I’ve been spending a bunch of time recently thinking about last cash markets – markets that are still dominated by cash payment – and how electronic payment can penetrate these markets. Some of these markets (vending, taxis, paid parking) are huge (measured in billions). The lack of connectivity with the point of acceptance is a huge issue for some of these verticals; low cost “back-channel” the point of acceptance is an absolute requirement for electronic payment to crack some of these markets.
I was grateful when my friends at PYMNTS.com put me on the hot seat with five questions about the topic. You can find their full Briefing Room on last cash markets here. My answers appear below. I’m interested in your thoughts.
1. Smaller ticket sizes, among other factors, in the taxi and vending industries have resulted in their being the last cash markets in the U.S. What barriers still exist on both the consumer and merchant sides to continue to migrate these markets to electronic-based payments?
In order to understand why cash markets still exist, I really think you have to think about cash is an incumbent competitor to electronic payment. Like any competitor, you have to evaluate the value proposition relative to the competition. For the merchant, cash is fast, reliable and low cost (although not costless) to accept. For the consumer, it is accepted ubiquitously, and requires no trust of an institution. When framed this way, it becomes clear that just how fierce of a competitor cash is.
The value proposition differs by vertical market; each with different needs. In some verticals, like the taxi and vending verticals, near-zero cost and near-immediate acceptance are absolute requirements. For electronic payment to crack these verticals, the cost of acceptance for the merchant must drop below the cost of accepting cash and the immediacy of collection must match the near-instantaneous immediacy of accepting cash.
2. Consumers have more payment options than ever at their fingertips. Why are consumers still loyal to cash?
For some consumers, particularly the credit challenged and the unbanked, cash will remain king. Some don’t have access to the classes of services that would enable them to pay electronically. Some choose not to access electronic payment services because of skepticism of the institutions that facilitate electronic payment. Whether by lack of access or choice, fundamentally this class of consumers has no other way to pay.
3. Payments is all about cracking the chicken and egg problems of changing consumer behavior and changing merchant behavior. From your perspective, what side of the chicken and egg debate is the hardest to solve for?
I’m a big believer that the chicken and egg “choice” is a false choice. Said differently, any solution that wants to displace cash must have a simultaneous value proposition for the consumer and the merchant. If the value proposition is weak on either side of the market, the solution will not take hold, no matter the strength of the value proposition on the other side.
Cracking these markets is about solving a problem for both sides of the market simultaneously and getting them to adopt the solution in lock-step.
4. Pundits have been telling us that the cashless society is right around the corner for the last fifty years. What’s taking so long?
In verticals where the point of acceptance is highly distributed, the availability and cost of connectivity required to facilitate electronic payment is a huge hurdle. For example, I think about every parking meter in the world as a point of acceptance. The up-front and recurring cost to network every one of those points of acceptance makes the economics of accepting electronic payment infeasible. Taxi’s and vending machines suffer from the same “lack of connectivity”. The more distributed the point of acceptance and the lower the collections per point of acceptance, the bigger the barrier to adoption.
Only now are solutions becoming available that leverage “nearly-ubiquitous” connectivity; the mobile phone. The mobile phone provides an already in place back-channel that costs the merchant nothing, because the connectivity is already in place and is paid for by the consumer.
5. What cash-based sector will be the last to convert from cash – why and when?
Without delving into illegitimate or illegal business activities that will always be dominated by cash, the sectors that will be last are those with the most fragmented and infrequent point of acceptance. In addition to taxis and vending, I’d add paid parking, charity events and even panhandling. In these verticals, it is just unrealistic to think that electronic payment can ever fully displace cash. Cash is too strong a competitor to be easily or fully displaced.