Let him know that you will not accept cash in the mail. Stress that you are being as understanding as you can but you did state the payment method in your item description.
Offer to relist it- to let him out of the transaction- see what he says. I don't think you do get penalised in any way- especially if they agree that they don't want the item anymore (I'm not a seller- big buyer though,lol). I've recieved 2nd chance items etc and bought relistd items and haven't noticed negative feedback for sellers because of it.