Making Markets in Overlooked Places
By: Jonathan Grady
Tags: Urban, Public Policy, Internet, Market, Digital Payment

Offering internet to densely populated and underserved neighborhoods

Photo by Renate Vanaga on Unsplash

Being Profitable While Doing Social Good

Recently, I had the pleasure of being part of a team of MBA students that participated in a case competition sponsored by Mastercard at NYU Stern which focused on the payment provider industry. The task was to think of ways to drive further participation in the financial ecosystem for underserved businesses. We were able to create a sketch of a pilot program which, if enacted, would potentially create new markets and grow the economies in disadvantaged and financially underserved communities. The answer we arrived at was to open internet hotspots for marketplaces, street fairs and block parties (in effect, designated popup internet availability) in densely populated underserved neighborhoods.

By having internet usage freely available in places of neighborhood commerce, payment provider companies can incentivize people to use different digital payment systems, create opportunities for economic growth since people have a way to transact by means of digital payment platforms, as well as develop additional insight from data collected as to the creditworthiness to traditionally cash based businesses, thus opening the opportunity for loans and access to capital for otherwise underserved businesses and communities. There also appears a unique fit for other payment provider companies, namely Square. Square offers an innovative P2P and business cash transfer app, Cash App. Fast growing Cash App has grown to over 30 Million users since its launch in 2017, making it a very important part of Square’s business. Cash App would appeal to underserved communities since these communities, per Mastercard, tend to rely more on cash-based transactions.

This is an interesting approach for both smart business and public policy. If we think about internet access in market terms, we are proposing creating a seamless platform which supplements doing business on top of existing markets. The proposal is for internet access in densely populated urban areas that lack home internet access because there is actual need for readily available internet. It is a targeted effect that offers the best bang for the buck and is much more economical compared to other internet proposals. Citing Brookings, there have been multiple studies observing a link between economic growth and internet access. The net effect is increased business and customer acquisition for the payment provider and economic growth for the community allowing a higher volume of business being done. It’s a way to promote a public-private partnership that could benefit disadvantaged communities and its residents.

The Problem: Savage Inequalities for Internet Access

According to research by NYU Stern Professor Robert Seamans, there is a stark divide between the haves and have nots when it comes to access to the internet at home. If you look at the bottom quintile of household income, roughly half of these homes have internet at home, compared to near complete internet home adoption in the upper quintiles. The data become acute when you look at the issue from a view toward city geography. There is substantial intra-city variation in internet adoption with respect to overlapping variables of race and economic status. As you can see in the graph, internet adoption is much worse off in disadvantaged areas of major cities compared to more well-off areas.

Observe the stark contrast between wealth and internet adoption in Washington, D.C. There are large parts of the city with wealth and these parts have substantial internet adoption. However, Southeast Washington D.C. is not wealthy and has poor levels of access to home internet. The neighborhood has a significant amount of crime and people who live there feel they do not receive the same services as other parts of the city. A policy intervention to make internet access available to facilitate digital payments would allow people to feel comfortable while doing business without carrying cash, potentially helping with the current crime issue. It would also help revive the local economy by a higher volume of business and number of transactions.

The overall trend is a wide dispersion between wealth and home internet access. According to Professor Seamans, the situation has not improved much since 2013.

Poor households are, more often than not, using cash over electronic payments. Citing Pew Research, there is ~80% US adult smartphone adoption, so the digital infrastructure is already in place. Per Professor Seamans, the issue we now confront is internet access to digital platforms. There is a substantial number of people who lack internet access and would benefit from accessing digital payments in dense urban areas. We concluded if a payment provider was interested in increasing financial inclusion of businesses for disadvantaged and densely populated neighborhoods, targeted internet availability becomes critical in order to promote adoption of digital financial products and further include these businesses and communities into the greater financial ecosystem. From our research of different efforts, a program like this does not exist within the payment provider industry portfolio.

The Idea and Value Proposition

The idea was by enabling hotspot internet connectivity at neighborhood markets, street fairs and block parties in disadvantaged urban neighborhoods that otherwise lack internet adoption due to a lack of affordability, we can empower small businesses and communities and promote financial inclusion.

The different elements of the value proposition include enabling community growth by creating outdoor hotspots in dense marketplaces to do business promoting a digital economy in communities that lack it. The ability to transact without cash makes business easier for both buyer and seller. By use of cash, per Mastercard, consumers are constrained by how much they spend by the amount of cash they have in their pocket at a given time. Digital payments therefore allow for a greater number and volume of exchanges.

Additionally, for the use of sponsored internet there could be an additional value add scenario where there is a collection of data of individuals and businesses with limited credit history allowing more insight for credit worthiness, hence more opportunities for disadvantaged communities to have access to new sources of capital and other financial opportunities. New insights on creditworthiness for loans is a fast growing industry in the fintech space. It’s clear there are different verticals for both a payment processor and the disadvantaged urban communities to benefit from targeted hotspot internet access. If promoting internet access was not already a critical need, promoting outdoor business also benefits urban communities that have been disproportionately impacted by Covid-19 and allows a safer way to do business during Covid-19 by operating outside.

The Outlook

The payment processor makes money since the payment processor model books revenue by each transaction it fulfills between buyer and seller. In a sense, a payment processor is similar to a broker with respect to effecting transactions. The payment processor would grow additional revenue from transactions that otherwise would have been cash transactions.

Working with the community, there would be new merchant use of different offerings, whether it be small business credit cards, QR codes and bundled products. The opportunity to acquire data that would allow a further understanding of cash based markets is worthwhile. There is also substantial positive brand goodwill associated with the economical investment in providing targeted hotspot internet service for urban businesses. Mastercard has already committed $250 Million to benefitting small businesses, so there is money being deployed to help grow small businesses, however smart policy is needed to know how to target underserved businesses for the best return on investment. Other payment providers would be very interested in this sort of idea. Square’s Cash App uniquely fits in this model since Cash App is linked to a debit card and would encourage cash transactions over a digital footprint, so the step up to digital cash transactions from a cash economy would not be difficult given current smartphone adoption. The potential to gain thousands of additional users through commonplace markets providing sponsored internet is lucrative for the payment processor.

There is already a strong desire from a public policy perspective to support internet access in disadvantaged areas. Opening the tent to other players that can partner and supplement internet access through business growth benefits the communities and the businesses that operate within them. There must be coordination from existing rules and regulations from local governments as well as some work in education in the adoption of digital products from a primarily cash-based transaction model in these communities. The benefits, however, to both the community, the businesses that service them, as well as the payment processors, make this an innovative policy and business strategy where everyone profits from the adoption of targeted internet offerings for underserved urban market gatherings.