Cash Roll

The Internet has fundamentally changed the way commerce is done — that is, for the 75 percent of the population with access to credit cards and checking accounts. For the remaining 25 percent, America’s un- and underbanked, cash is a way of life, meaning that ecommerce is not. August Capital partner Dave Hornik describes this as the “second class Internet.”

PayNearMe, which launched its cash transaction network in 2009, allows merchants to accept cash payments from remote users via more than 8,600 7-Eleven and ACE Cash Express stores throughout the US – a network that continues to grow. Throughout the company’s three-plus year history, this service has allowed primarily large merchants with internal IT teams to integrate with its platform and accept cash from their customers, wherever in the country they were located.

Today, the company is rolling out PayNearMe Express, a self-service solution that extends the platform to an entirely new category of merchant. Now, small property managers, collections agencies, educational institutions, and the like can quickly and easily leverage the platform without the need for expensive IT resources. In addition to the new platform rollout, PayNearMe is announcing $10 million in Series D funding led by August Capital, with participation from existing investors Khosla Ventures, Maveron, and True Ventures. The round brings the company’s total financing to $32.3 million.

Mountain View-based PayNearMe is valuable to more than just the underbanked. The service also makes sense for teens, and also many adults who, for whatever reason – privacy, credit limits, personal preference – prefer cash to debit or credit. In total, these three constituencies represent more than 100 million US households, according to PayNearMe CEO Danny Shader.

For any business that does not have a physical location everywhere its customers are, or is uncomfortable accepting cash, PayNearMe and PayNearMe Express are the most convenient and economical option available. The only real competition are Western Union, MoneyGram, and cashier’s checks, all of which are expensive and inconvenient. Most of PayNearMe’s payment locations are open 24 hours per day, and the payment network takes all the security risk, while guaranteeing against fraud, chargebacks, or non-sufficient funds.

“We have never [before] accepted cash payments from our tenants because of the security risks and handling issues involved, and cashier’s checks and money orders are a big hassle for our renters,” says Bob Abbott, owner of Charlotte-based Alarca Realty and a PayNearMe Express customer.

PayNearMe Express requires that merchants pay a one-time $199 setup fee, and consumers pay a fixed fee or $3.99 per transaction fee. As a result, the new service is slightly less flexible than the Pro version, and likely only makes sense for transactions of approximately $100 or more. Eventually, merchants will have the option to waive this consumer transaction fee, but not in version one, and dynamic pricing may be rolled out in the future, according to the CEO.

From the merchant perspective, the main difference with the Express product is the ease of setup. Merchants simply enter and verify their business and bank account information, and then enter the personal identification information and payment amount for each consumer. What previously took up several days to integrate with a lender’s IT and payments system now takes an hour or less.

Consumers can process payments in multiple ways. First, they can receive a PayNearMe invoice by email or MMS. This can be printed out, or scanned directly from their smartphone. (Interestingly, the un- and underbanked are disproportionately more likely to have a smartphone than the population at large, according to statistics cited by the company.)

Alternatively, non-smartphone owners can receive an SMS from the company, and pick up a blank, one-time-use payment card at a PayNearMe location. By replying to the text with the code on the back of the card, the payment card becomes activated as their personal identifier for the payment. Transactions take less than 30 seconds to complete, as compared to Western Union, which can take 15 minutes plus and costs more than 10 percent of the transaction amount.

“PayNearMe Express really opens up the pace at which the company can address the cash needs of purchasers,” says August’s Hornik, an early investor in and board member of  PayNearMe. “The market was addressable before, but this just changes the speed at which they can do so.”

The company’s latest funding round will be used to continue expanding the platform and to attract new customers to both pro and self-serve products. The company has existing accounts with Greyhound, Tupperware, AppFolio, several local utility providers, and many other merchants. With PayNearMe Express, the pool of potential businesses has grown exponentially.

In 2012, PayNearMe saw 325 percent year-over-year transaction growth. The company is not yet cash-flow positive, according to its investors, but that’s merely a reflection that it’s investing out ahead of growth. August’s Hornik says that the company is in discussion with several massive customers that, if onboarded, would likely drive massive transaction volume and push the company into profitability.

PayNearMe is the category leader, but the war is far from over. Several payments giants are busy duking it out for credit card processing supremacy, but they may not ignore cash forever. If and when PayPal, Braintree, Stripe, and Square do target this sector, they now have PayNearMe’s playbook from which to do so. It won’t be easy, but competition is likely inevitable.

“There’s still an opportunity for others to go after it, but it would be a giant logistical challenge,” says Hornik. “Real technology is needed to create a platform to integrate the cash endpoints with any given datapoint. The most difficult piece of the puzzle is, “How do you translate cash dollars into digits?” All of this must be addressed before tackle the massive head start and network effects that PayNearMe have built.

“Well designed technology has always done a good job of removing complexity and burdens,” says Hornik. “This company is led by mature, experienced, thoughtful entrepreneurs. They’ve figured this problem out.”