by Marc Gunther

Turning trash into cash

RecycleBank pays people to recycle. Fortune's Marc Gunther takes an inside look at the company's plan to help save Mother Earth - and profit along the way.

By Marc Gunther, Fortune senior writer

(Fortune Magazine) -- Do you know how much you pay for trash collection?

Neither do I. And that's a problem, because it means that most of us throw away more than we should, wasting stuff, wasting money and fouling the planet.

Ron Gonen, the CEO of RecycleBank, came up with the idea of paying consumers to recycle while studying for his MBA.

It's a classic case of market failure, and one that can easily be fixed, as a startup called RecycleBank has learned. The company, which helps people turn their trash into cash, recently attracted a $2 million investment from Coca-Cola (Charts, Fortune 500), as part of the beverage giant's effort to promote recycling.

Let me explain why the trash market doesn't work in most of America. It costs money to collect and dispose of garbage, of course, and we all pay for it, usually through local taxes.

But since the costs are invisible in most places, there's no economic incentive to throw away less. That's one reason why U.S. residents, businesses and institutions generated more than 245 million tons of municipal solid waste in 2005, according to EPA, which says that's 4.5 pounds per person per day.

Much of what winds up in landfills - paper, food waste and yard clippings - could be recycled, reused or composted, which would save energy and reduce greenhouse gas emissions.

What to do? One option is for local governments to charge people for trash pickup based on what they throw away, a concept called "pay as you throw." About 5,250 cities and towns, representing about 20% of the country's population, do just that.

But the idea of "pay as you throw" is often politically unpopular because it is seen, mistakenly, as a tax. It's actually just a way of allocating costs more fairly.

Another option - the one taken by Philadelphia-based RecycleBank - rewards people for recycling. Think of it as the carrot, as opposed to the stick. (Both can be recycled, by the way.)

Here's how it works: Customers who sign-up with RecycleBank receive a special container embedded with a computer chip. Every time the recycling truck comes for a pickup, it records the weight of the bin and transmits it wirelessly to an online account. Homeowners accrue up to $35 worth of credits a month based on the amount of recycling they do.

The credits, in turn, can be turned into coupons that can be redeemed at more than 300 retailers, including Starbucks (Charts, Fortune 500), Whole Foods (Charts, Fortune 500) and Rite Aid (Charts, Fortune 500).

In the end, homeowners save money, cities save money as disposal costs go down and Recycle Bank wins by collecting a share of cities' savings.

It's green all around, as Ron Gonen, RecycleBank's chief executive explained when we met this week at the National Recycling Coalition conference in Denver. "We're a rewards and loyalty program that motivates people to take positive environmental actions," says Gonen. He's just 32, and cooked up the business plan for RecycleBank while studying for his MBA at Columbia.

Launched three years ago, RecycleBank has about 100,000 residential customers in Pennsylvania, New Jersey and Delaware. Recycling volumes have climbed across the board, according to Gonen.

In Wilmington, about 90 percent of residents participate in RecycleBank's rewards program, and the amount of garbage headed to the local landfill has dropped by about 40%. That saves the city, which pays roughly $70 a ton in tipping fees to landfill owners, about $800,000 a year. The city shares half of that with RecycleBank.

"People get a lot more zealous about recycling," says Kevin Dietly, a former EPA consultant now with Northbridge Environmental Consulting. "Just about every house has a [RecycleBank] cart out front."

Gonen says customers could save as much as $400 a year.

Coca-Cola invested in RecycleBank because it saw an opportunity to collect more of its plastic bottles, which can be recycled, and to help keep streets free of discarded Coke or Dasani bottles.

The beverage giant also sees recycling programs like RecycleBank's as a better alternative to so-called bottle bills, which encourage the recycling of carbonated drinks but don't always apply to other recyclables like plastic water bottles.

This spring, RecycleBank received $13 million in funding from RRE Ventures, a venture capital firm where James D. Robinson III, the former CEO of American Express (Charts, Fortune 500), is a partner; and Sigma Partners, a venture firm that focused on technology companies. Casella Waste Systems, a Vermont-based trash company, and Columbia University were early investors.

Gonen says RecycleBank is on track to turn its first profit soon. On top of receiving a cut of cities' savings, the company generates revenues from advertising.

In fact, advertising is a big piece of Gonen's strategy. As RecycleBank rolls out nationally in the next couple of years - look for a debut in some Manhattan apartment buildings this winter - he'll have collected the names, addresses and buying habits of hundreds of thousands, possibly even millions of people.

At that point, Recycle Bank will have a database of loyal customers who manage accounts online and can be targeted by advertisers. If nothing else, it should become a place where companies can sell to "green" consumers, says Gonen.

"The core of this company is the ability to target and market to a captive audience that feels good about what they are doing," he said.

A media company built on garbage: It's the perfect example of business riding the green wave. Top of page