Amazon Go Has a Cash Problem It's Trying to Solve

Amazon's (NASDAQ: AMZN) dream of a cashless society where digital ones and zeroes take care of messy transactions is a great vision for the future. But right now, cash is still legal tender for all goods and services. To emphasize that point, some cities and states have recently gone so far as to explicitly make it illegal for a retailer not to accept cash as payment.

That presents a challenge for Amazon, a digitally native retailer that's increasingly pushing into brick-and-mortar stores. Its Amazon Go stores are not only cashless, they're also cashier-less. But as more state and municipal legislatures propose bills that could make Amazon Go's business practices illegal, the company is working on ways to accept cash in its stores.

Ultimately, being able to accept customers without bank cards is in Amazon's best interest. It's already developed programs to increase its online customer base among the 6.5% of U.S. households that are unbanked or underbanked, so it knows those customers present a real opportunity.

What Amazon's done so far

Amazon's initial foray into supporting cash-only customers was the launch of Amazon Cash about two years ago. Amazon Cash allows consumers to go to a nearby retailer, scan a code linked to their Amazon accounts on their phones, and exchange cash for funds loaded into those accounts. The service is more secure than buying a gift card in-store to use yourself, since funds are loaded directly to your account.

Amazon Cash is technically a solution to accepting cash payments in Amazon Go stores. But there are fundamental problems with the product that are preventing wider adoption.

Customers are concerned about privacy, and their inability to retrieve those funds for use on things Amazon doesn't sell (like housing). There's also the additional hurdle of having to set up an Amazon account. Amazon has tried incentivizing customers to sign up with one-time promotions, and giving them additional funds when they load a certain amount into their accounts. But the efforts haven't produced very good results. As a result, Amazon Cash adoption has been disappointing.

There's also the problem that not every person has a smartphone, which is necessary to use Amazon Cash. About 19% of U.S. adults don't own a smartphone, according to a Pew survey from last spring. It's likely that percentage is even higher among the unbanked and underbanked. Amazon can't really say it accepts cash at Amazon Go, if it only accepts cash from people who also have a smartphone.

Searching for solutions

An Amazon spokesperson told CNBC this week that the process for paying in cash at Amazon Go stores, when implemented, will be pretty simple -- "you'll check out, pay with cash, and then get your change."

But Amazon Go stores don't have registers or cashiers. You scan a code on the Amazon app as you come in, cameras follow you around the store tracking everything you take off the shelves, and then you walk out.

Cash customers might not have a code to scan on their phone. Cameras can follow them around, but they won't be linked to an account. And they can't "just walk out," as Amazon says, because they need to give cash to someone.

Amazon might be able to create an analog system that mimics some of the digital systems in place. Even so, it will require additional expenses, including potentially reprogramming or adding additional programming to the machine-vision system for tracking customers throughout the stores, and establishing a means to accept cash. Most importantly, it might require stores to staff another employee to take cash payments, or to monitor a self-checkout system and troubleshoot.

One of the keys to Amazon's strategy for Amazon Go is keeping its marginal costs low, increasing potential profit at scale. Adding more workers, who need to be paid hourly wages (unlike computers and cameras), would hurt those potential profits. Additionally, accepting cash and developing systems to do so opens the door a bit wider for potential fraud and theft, something Amazon's camera technology and secure online login have done a pretty good job of preventing.

If Amazon must accept cash payments, it will find a way. It needs a more robust solution than Amazon Cash, but that makes things much more complicated for Amazon (even if it makes things simpler for customers). Investors should watch how this affects the company's expansion plans for Amazon Go, and what any potential solution could mean for store profitability.

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