E-Commerce: Where Cash Isn’t King—But Could Be a Prince

Historically, the payments industry has ignored the fact that not everyone who shops online has a credit or debit card. With a handful of startups providing cash processing for online transactions, that’s no longer the case.

By Karen Epper Hoffman

No matter how much credit and debit cards have come to dominate the payment landscape, there remains a segment of consumers that likes to, or has to, pay with cash. Even online.

Enter the cash-payment services. In recent years, services that allow consumers to buy goods online and pay with cash, usually at a nearby store or kiosk, have been emerging as a new way to pay for people that for one reason or another aren’t packing plastic.

Several companies operate in this new space, but perhaps the most popular and well-established one is Mountain View, Calif.-based PayNearMe Inc.

Launched only in late 2010, PayNearMe’s payment system allows consumers to pay cash for online goods or gaming credits through its real-time connection to terminals at more than 6,400 7-Eleven Inc. convenience stores in the United States. PayNearMe’s merchant acceptors include Amazon.com, OffGamers Alliance, and BigPoint.

When consumers want to make a payment online and click the PayNearMe option, they generate a receipt with a bar code and transaction code linked to a record in the company’s system.

The customer then prints out and takes the bar code, which includes instructions for the clerk, to the nearest 7-Eleven store, where it’s scanned. The consumer hands over the cash for his goods, and receives a receipt.

Funds are settled via the automated clearing house network in such a transaction, which PayNearMe chief executive Danny Shader previously, and aptly, described to Digital Transactions News as, “the world’s longest credit card authorization or shortest layaway.”

‘They’re Wrong’

According to Shader, his service offers a solution to the “limitations” that plague other prepaid or cash-based options available to consumers. Most important, he says, PayNearMe offers a return option to the merchant and the ability to vary pricing in a way that can give both the merchant and the customer more control over the transaction.

While Shader won’t divulge fees, the PayNearMe Web site’s Frequently Asked Questions section says merchants are charged “a discount rate that is comparable to interchange, with the added benefit of no chargeback risk.” As PayNearMe’s partner, 7-Eleven takes an undisclosed cut on the transactions.

Merchants can choose whether to charge fees for the service back to the consumer or make it free, and can communicate marketing messages or convey information on the receipt at the time of payment.

While prepaid cards may appeal to brick-and-mortar shoppers who are eschewing credit cards, Shader says that his company has found a sizable market of “people we’re intercepting online” who need another pay-before mechanism.

“Everybody assumes consumers with cash are not shopping online,” Shader says. “They’re wrong.”

PayNearMe recently got some competition with the entry of ZipZap Inc., which launched in January with a venture-capital investment led by Blumberg Capital with participation from TriplePoint Capital and Fashionmall.com founder, Ben Narasin.

ZipZap’s CashPay service works essentially the same way as PayNearMe: A customer selects the CashPay option and receives an auto-generated payment slip with details on the closest offline place to pay, where she can go and make a cash payment to complete the transaction.

“As an alternative-payments provider ZipZap is redefining the payment experience for cash-preferred consumers and enabling merchants to monetize a largely under-served consumer segment,” said Alan Safahi, founder and chief executive of ZipZap, said in a January prepared release on the company’s launch.

The San Francisco startup, however, aims to stand apart by going after the global market, targeting consumers and partners outside of, as well as within, the United States. ZipZap debuted with a network of 700,000 payment locations through deals with a number of retailers, including CVS and Wal-Mart stores as well as banks, post offices, and grocery chains. Only 10% of the locations are in the States.

Recent Boom

Like its rivals, ZipZap charges an undisclosed transaction fee, which merchants can pass along to the consumer or absorb themselves, according to the company’s chief marketing officer, Scott Holt.

Another point in common is an early focus on one particularly appealing market: online games. Fast on the heels of its launch, ZipZap announced a partnership with Xsolla, a Los Angeles-based company that offers payment services to worldwide gaming publishers. The publishers typically appeal to a market of consumers—often tweens or teens—who might not have access to forms of payment other than cash.

Such also is the case with San Francisco-based Rixty Inc., which, since being founded in September 2007, has focused almost entirely on offering the cash-payment option to people who play online games.

The company partnered with Coinstar Inc. in March 2009 so that users could make their payments at any of Coinstar’s 15,000 U.S. coin-counting kiosks, about one-third of which are located at Wal-Mart stores, according to Rixty chief executive Ted Sorom.

The system has appeal not only because of the strong correlation between (often young) unbanked consumers and gamers, but because the users are able to easily trade in loose change for game play, typically without paying a fee, says Sorom.

More recently, Rixty has added account-reload services through Green Dot Corp. and its own prepaid card sold through chains like Kroger, Kmart, Safeway, and Toys “R” Us.

Despite declaring their companies successful, executives at all of the cash-payment services Digital Transactions interviewed refused to share data about the number of users or transaction volumes. They do say that business, especially in recent months, has been booming.

At Rixty, despite its focus on the youth-oriented gaming market, Sorom says 70% of users are adults and “the older they are, the more they spend.” The average user spends $60 per month, and Rixty saw 40% month-over-month increases in transaction volume in the last couple of months of 2011.

Shader claims that PayNearMe saw double-digit compound growth in its transaction volume for most of 2011, topped by a 100% jump between November and December. Aside from the fact that roughly one-quarter of adult Americans lack a credit or debit card, the weak economy is forcing some people with plastic to reach for cash rather than risk overdrawing their accounts, Shader says.

Nonetheless, proponents say opportunities abound among the portion of the market that still wants to pay—or must pay—for its online goods with folding money. Rick Oglesby, senior analyst for Boston-based research firm Aite Group LLC, agrees that there’s a sizable market of unbanked and under-banked consumers worth targeting, around 56 million in the United States alone. But he adds gaining adoption for online cash payments is a significant challenge.

“How many of those unbanked adults or teens are transacting online today? And how many of those are even aware of these solutions?” Oglesby asks.

In addition, Oglesby questions how eagerly consumers will embrace online cash payment, given that they have to leave the house and find a location to complete a transaction.

“The experience overall, having to move from online to offline, it takes away from the value of purchasing online,” he says. “A lot of the ease and convenience is eliminated.”

At least one seemingly promising online cash-payment provider, PaidByCash, may have already stumbled over this and other issues. The service, launched about five years ago and owned by Retail Expansion Network Inc., Oakland, Calif., reportedly has gone out of business.

PaidByCash allowed consumers to make cash payments online by giving them a 14-digit code for a virtual prepaid MasterCard account, which they could use to make payment at locations of The Western Union Co. Right out of the gate, the service signed up premier online entities like Second Life and drugstore.com.

Shader, who says a principal for the company offered to sell to PayNearMe the PaidByCash domain name before the company failed, says it suffered from “the same problem” as some other would-be online cash-payment schemes, that being “putting another layer on top of the same clunky retail network” rather than creating a new system.

(PaidByCash’s Web site was still live as of mid-February, though the site for Retail Expansion Network was simply blank; Digital Transactions’ attempts to reach Retail Expansion Network executives were unsuccessful.)

Attractive Segments

Companies that want to survive and thrive in the cash-payment online business are increasingly trying to build not only a better mousetrap, but also one that’s more accessible, farther reaching, and ever-more targeted on businesses where cash payment could be a boon. Case in point: PayNearMe is finding great success with bus company Greyhound and its online site.

“Greyhound sells hundreds of millions of dollars in bus tickets in cash every year,” Shader says.

PayNearMe’s service offers a new option to riders who can find bus schedules and routes online, but cannot pay with cash or ensure a seat unless they go down to the bus terminal, he adds. But now, Greyhound has 6,500 new ticket terminals, courtesy of PayNearMe and 7-Eleven. Shader says they have offered the cash-payment service for Greyhound nationwide since November after testing that began last May in Dallas.

“And we’ve been crushing everyone’s expectations for the service … it’s an unabashed home run,” he says.

As a result, PayNearMe is talking to other transportation and online travel sites about cash payments. The company also is finding good fortune working with property-management firms by giving renters an option to pay for their utilities or rents in cash (see illustration).

“Basically, there’s no transaction type we can’t execute this way,” Shader says.

ZipZap, meanwhile, is looking outside the U.S. The bulk of the global cash-transaction network’s physical payment locations (and presumably its business) is focused on Brazil, Russia, and the now-independent former Soviet republics known as the Commonwealth of Independent States (CIS).

Holt says the company’s service is built on the premise that online shoppers might like to make purchases from sites based in other countries—such is the Internet’s global economy.

“A Russian gamer might want to buy gaming credit from a company in the United States,” he says.

Digital goods such as gaming credits or media downloads like e-books or songs represent a potentially huge market because there is no need for physical infrastructure to deliver them.

And focusing outside the U.S could give ZipZap, and other cash-payment providers, access to a broader audience of consumers who already prefer to pay with cash in general.

“The United States is not as much of a cash-based economy as Brazil or the CIS,” Holt says. “We see this option as more successful outside the U.S. than in it.”

As a result, ZipZap plans to roll out service in the near future in other cash-dependent areas of the globe, including many countries in Latin America and parts of Asia and the Middle East, by working with prominent money transmitters or payment-service companies in those countries.

Sorom and Shader would seemingly agree.

Rixty is already working with several gaming companies in Korea, and is partnering with “like-minded international cash-payment networks” like Ukash and Skrill-Moneybookers, according to Sorom. The company also has “firm plans” to introduce new products in Brazil later this year, he says.

And as more content and digital downloading moves to mobile channels such as tablet computers, Sorom predicts that more and more consumers will be itching to buy these low-cost goods online with cash.

Shader at PayNearMe believes new methods for conducting cash transactions—rendering barcodes on mobile devices, for example—will emerge as the market grows here and especially abroad.

“I suspect the opportunities outside the United States will dwarf the opportunities in the United States,” he says.