Cash Only

Entrepreneurs and VCs are falling all over themselves to grab a piece of the next-gen payments ecosystem. But while much of Silicon Valley laments over the future of digital wallets, virtual currencies, and other futuristic payments technologies, roughly 25 percent of Americans are either unbanked or underbanked. That’s between 60 and 100 million people who need to, or prefer to, pay with cash, and thus are completely missed by most payment platforms. As more business and services move online, what was once a simple inconvenience has more recently become a major obstacle to consumers and merchants alike.

PayNearMe has spent the last four-plus years aiming to solve this problem. The company has built an electronic cash transaction network that makes it possible for merchants like landlords, utilities, transportation companies, and lenders to accept cash payments from remote consumers. For consumers, the company provides a nationwide network of neighborhood retail locations that are open 24/7 and setup to accept these cash payments in under 60 seconds and for a nominal fee.

Today PayNearMe made a barrage of announcements that collectively suggest it’s closer than ever to its goal of removing the barriers confronting those without checking accounts and credit cards. First, the growth-stage startup has raised $20 million in a Series E funding round led by GSV Capital, with participation from existing investors August Capital, Khosla Ventures, Maveron, and True Ventures. The new funding comes as the company announced that it more than tripled payment volumes in 2013.

“It’s easy to lose sight of the real world where 60 to 100 million Americans live primarily using cash – that’s a population larger than the UK,” GSV Capital chairman and CEO Michael Moe says. “It’s shocking on one hand, but as you work through it you understand. Most people just assume that everyone has a credit card and a bank account but that’s just not true.”

PayNearMe also announced a new partnership with the Family Dollar discount chain that will increase its nationwide footprint by more than 80 percent to over 17,000 total payment locations. The company already has existing relationships with the more than 9,000 7-Eleven and ACE Cash Express stores across the US.

“It would be hard to overstate how big of a deal this is for us,” PayNearMe CEO Danny Shader says. “We’ve had a reasonably good footprint in the past, but this gives us the best brick and mortar payment footprint around – not the biggest, but the best. Between 7-Eleven and Family Dollar, we’re in almost every community in America.”

Shader adds that there are more Family Dollar stores than there are 7-Elevens, and they often are in places that 7-Elevens aren’t. For example, there are no 7-Elevens in Atlanta. More importantly to PayNearMe’s merchant partners, these retailers are well known and trustworthy. By contrast, many of Western Union and MoneyGram’s payment locations are off-brand bodegas and corner stores, Shader says – not exactly the type of place companies like Greyhound, Tupperware, FIS, Infosend, and Ford Motor Credit want to direct customers with a wad of cash.

“Our priority is to level the playing field,” Shader says. “The unbanked currently has jump through hoops that they shouldn’t have to.”

Consumers can interface with PayNearMe in a variety of ways. They have the option of receiving invoices by email or MMS, and then printing these out or scanning them in-store directly from a smartphone. (Surprisingly, the underbanked are even more likely to have a smartphone that the general population). Those with feature phones can receive invoices by SMS and pick up a one-time payment card at any of the company’s payment locations.

For merchants, PayNearMe offers a low-risk and simple way of accepting cash payments and avoiding the hassle and expense of money orders. Payment location owners like 7-Eleven franchisees and the Family Dollar chain benefit as well through an influx of incremental business.

“Our proposition to a retailer is pretty compelling,” Shader says. “We say, ‘On our nickel, we’re gonna go sign up major national brands and then on their nickel, they’re going to drive customers to your stores to make payments. They’ll probably buy something while they’re there.’ That’s pretty hard to turn down and the implementation cost is diminimous.”

PayNearMe has identified more than $200 billion worth of cash transactions made each year within its target sectors of rent, municipal government payments, lending, and transportation. Shader has no doubt that there’s even more of these payments that are going unrecorded. Add in the newly passed Affordable Care Act (aka Obamacare), which will require many underbanked Americans to pay monthly premiums, and the size of this market could well explode.

The company also has visions of giving this segment of the population access to ecommerce and TV direct sales markets that it currently is forced to ignore. Finally, there’s international. Shader is hesitant to look beyond the US which is a massive market that it’s barely begun to capture. But he admits that PayNearMe is in preliminary discussions around licensing its technology abroad. All told, the company is in a sizeable market with plenty of room to grow.

Early on, PayNearMe’s biggest challenge was to onboard large enterprise merchants and to build out its nationwide network of physical payment locations. Much of that work is now done, or on autopilot.

“Now that the network’s built – they have a huge footprint and just tripled volume – they’ve already accomplished the hardest parts,” Moe , the company’s newest investor, says. “We’re coming in at a point when a lot of the business have been de-risked. The network effects are a huge driver of growth and an equally real deterrent to competition.”

PayNearMe has had a strong two year run. It’s grown transaction volume by more than 975 percent over that period and nearly doubled its footprint. But that doesn’t mean it’s out of the woods.

The biggest risk that remains is trust. “When you deal with cash, you need to be above reproach – it only takes one bad event for trust to come crumbling down,” Moe says. Shader and his team have built a backend payments platform aimed at minimizing these risks, but there’s only so much the company can do. The company handles things things like compliance, fraud-mitigation, chargebacks, and non-sufficient funds incidences on behalf of its merchants. But cash has a way of drawing attention and there are endless numbers of way an individual transaction could go bad.

The good news is that for now PayNearMe faces almost no competition. While Western Union and MoneyGram help consumers send cash, their businesses are almost exclusively focused on the peer-to-peer and remittance markets. They have shown no interest (or ability) to build a business-staged, business-to-consumer cash payment network. On the other end of the payments spectrum, companies like PayPal (and its recently acquired subsidiary Braintree), Stripe, and Square, are trying to disrupt the credit card processing market. Given the size of that market and the fierce competition, it’s unlikely that any of these Payments 2.0 competitors has the intention or the resources to tackle the cash market. Even if they did, they’d be years behind.

Payments is a notoriously difficult category fraught with regulation, fraud risk, and brutal competition. While many smart people have focused on the fat 75 percent of the market with which we’re all familiar, Shader and PayNearMe have found a massive and underserved market hiding in the shadows. They’ve barely scratched the surface, but with every year that passes, it seems like the barriers to the underbanked grow a bit smaller.

[Image via tattoodesigns24]

    1. Adam D'Augelli
      Past Investor
    2. David Hornik
      Past Investor
    3. Vinod Khosla
      Past Investor