Will LevelUp… Level Up?

You know what’s wrong with the mobile payments industry? There are some people within the industry who think the rest of us can’t do math.

Sadly, that might not be a bad assumption, but I like to think of myself as being able to do math. After all, I do have an MBA in finance and statistics, so it makes me feel assured that I’m not going completely senile to be able to do some math from time to time.

Here’s an example of some of the math I did recently.

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While gathering some facts for a recent presentation, I needed to get some information about LevelUp, the Boston-based mobile payments provider. In an April 2014 article, ReadWrite reported that LevelUp:

“Had signed up 14,000 merchants in the US (though not all are active)–mostly from the food industry–and was processing about 600,000 transactions per month, at an average transaction value of a little less than $10.”

OK, sounds reasonable to me.

***

Fast forward to December 2014, when PaymentsSource reported:

“Days after merchants launch a mobile app powered by LevelUp, the app accounts for roughly 20% of their transaction volume, exceeding American Express’ 13% transaction volume, [LevelUp Chief Operating Officer Michael] Hagan said. Afterwards, that growth continues at a slower pace, with many merchants eventually seeing the app account for 40% of transaction volume and others eclipsing that, Hagan added.”

Wow, pretty impressive. Within “days” of launching, the app accounts for one in five of the merchant’s transaction volume. And “many” see the app account for 40%.

Sign me up!

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And now for the math–and reality–portion of the blog post. No need for you to get out your calculators, I’ll do the math for you. 

If the 600k transactions per month at ~$10 per transaction estimate was correct, LevelUp was processing $72 million in transactions on an annual rate. If that accounted for 20% of LevelUp merchants’ transaction volume (which LevelUp claimed they get to “days after launching”), then LevelUp merchants’ total business volume is $360 million a year.

With 14k merchants signed up, that would mean, on average, LevelUp merchants do an average of $26k per year (that’s not a typo–it’s k, not m). There are households in the US below the poverty line who make more than $26k per year.

But not all merchants are active, as one of the articles pointed out. But if just roughly a third of the merchants are active, then those 5k merchants are still just averaging $72k in business per year, which isn’t anywhere near enough to stay in business.

At this rate of transaction processing and average ticket value, only 350 merchants could be driving LevelUp’s business. With 350 merchants driving 600k transactions, at LevelUp accounting for 20% of their business, they would bringing in just over $1m a year.

***

It’s possible, of course, that between April 2014 and December 2014, LevelUp significantly increased its transaction volume.

OK, fine–assume that they doubled their business over that eight month stretch. Double the revenue calculations, and in the 5k merchants scenario, their average annual revenue is $144k, which is still not a reasonable number for a restaurant of QSR provider to stay in business. And to reach an average of $1m in revenue, the number of active merchants would double from 350 to 700, or just 5% of the 14k merchants who allegedly signed on to LevelUp.

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The “many merchants eventually seeing the app account for 40% of transaction volume and others eclipsing that” claim is something I just can’t see my way to believing in any scenario.

***

I don’t want to call anyone a liar, but I just don’t think LevelUp is….leveling up.

 

Ron ShevlinRon Shevlin is Director of Research at Cornerstone Advisors. Check out more of his ideas and research on Cornerstone's Insight Vault. And don't forget to follow him on Twitter at @rshevlin.

This article was originally published on June 3, 2015. All content © 2018 by The Financial Brand and may not be reproduced by any means without permission.

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