When 19-year-old Caitlyn Bolen bought her regular veggie sandwich at Deli-Boys in Cleveland, Tenn., this week, she didn't pay with a credit card, she didn't use cash and she didn't whip out a checkbook.
She paid by scanning a code on her smartphone, using an app called "Level Up."
"It's easier," she said. "I don't even have to bring in my purse. And it saves you money, too."
Level Up is the latest in a string of innovations aimed at helping merchants avoid the typical 1.5 percent to 3 percent in credit card processing fees that accompany the traditional swipe, and is just part of a broad shift toward mobile and digital payments.
Deli-Boys has been using Level Up since September, and on Wednesday the quick-service sandwich shop went on a credit card diet -- accepting only cash or Level Up payments for the duration of the day.
"We like the fact that we're not having to pay the processing fees that come with traditional credit card swiping, and we're able to offer a reward system to our customers to keep them coming back," Deli-Boys co-owner Jennifer Majeske said.
Level Up links to the consumer's credit or debit card and doesn't charge any processing fees. Instead, the company requires merchants to start a customer loyalty program -- at Deli-Boys, customers receive a $5 credit every time they spend $50 through Level Up.
And when the customer spends that $5 credit, Level Up takes 40 percent of every credit dollar spent.
"It's not a huge impact for us as far as savings," Majeske said. "We're benefiting, but we're benefiting by keeping our customers coming back in on a regular basis."
Patrick Geho, state director of the Tennessee Small Business Development Center at Middle Tennessee State University, said that among small retailers, the first push away from the traditional swipe started when businesses began using card readers with smartphones. But now, he's seeing a second shift toward smartphone apps.
"It's evolving into individual apps, and there are more and more of them," he said. "They're coming out every day. The problem is getting adoption."
Because apps such as Level Up are so new, creators often are still working out bugs and making changes to the process, he said, which can discourage business owners from making the switch.
"The upside for businesses is that it's a negligable cost, if any," he said. "The downside is that the evolution of the applications may cause problems in the payment processing."
Brad Merriman, owner of Chattanooga Mattress, said he's not currently using any credit card apps, but he has considered it because of the lower fees and faster processing.
"Customers seem to like them," he said. "Purchasing is completely different than it was 20 years ago. Now, a customer can stand in my store and look at an iPhone and see the prices of mattresses in a bunch of other stores. Everything has to be faster now."
Credit Card Surcharges
Another way for small businesses to deal with credit card processing fees is to pass the cost on to the consumer. Last month, MasterCard and Visa agreed for the first time to allow retailers to tack on a credit card surcharge per transaction.
"Historically, Visa has not permitted retailer surcharging, but allowing surcharging was a key provision required by merchants to settle long-standing litigation brought by a class of retailers in 2005," Visa states on its website.
Retailers who chose to add the fee can charge only as much as they already pay the credit card company and must warn customers at least twice before the purchase that they'll be charged extra.
The surcharge never can be more than 4 percent and can't be added in the 10 states where it's already illegal, including California, Florida, Oklahoma and Texas.
But despite the policy change, Merriman said he'd never add a surcharge when his customers pay with credit cards.
"I'm the little guy on the block, and I'm competing with the box stores," he said. "If I say, 'Oh by the way, I'm going to hit you up with another 1.5 percent -- if I was a customer at a little store, I may walk out. There's no way I could do that. No way."
Susan Paden, owner of Good Dog, a hot dog shop in Chattanooga, said she knows some restaurants that already charge a higher price when a customer pays with a credit card, but she hasn't added any fees in her shop.
"It's so hard to justify to a consumer," she said. "You just hate that there is another thing you have to add to the price. Because the customer sees a hot dog, and they don't see the rest. But the price of that hot dog does include all of this."
Credit Goes Mobile
As a whole, retail purchasing is moving toward mobile devices and phones, Geho said.
"It's a given," he said. "It's just a matter of time."
In the five months since Deli-Boys started using Level Up, about 400 customers have downloaded the free app and completed 1,900 transactions, Majeske said.
They've spent just over $25,000, which is less than 10 percent of Deli-Boy's total sales. But Majeske can log in to the app and see how many times each customer has visited the restaurant. She can see when a customer first visited and when his latest visit was.
She can track how much each customer spends through Level Up -- both the average per trip and the total spent, and access a myriad of other demographic information.
So if she wants to send a promotional email through Level Up to only people who haven't eaten at the restaurant in three months, she can do that.
"Small business owners are recongizing Level Up as the next step in payment," said Max Mozes, a launcher at Level Up. "Now they're seeing that lots of their consumers are coming in with smartphones and the entire industry is going mobile."
Even the credit card giants are starting to roll out initiatives that move away from plastic. At the World Mobile Congress in Barcelona on Monday, MasterCard announced MasterPass, a digital service that lets card holders pay with most mobile devices by using QR codes, tags or near-field communication.
And at the same event, Visa and Samsung announced an agreement in which all Samsung devices will come pre-loaded with Visa's mobile payment app, called payWave.
"At the heart of it is consumers," said Seth Eisen, a senior business leader at MasterCard. "Consumers are changing the way they interact with each other and their money. We're all living a more digital life, and any device has the potential to become a shopping device."
Paden said she thinks the industry is right on the cusp of the change.
"I've been hearing about this, but so far no one has approached me about a better or different way," she said. "What we're doing now works, but we're right at the point where I need to find out more."
Back at Deli-Boys, customer Tommy Wills paid with Level Up and said he'd never go back to swiping his credit card.
"There's no point to it," he said. "I'd loose money. This way, I don't have to sign or anything. It's the fastest thing I've ever seen. It's scary."