(Courtesy of LevelUp)
(Courtesy of LevelUp)

With retailers still battling credit card companies over fees, LevelUp is trying a new tactic to get more merchants to use its mobile app to process payments from customers.

On Wednesday the Boston company said it lowered the flat fee it charges merchants to 1.95 percent, from 2 percent, which puts it well below what many businesses typically pay the major credit card companies to process customer transactions.

Moreover, LevelUp founder Seth Priebatsch said the company will continually cut fees to merchants, with the ultimate goal of not charging them anything to use its mobile app.

“We will absolutely be doing this again within the next few months,” Priebatsch said.

Instead of making money from transactions fees, LevelUp receives a cut from loyalty programs run by merchants using its app. For instance, when a consumer redeems a reward for $5 from a merchant, LevelUp receives a fee of about one-quarter of the amount.

Although high transaction fees have been a huge issue in the retail industry, LevelUp has not made a major inroad among merchants so far. Its app is currently used by 8,000 merchants around the US — including hundreds of restaurants in the Boston area — with most being single-location eateries or small restaurant chains. About 1.5 million consumers use the service, LevelUp said.

The service has seen modest growth since a year ago, when it had 5,000 merchants and 1 million users.

The fee reduction by LevelUp should prove attractive to small merchants, most of which don’t have the bargaining power of large retailers to negotiate lower card fees, said Michael Misasi, senior analyst at the Mercator Advisory Group in Maynard, which follows the payments industry.

“I imagine under 2 percent is definitely something that’s going to get their attention,” said Misasi. “Some of them are probably paying an average rate of 3 percent or higher.”

Merchants have been fighting credit card companies for years over transaction fees. In December, merchants were awarded $5.7 billion in a class action settlement merchants against MasterCard Inc. and Visa Inc., though many larger retailers, including Wal-Mart Stores Inc., Target Corp., and Amazon.com Inc., refused to be part of the settlement on grounds that it didn’t go far enough.

And in March Wal-Mart sued Visa for $5 billion, alleging that Visa’s fees were so high it cost the retailer lost sales.

“It’s hard to underestimate how big of an issue it is,” added Misasi.

Meanwhile at LevelUp, Priebatsch said the company has been able to lower its fees after finding new efficiencies such as grouping transactions together — only charging the credit cards of users once a month, rather than after every purchase — which lowers LevelUp’s own transaction costs.

Instead of swiping a payment card, LevelUp customers use their smartphone to display a unique QR code that is read by a special scanner at the checkout counter. The QR code is linked to that customer’s payment account.

LevelUp has raised more than $48.5 million in venture funding, with investors including Highland Capital Partners and Google Ventures.

Among its competitors is PayPal’s mobile payment app, which the company says is accepted at 1.9 million merchants through a partnership with Discover. PayPal charges a fee of between 2.7 percent and 3.5 percent per transaction.

This article appears on page B5 of the Boston Globe on April 17, 2014, with the headline: LevelUp lowers its fee to merchants.

Kyle Alspach has worked in journalism in Massachusetts since 2005 and was one of the original staff writers at BetaBoston. Follow Kyle on Twitter

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