Last Cash Markets - 5 Burning Questions on Last Cash Markets: Derek Pilling

5 Burning Questions on Last Cash Markets: Derek Pilling

PYMNTS.com put Derek Pilling, a venture capitalist and Managing Director at Mertitage Funds, in the Briefing Room Hot Seat to answer five burning questions on last cash markets.

Derek weighs in on the changing consumer payment options in the existing taxi cab market, the mysterious chicken vs. the egg, which cash-based market will be the last to convert, and more.

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.

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.

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.

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.

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.

Derek Pilling is a Managing Director at Meritage Funds, a Denver-based venture capital firm. Mr. Pilling describes his investment thesis as "all about platforms and services." As a result, Mr. Pilling focuses his investment activity on opportunities in mobile/wireless, financial services and Internet infrastructure. Mr. Pilling represents Meritage Funds on the Boards of Directors of IP Commerce and Crisp Wireless. You can learn more about Mr. Pilling on his blog, Non-Linear VC, and follow him on Twitter (@dpilling).

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Comments

Having said that, the use of cash in the US peaked aroudn 2004, while that of checks peaked in 2002. While the value proposition of cash is strong for consumers and merchants, the real reason why te change is so gradual is sociological: different generations perceive money differently. Give a GenY a choice between cash and plastic, more often than not she will pick plastic

Posted by Patrick Gauthier, 01/03/2010 1:00pm (2 years ago)
Beware of incumbents. It was a key lesson for all the e-purse trials of the mid ‘90s. (Visa Cash, Mondex, Danmont, Proton, Chipper, Chip Knip, Avant, Gledekarte, etc.).

To succeed, any cash replacement payment product must be faster, easier, more convenient and cheaper than cash. While cash does have its drawbacks and costs, it is difficult for any new electronic payment mechanism to beat cash on all of these dimensions.

This is particularly true when you consider two key points:
 ubiquitous acceptance is a key convenience factor. Any new payment product will struggle to gain this level of acceptance.
 low value payments are the last bastion of cash only acceptance. Even if you were to replace all of the costs of cash handling in these environments, it is not enough to build and sustain a new electronic payment mechanism.

There are certainly other key factors to consider when building a cash replacement product and business model. However, if these two can not be addressed, there is no need to continue the exercise.

Posted by Joe Chouinard, 17/12/2009 1:28pm (2 years ago)
Agree that this is a very complicated topic. As long as the "competition" between players is suspect and therefore costs stay artificially high, the floodgates will be held back. If I compare the last 10-15 years in the brokerage industry with the "interchange" based credit card industry, I see a stark contrast. It used to cost me $250 to buy or sell a couple hundred shares of stock, now that is $9 or so. In that same time, Interchange has gone up every year while the marginal cost to process a transaction has sunk dramatically. What is wrong with this picture?

Posted by Steve Klebe, 16/12/2009 1:50pm (2 years ago)
Agree that this is a very complicated topic. As long as the "competition" between players is suspect and therefore costs stay artificially high, the floodgates will be held back. If I compare the last 10-15 years in the brokerage industry with the "interchange" based credit card industry, I see a stark contrast. It used to cost me $250 to buy or sell a couple hundred shares of stock, now that is $9 or so. In that same time, Interchange has gone up every year while the marginal cost to process a transaction has sunk dramatically. What is wrong with this picture?

Posted by Steve Klebe, 16/12/2009 1:50pm (2 years ago)
I have been in the payments business for 40 years now. There is now a huge push to offer products and services (gasoline is one of them) at a lower cost for cash than for credit. Every gasoline station in my neighborhood offers a better deal for cash than using a card. The seemingly everlasting 'Visa rule' that forces retailers to charge credit fees even on cash purchases is fading fast in this economy. When I can get gas for $.12 to $.18 less per gallon, why pay more for plastic? Sure it's easier, if you don't care about saving money. This trend will continue to grow. And so, in my opinion, will the use of cash.

Posted by lou krouse, 16/12/2009 12:32pm (2 years ago)
With SizzleMoney we offer an option to cash that provides advantages to both merchants and customers. Safe, convenient and low cost mobile money account from Denarii Payments,Inc. Norcross, Georgia.

Posted by Donald Baggett, 16/12/2009 8:48am (2 years ago)