Mobile payment app aims to create loyalty

Seth Priebatsch, 23, has a big vision for his Cambridge company, SCVNGR. He wants to dominate the market for mobile payments, allowing cellphones to be used in place of cash or plastic to buy things.

Already, 250 businesses around Boston allow consumers to use SCVNGR’s LevelUp mobile app to pay, and Priebatsch says another 100 will come online soon. The system, deployed in eight other cities, is handling more than $1 million in transactions each month. One analyst believes the only app used by more consumers today for mobile payments is the Starbucks app.

SCVNGR has had several incarnations.

It started in 2008, enabling sites like museums or colleges to create text-based games that could be played on any mobile phone as players navigated a real-world environment.

Then, SCVNGR started chasing Foursquare, a Manhattan company that was the first to encourage mobile users to “check in’’ and share their location with others.

Last March, SCVNGR launched LevelUp, which was seen as an attempt to cash in on the Groupon craze. But while Groupon’s prepaid coupons only created an incentive to go to a business once - to take advantage of, say, $50 worth of tanning time for $25 - LevelUp offered an enticing second and third deal once you cashed in the first. The idea was to try to engender loyalty, rather than just drive a swarm of bargain-hunters to the business.

The original LevelUp product didn’t take off. SCVNGR was pitching it to merchants when dozens of other companies were also trying to persuade them to offer new kinds of digital deals.

SCVNGR introduced the current version of LevelUp in July. Once you enter a credit card number into the app, you can use your cellphone to pay at businesses that accept LevelUp. The merchant puts a SCVNGR-supplied mobile phone on the counter in a special plexiglass holder. When you open the app, it displays a QR code - a more pixelated version of a bar code - which is read by the merchant’s phone and initiates the transaction.

In my experience, the LevelUp scan works more reliably than a credit card swipe, and it’s generally faster.

But the big incentive is that most businesses accepting LevelUp offer deals to get you in the door. The app lets you see a list of businesses near you, and how much they will knock off your first purchase: a $4 credit at Naked Pizza, for instance.

Once you make that first purchase, a business can dangle future discounts based on a certain spending level. That’s an easy way to run a loyalty program without having to dole out those annoying punch cards.

When I used Twitter to survey people who use LevelUp regularly, they cited discounts and the simplicity as their two favorite features.

Dan Croak of Cambridge said he liked the way it cuts down on visits to an ATM, and doesn’t require him to sign a credit card receipt.

Katie Cohen of Boston said the app’s only drawback is that “I feel like a nerd every time I use it.’’

Merchants tell me they appreciate LevelUp’s low transaction fee: about 2 percent. “Accepting other credit cards can be as high as 5 or 6 percent,’’ says Mike Conley, director of marketing at Sebastians Cafés. “Plus, LevelUp gives us a wealth of data about our customers: how often they come in, and how much they spend.’’

Conley says nearly 4,000 people have used LevelUp to pay at Sebastians, and their average purchase is higher than other customers.

Patrick Lynch, who runs the Bon Me food truck, says he has found “it’s worth our while to give a little discount with LevelUp to try to convert people into regulars.’’ Bon Me offers $2 off a customer’s first purchase with LevelUp.

Building a mobile payment product that consumers and merchants like is a significant accomplishment, and Yankee Group analyst Nick Holland says that SCVNGR has maneuvered into a very strong position. “It’s arguable that they’re number two behind Starbucks,’’ Holland says. “But we’re still in the very low single-digit percentages, in terms of people using their mobile phones for anything transactional.’’

Handling $1 million in monthly transactions is not generating much revenue for SCVNGR, which so far has raised $20 million in venture capital. The 120-person company collects $20,000 in fees on that $1 million, some of which it must pay to credit card issuers and middlemen. Even getting to $100 million a month in transactions would not create a very big business.

But Priebatsch has already figured out his next move. “In three years, we’ll be handling $10 billion a month of transactions - and making zero on the transactions,’’ he said. Instead, LevelUp will charge merchants a monthly fee (perhaps $100 per location) for help bringing in new customers, transforming them into repeat customers, and analyzing their spending habits.

“Google has had great success with selling advertising that understands what you’re searching for, and generates revenue every time you click on one of their ads,’’ Priebatsch says. “Our ad unit is based on the transaction, on getting you into a business to buy something. We think that what we are building is the largest financial advertising system on the planet.’’

Priebatsch’s lofty vision could get SCVNGR acquired, as established players in the payments industry, such as PayPal, Google, and credit card companies, try to formulate winning strategies for mobile. But building a profitable business atop the vision would give SCVNGR a chance of becoming a major player in its own right - perhaps the 21st century’s version of American Express.