How payment startup LevelUp is taking a page from Starbucks

When LevelUp relaunched its local deals service in October toward a more loyalty-driven model, what stood out to me was the new mobile payment system it built from scratch to support the service. The mobile wallet mimicked Starbucks’ successful payment system, which relies on a mobile app generating a QR code at checkout that can be scanned by an employee.

Turns out there’s been a fair amount of demand among a variety of merchants for just such a system, and LevelUp is starting to capitalize on that. The company, part of Boston-based SCVNGR, said it is now doing $1 million of transactions a month through its payment system, which now has 100,000 users. Users are using the payment system two to three times a week on average, the company says. Payment volumes have been doubling in the last six weeks, and merchants are climbing on board, with 1,400 signed up, including 400 in February alone. Another 600 retailers are set to come on board this month, according to LevelUp.

One million dollars is small in the grand scheme of things, and LevelUp still has more growing up to do. It’s only available in eight markets (Atlanta, Boston, Chicago, New York, Philadelphia, San Diego, San Francisco and Seattle). It’s going to face a lot more competition from Google Wallet, Isis, PayPal (s ebay), Visa (s v), Square and others.

But it is showing that a start-up can make some noise in this crowded field of mobile payments, and it’s providing a lesson in how a payment system can work when it’s integrated into a deals and loyalty program.

LevelUp’s growth shows that there are going to be other viable mobile payment systems beyond things like Google Wallet (s goog) and Isis, both of which rely on near field communication.

I talked to Seth Priebatsch, “chief ninja” at LevelUp, who pointed out the similarities between Starbucks’ payment system, and said that’s been the biggest driver of sales to merchants. Many businesses have wanted to embrace a simple mobile payment and loyalty system, but Starbucks wasn’t offering its solutions to other businesses. Starbucks said recently that users loaded $500 million into mobile accounts in December and conducted more than 26 million mobile transactions last year.

“Starbucks is our best sales person,” Priebatsch said. “They have closed more deals for us than we could have done ourselves.”

Priebatsch said in the more than 2,000 store locations where LevelUp is used, some merchants are seeing more transactions through LevelUp in the first 30 days than through American Express (s axp). LevelUp offers a loyalty and analytics platform that allows merchants to reward first-time and repeat customers with discounts. The LevelUp payment system has interchange fees of 2 percent, compared with rates of about 3 percent for most credit card transactions.

When a user goes to pay, the LevelUp app creates a one-time QR code that the merchant can scan with an iPhone (s aapl) or Android (s goog) app on their phone. Or they can use a new T-Mobile terminal that houses a dedicated phone that scans LevelUp QR codes. Consumers can conduct transactions through a LevelUp app on the iPhone or Android devices or through a mobile web version or a separate payment card.

The next step for LevelUp is to open up the system to even bigger players. It released an API today that allows point-of-sale makers and software companies that service POS terminals to integrate LevelUp into existing terminals. And Priebatsch said LevelUp is working with more than 10 point of sale terminal makers and software providers and will have some announcements soon.

The integration will make LevelUp available to a modest 3-5 percent of terminals by this summer, but it gives LevelUp an opening to compete in much bigger retail chains. He said LevelUp will be able to compete across the board, against Square for smaller merchants and Google Wallet and Isis for larger merchants, without forcing them to make big hardware upgrades.

LevelUp is interesting because it started with deals and discounts and later integrated payments. Many of the emerging wallets have evolved the other way around. Either way, it’s clear that you’ve got to have more components than just an alternative to a credit card swipe. Consumers need discounts to lure them in and merchants need more ways to engage customers.