PayNearMe Unveils Mobile Payment Network, Collects $16 Million

11/16/10Follow @wroush

There’s an industry term for the one-quarter of American households where, through choice or necessity, members don’t have bank accounts or credit or debit cards: the “unbanked.” But just because these consumers don’t have formal relationships with financial institutions doesn’t mean they don’t pay a lot for financial services. Every time they cash a payday check or wire money to pay a utility bill, they have to shell out for fees—often exorbitant ones.

This naturally deters them from paying as promptly as they might otherwise. They also have a harder time buying things online, where credit cards rule. So creating easier, cheaper ways for the unbanked to buy things and pay their bills using cash ought to be a win-win: it helps consumers get what they need, and helps merchants and other payees collect their money.

That’s the idea behind PayNearMe. In September, the Mountain View, CA, startup launched a system designed to open up all kinds of remote transactions—online payments, money transfers, and loan and utility payments, for example—to the unbanked. Until today, that system relied on barcode-bearing paper slips that could be printed on home computers after an online transaction. Consumers took the slips to the nearest 7-Eleven store, where cashiers scanned them and collected the cash.

Today PayNearMe announced that it’s simplified its system to let users sidestep the paper slip, instead using their mobile phones and a series of text messages or phone calls to associate a cash payment with a given purchase. (Keep reading for the technical details.) “It turns out lots of people don’t have access to a printer, but they all have mobile phones,” says Danny Shader, CEO of PayNearMe, which was formerly known as Kwedit. “What we are announcing is a new way of doing business.”

PayNearMe also said today that it has collected a new round of venture financing—$16 million, from a group including Khosla Ventures, August Capital, and existing investors True Ventures and Maveron. It’s the company’s third and largest venture round—the A and B rounds totaled $6.3 million, of which it had spent less than half. “We have a very significant balance now with which to pursue our business,” says Shader, who formerly led mobile messaging company Good Technology, which was acquired by Motorola in 2006.

PayNearMe’s new system works like this: A customer completes a transaction by phone or online; let’s say she’s buying DVDs from Amazon (a PayNearMe user). She gives her mobile phone number to Amazon, which uses PayNearMe’s backend infrastructure to “stage” the payment in advance—that is, to line up all the instructions about what should happen when she finally hands over the cash. The customer goes to any of 6,000 7-Eleven stores in the United States and obtains a free PayNearMe card bearing a unique ID number. She sends a text message containing the number to PayNearMe, which binds the card to her particular transaction. She then hands the card to a 7-Eleven sales clerk, who scans it and collects the cash. PayNearMe notifies Amazon that the payment was made, and shuttles the funds electronically from Dallas, TX-based 7-Eleven to Amazon within a few days.

It may sound complicated, but “it’s incredibly simple once you use it,” says Shader. “It’s just the complete opposite of what everyone has done before” in the cash economy, namely, buying stored-value cards or gift cards, wiring money via a service like Western Union or MoneyGram, or loading cash onto prepaid debit cards like those provided by Green Dot. PayNearMe’s cards have no value—they’re just tokens identifying each transaction and therefore bridging the gap between an online merchant’s transaction system and 7-Eleven’s point-of-sale system. Staging the whole transaction behind the scenes saves the consumer the hassle, paperwork, and fees associated with wiring money the old-fashioned way.

PayNearMe makes money by collecting a commission on each transaction from the payee, plus small convenience fees on certain types of transactions such as loan payments. In addition to Amazon, cash payments through PayNearMe are accepted by Facebook (where members can use them to buy credits for game play and other services) and a range of payment “gateways” such as PaymentVision and Money to Go.

While there’s a huge amount of complex technology under the hood at PayNearMe—such as a transaction system built to interact with all kinds of merchant backends and interfaces, while at the same time monitoring for fraud and keeping track of every penny exchanged—building it wasn’t actually the startup’s biggest coup, Shader says. That was getting 7-Eleven on board.

“The hardest thing was going to 7-Eleven and its 6,000 stores and convincing them that they should tie their IT system to ours,” says Shader. “That is an achievement for a startup, but it also reflects the fact that 7-Eleven is very forward-looking and looks at us as an innovation partner. We are very close to these guys—I talk to my counterpart at 7-Eleven more than I talk to my wife, to her chagrin.”

Ultimately, Shader sees PayNearMe and similar payment networks as a way to open up commerce to a larger cross-section of consumers, without hidden fees, and without the unused balances that are another expense of using stored-value cards. “The reality is that a quarter of the country does not have credit or debit cards, and these people are getting ripped off,” Shader says. “Why is the least affluent part of the population getting charged the most outrageous fees? That is not good, and technology can reduce the cost.” The size of the Series C round announced today, he says, “reflects the confidence the investors have in the market and the technology.”

Wade Roush is Chief Correspondent and Editor At Large at Xconomy. You can subscribe to his Google Group or e-mail him at wroush@xconomy.com. Follow @wroush

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