pretty tough. Using Google's service, for instance, requires you to be a Sprint customer using the Nexus S. (The Galaxy Nexus for Verizon Wireless still can't support it.) It also requires the retailer to support a technology called near-field communication, or NFC, which many don't.

There's a reason why other attempts, such as the joint venture between the other three national wireless carriers, dubbed Isis, have only so far inched into the area.

Then there's LevelUp, a pilot program spun out of social and location-based game Scvngr. Like Scvngr, it was founded by Seth Priebatsch, who serves as "chief ninja." While Scvngr is intended to be a free social game, LevelUp is designed to garner the same kind of user engagement, but with a money-making component to it.

"The mechanics that power Scvngr can promote traffic and can be linked to transactions," Priebatsch said.

It does so by plunging headfirst into the mobile-payment business, using easily obtainable apps and quick-response, or QR, codes found on any smartphone, which gets around the need for any special NFC checkout terminals or phones.

The transactions are all conducted using smartphones. When you pay for your goods, rather than open your wallet or purse, you pull out your smartphone and open the LevelUp app, which displays your personalized QR code. The cashier doesn't ring up the purchase; rather, he pulls out a store-owned smartphone with the same app, scans the QR code with the device's camara, and money is exchanged electronically.

LevelUp uses a triple authentication model, meaning money isn't exchanged unless codes are provided from the customer, retailer, and LevelUp itself, which Priebatsch said is more secure. Bank of America processes the payments and stores the financial information, which LevelUp doesn't have access to.

LevelUp is only charging a 2 percent cut of each transaction, compared with the usual 4 percent to 6 percent fee of a normal credit card payment.

Still, LevelUp's model only works if retailers have smartphones to loan out to their workers. The company is partnering with T-Mobile USA to address that, creating a program that leases out smartphones customized to run as a reader. Retailers pay $25 a month for each phone, although LevelUp is willing to waive that fee if they sign up new businesses or take in new customers, depending on which market they are in.

LevelUp and T-Mobile began selling the phones, which come with their own counter-friendly base, on Thursday.

While that may solve the problem of the lack of NFC equipment, what's the extra feature that makes LevelUp worth using for a customer? Similar to Scvngr's game-based model, LevelUp rewards consumers who try a new restaurant (they tend to get $1 to $2 off on their first purchase), and provide subsequent discounts after every five or so trips. (The retailer decides.) That gives retailers their own loyalty program, administered through LevelUp's app.

Progress is shown with a bar, providing a role-playing game feel. When you hit a certain amount you "level up" (get it?) and get your special offer.

"As you go back more, you earn more discounts," he said. "This the value on top of the payment."

Priebatsch isn't shy about taking gentle jabs at Google Wallet, made all the more amusing because LevelUp and Scvngr are both funded by Google Ventures. He also has a clear view of which one has the marketing muscle and dollars behind it.

But LevelUp is off to a nice start. It's operating in New York, Boston, San Francisco, and Philadelphia, with 100,000 paying customers and 1,000 participating business. Priebatsch boasted that the user activity is high, with 75 percent of users actively paying with LevelUp each month.

Not lacking any confidence, Priebatsch cavalierly boasted that he planned to grow LevelUp's users while Google Wallet gets NFC into the mainstream, allowing him to eventually switch to NFC and get Google Wallet users to switch to his service.

That probably won't be for a while.

"It'll take three years for NFC to go mainstream," he said.

Priebatsch, presumably, will be busy trying to make a name for himself and LevelUp in the chaotic mobile-payments arena.