Even with quick innovation, cash is still necessary
Given Silicon Valley’s focus on scalability, it raises the question, why bother accommodating cash?
The answer, quite simply, is that through solving for cash transactions early, new applications can gain the critical mass necessary to turn a first-mover advantage into an entrenched position. A country such as Mexico, for example, has always favored cash transactions. So, to overlook cash transactions is to effectively eliminate a fifth of the addressable market — or potentially a far larger slice since many gig economy companies cannot currently accept cash, limiting the proportion of cash transactions in the larger e-commerce payments mix. Across Latin America, to overlook cash generally means skipping 10% to 25% of all consumers in a given country.
Typical electronic transactions are considered “pull” payments, in which the vendor initiates the transaction and their banking institution “pulls” the money out of the customer’s account and channels payments to the appropriate counterparties. These transactions tend to be pretty cut and dried.
In underbanked markets, where it’s far more likely that neither the vendor nor customer have bank accounts or credit cards, vendors have to rely on “push” payment options, which are initiated by the consumer. It requires additional considerations on the part of the P2P platform, but depending on the specific market, customers will be well accustomed to the necessary accommodations. Prepaid cash cards tend to be popular in many cash-oriented geographies, whereas other markets may favor direct alternative payment methods (APMs) in which customers secure vouchers at physical locations or kiosks to complete transactions within a given period of time.
In Argentina, for instance, “extra-banking” retailers such as Pago Facil and Rapipago operate more than 11,000 locations, where consumers can pay for everything from their cable and gas bills to taxes, internet purchases or prepaid consumption vouchers, all using cash. In Mexico, Oxxo’s reach is even larger, with over 18,000 storefronts. And in Brazil, the central bank’s Boleto bancário cash-payment method, allows users to pay in any bank branch or in several different retail outlets across the country, covering approximately 200,000 locations.
For new entrants in any geography, though, it’s critical to offer the full breadth of preferred payment options, be it local or international credit cards, debit cards or bank transfers, e-wallets, or any other widely used alternatives. And while cash transactions are shrinking in the U.S. and other markets, it remains king for consumers in emerging markets.
Moreover, consider who, exactly, the ride-sharing platforms — to name one example — aim to disrupt. The unaffiliated, technology-wanting incumbent taxis, traditionally only service cash payors. When Uber entered the Brazilian market, it built a cash option directly into its driver app, allowing the merchant to collect fares in cash and then pay the commissions through the app using their own preferred payment options. It solved pain points for both consumers and drivers, but more important, it gave the brand an advantage over the incumbents.
The gig and sharing economies are only expected to grow from here. In fact, the McKinsey Global Institute forecast that by 2025, the gig economy could add as much as $2.7 trillion to global GDP. This should provide incentive enough for P2P platforms to capture as much market share as possible, as quickly as possible. But while a Minimum Viable Product (MVP) approach may work when expanding across North America or Western Europe, minimally viable solutions in emerging markets may do more harm than good. Any new app, if they’re premised on a frictionless experience, will fail to convert users if it can’t accommodate payment preferences, and in emerging markets, that means a cash workaround that works for merchants and consumers alike.