The Future of Financial Services
Uber: Payments & Profitability
Where Uber goes from here, how it’ll look in the future and what that means for the payments ecosystem and profitability
Uber’s recent IPO and subsequent share price performance has drawn focus on the profitability potential of the company. Looking back to day one of Uber, least we not forget about how much the payments experience played part in the success of their story and in changing consumer habits and behavior. Patient venture capital has allowed Uber, already a decade in the making, to take time in plotting its next move. Uber is now poised to further enhance their app to create “something” within which we all spend more time and from which we all derive more value. In turn, the company will seek to take more of the economics and payments and financial services will play an increasingly important role.
Can Uber become better than the banks at being a bank — the evidence below suggests yes!
When Uber started out, it addressed two key issues; low cost on-demand transportation and frictionless payments. With the former now a well oiled machine, the focus becomes the latter. With many questions being asked about profitability, this key piece of the business model offers vast potential for both expense saves and revenue contribution.
The recent IPO filing offered some ideal color on the opportunities that are present, but we need only use our imagination (and look to Asia) to take a guess at what Uber may begin to look like, who then remains relevant and what impact this has on existing players.
Per the IPO filing, 87% of Gross Bookings were paid by either credit card or debit card in 2018
In 2018 Gross Bookings were almost $50 billion, which at 87% translates into $43.5 billion in processed card volumes. Per the IPO filings, Uber paid $749 million in credit card processing fees in 2017. This was on $34.4 billion of Gross bookings, which suggests the cost of card processing is ~2.2%.
In turn, we can take a guess that Uber paid >$1 billion to process card payments last year — say what!
Again, whilst Uber doesn’t name names, those on the other side do not take the same approach. In turn, we know that PayPal’s Braintree works closely with the company, as do Stripe and Adyen. Also in reference to payments partners within the aforementioned SEC filings we learn about Uber’s approach, “because we integrated payments into our technology stack, we can continuously innovate to meet the needs of platform users.” This plug-and-play type models suggests that Uber were able to easily integrate third party capabilities. Similarly, we can expect that they can just as easily remove without issues.
So what next? With Uber having become synonymous with the concept of “on demand,” it seems only wise for the company to continue adding services which check this box. It then becomes a case of enticing and incentivising users to spend more time in and more money on the app.
Looking In
Uber clearly have ambitions beyond owning transportation; which in and of itself now also includes bikes, scooters and on demand car rental. Uber Eats can be viewed as a somewhat natural progression, but coming back to the idea that Uber are and always have been sat on a payments empire, it is this aspect of the business model that yields some of the lowest hanging fruit.
A couple of more recent developments that are indicative of a push into payments. “Uber Cash” seemingly aims to round the payment processing aspect of transactions by having users deposit cash into what is a hybrid e-wallet. Whilst the company must still pay interchange fees on the deposit (from your Amex for example), similar to the Venmo model (PayPal partnership to be noted here), it allows for Uber to move cash around internally i.e. from riders to drivers, with fewer (or better no processed) transactions. The plan then being to increase user’s cash balances and keep more of that “cash” within the Uber ecosystem. All in reducing the number of and need for third party transactions.
Looking to another financial services stalwart Charles Schwab, they make money on the dry powder left idol in customer’s trading accounts. With their securities book essentially reflecting brokerage cash balances i.e. cash held in trading accounts not invested in securities, we know that the company were able to earn a 2.74% return on this in 1Q19. Also in true Uber fashion, the economics don’t yet makes sense, but over time, you can understand how this works. Case in point, today Uber will give you $100 of Uber Cash for just $95.
As another subtle move to drive increased use of Uber vs. peers, the company recently launched “Uber Rewards”. Addison Lee, a less well known cab operator in the UK, offered a similar program to users. Noting that when Uber launched in 2009, in London, Addison Lee was very much Uber’s core competitor when it came to “high-end black cars.” Each tier comes with additional benefits, alongside the base cash reward of $5 for every 500 points accumulated. Notable benefits include price protection, priority pick ups, flexible cancellations etc etc.
The “Uber Credit Card” is a fairly standard co-brand card issued by Barclaycard US. Simply put, Uber can increase their share of wallet and drive increased brand loyalty along with capturing all important spending data. Barclaycard, as is often the case for co-brand cards, get the benefit of a unique and sizable origination channel. There is also likely some revenue sharing between the two and unquestionably a number of ways in which Uber can steer customers back to spending on the Uber app. However, the card offers more rewards for restaurants, as they seek to learn more about customer’s consumption habits to work back into Uber Eats; 4% on restaurants and dining (including Uber Eats), 3% on airfares and hotels (again for similar reasons most probably) and just 2% on Uber travel.
Finally, the “Uber Visa Debit” which is issued by Green Dot’s GoBank. This product and partnership underpins the Instant Pay service which allows for drivers to be paid as much as 5x per day and is the closest thing to traditional banking that Uber have done to date.
Looking East
The pivot to financial services among Asia’s leading providers offers the perfect proxy for what Uber should want to look like in the future. Admittedly the mass adoption of e-wallets and super-apps across the APAC region has been driven in large part by a more recent move away from cash (vs. the US and Europe). Making use of the secular growth of smartphone ownership, the region has been able to leap-frog the high-latency technology that is currently holding more “developed” markets back. Yet it is the focus on the unbanked that has been truly revolutionary.
Uber did make a push in APAC, but Grab acquired Uber’s business last year, which left Uber with a valuable 27.5% stake, and Grab getting their competition from a previously unexpected source — Indonesia’s GO-JEK. As for models to be admired by Uber, we must also consider Tencent funded Didi and India’s Ola. Per the image on the left, the idea of truly capturing customers comes with inslusivity — that is, providing customers with an omnichannel experience with no restraints on how money can be spent and where. The incentives in this case no doubt help too. Visa in this case — remaining relevant in providing services to new entrants e.g. the recently announced Ola Money-SBI Credit Card.
Looking specifically at Grab; beyond the obvious verticals such as transportation and food delivery, they have already embarked on leveraging the payments aspect of this model. GrabPay is now accepted by the vast majority of merchants across SE Asia, and Grab Financial has taken this one step further in partnering with third parties to offer SME loans, insurance and cross-border transfers, among other products and services. It is believed that in addition to driving increased profitability, Grab’s move into financial services was also a ploy to make their app “stickier” for users.
QR codes are commonplace across APAC. Below, an example of how Grab have made it possible to pay a merchant from the app offline:
Given a still heavy use of cash, Indonesia may not be the most obvious market to look to, but per Amazon’s recent move to capture the spend of the under and un-banked, there are lessons to be learnt. After all, all these companies are seeking to acquire new customers. A more recently deployed tactic has been to create new customers.
Indonesia’s GO-JEK has reinvented the wheel when it comes to financial services; offering both merchants, contractors/drivers and consumers an inclusive ecosystem from within which they could operate the majority of their daily lives. For GO-JEK, it was built on the initial capturing of the unbanked, creating a mobile fleet of bank tellers in many ways (allowing drivers to take cash deposits) and also offering a personal finance management (PFM) platform.
Admittedly, comparing Uber to Grab or GO-JEK is far from apples-to-apples given the operating landscape, but it does provide a road-map for how things may develop. Using cash and/or other rewards has proved a successful strategy for traditional credit card issuers. GO-JEK’s (via their GO-PAY platform) used Indonesia’s love for bubble tea to gain adoption. Offering promotions and discounts across the country proved to be a great way to change consumer spending habits. This was in addition to already offering rewards and discounts for using GO-PAY for Go-JEK rides and deliveries. They then turned to a number of partners which has led to exceptional growth and ever-creative solutions to issues many didn’t even know existed.
Both Grab and GO-JEK have led with transport and leaned into payments and financial services. And all told, it’s all the data that they are acquiring that makes the future of these companies so exciting. Similar in many ways to the underlying business case of Square i.e. using propitiatory data to better price risk and underwrite credit.
Grab Financial has set a clear ambition to become both the region’s largest payments and financial services platform in 2019; aiming to become one of the region’s largest merchant networks with, the largest insurtech policy provider and the biggest fintech lender, all within one platform.
Again, another focus for the likes of Grab and GO-JEK is getting cash into the app and keeping it there. And even better is to get customers to use the app (e-wallet) as their preferred payment method at merchants and for money transfer/remittance. Creating this network of collection and disbursement points allowed these companies to scale. Solving the issue that many in key markets still liked cash, but equally, wanted access to the digital world.
Building on investment into financial services, it then becomes a case of volume. In the case of Grab, they sought to offer complementary products and services such as insurance (as previously mentioned), whilst also making a notable investment in budget hotelier Oyo. The trend here becoming increasingly clear; transport, payment, travel, discounts/incentives, rewards, loyalty, PFM etc etc. Working with industry leaders (unsurprisingly also new entrants) is also seemingly a strategy which is helping with the quality of UX/CX etc:
Similar to how Oyster cards gained mass appeal for contactless cashless travel across London (you could top up at news agents and super markets), as below, GO-PAY have achieved similar success in helping to create an inclusive and frictionless experience for any user:
With the platform and network in place, the focus turns to volume, and lots of it!
Looking Out
It was reported by CNBC last week that Uber were looking to “accelerate the creation of financial products with a new fintech outpost in New York,” seeking to build “payments experiences,” whilst also “helping contractors manage funds they earn.” Taken at face value, think simply about the value Uber could derive from just keeping the cash earned by drivers on the platform?
Another thing to consider is one of the stand-out benefits of a platform which runs on a phone, GPS ( Global Positioning System— do we not often forget the basics?). Geo-fencing has been talked about by many for some time (notably mobile wallets and credit card companies), but to little avail.
First and foremost, knowing where “things” are underpins Uber’s core business model. Connecting said “things” to one another is the core value proposition of Uber (and peers). The two sides of the network i.e. passengers and drivers/cars is the icing on the cake. Once you layer the icing over multiple cakes (or products and services in this case), you have the cherry on top. You have consumers attention and engagement.
Per the recent initiative “Visa Local Offers” this seems like step one of working to offer real-time offers based on location and leveraging the vast amounts of customer data (links with reasons as to why PayPal are so close these days).
Uber has also been cited as seeking to add in-app content and looking into the potential to become a targeted advertising platform during rides (perhaps beyond during rides given the right permissions).
Still looking East, but a little further afield, take examples from China; WeChat and Didi have managed to do just this in aggregating almost every product and service inside of a so-called “super-app”. This includes all things financial services — payments, savings, investments, wealth management and insurance. This is why Chinese ride-sharing company Didi is looking more like Ant Financial and Tencent’s WeChat. This is why Uber acquired Middle Eastern competitor Careem, who have long spoken about their desire to capture the many millions on un-banked in the region, but whom are now plugged into the digital network.
In order to scale from here however, Uber is unlikely to be able to go it alone and therefore they must, as they already have in many cases, seek out the most valuable partnerships. To ensure our minds don’t wonder too far from the point of focusing on what Uber can do within the realm of payments and financial services, they can of course seek to drive volume to partners (as has been done already elsewhere around the globe) such as hotel booking sites and airlines. Not forgetting also, in the case of Grab and Singapore Airlines, Adyen is also a partner to both (NB seeing here the emergence of ecosystems comprised of new entrants).
In one of many creative examples, Uber partnered with Relatient to “increase access to healthcare”. Per Retalient’s CEO:
“Missed appointments lead to risks that could be averted. According to the National Commission on Prevention Priorities, 100,000 people die each year because of lack of access to preventative care services, like screenings for hypertension, cholesterol and certain cancers.”
The possibilities for Uber seem endless, even ticking ESG boxes as above. Their “for business” division is giving employers more reason to use them for business travel (thinking the Amex GBT customer base could be taken by Uber in time), as evidenced by a recent partnership with corporate T&E management technology firm Fraedom, based around streamlining the expense management process for users.
Assuming Uber can add incremental use cases within its platform, scale their offering, bring payments in house AND actually make money on transactions (via interchange similar to card issuers today), profitability concerns should soon be in the rear view and beyond that, the future of this ecosystem looks phenomenal!
Going one step further, talk of creating a bank account has come and gone multiple times of late. There is an on-going debate around what it would ultimately mean to try and fully cut out the middlemen. As above, working with many experts in their respective fields and opting for more of a partnership model, has proven successful. And, with more than 6000 banks already chartered in the US, regulators have taken a firm stance on issuing new licenses, especially to “FinTechs”.
For those who care, Varo Money was the first all-mobile national bank to be granted OCC approval to form a de novo national bank. Yet the idea of “renting a banking license” has become much more digestible. Many already chartered banks are quietly working behind the scenes for well known disruptors such as Robinhood and Square, both whom have yet to convince regulators to issue them banking licenses. These banks (with names such as GoBank, Evolve, Cross River, Sutton Bank and Celtic) are simply sourced to handle arguably mundane banking activities such as holding deposits and actually underwriting loans.
Looking to Amazon, as is always the case when commenting on Uber, they have reportedly engaged with some of the largest banks to explore this “rent a banking license” concept and thus, if at all, one would expect Uber to explore a similar strategy. With Apple working with Goldman Sachs and T-Mobile layering an offering on top of BankMobile’s (a sub of Customers Bank) framework to offer some of the best checking rates on the market (4% APY), it seems in the US at least, this will be the way to go.
“The battle for U.S. retail banking customers is intensifying as Amazon is expected to partner with a bank to offer a co-branded, mobile-friendly, checking-account-like product initially targeted to young adults.”
Tech companies camouflaged by the provision of services and licenses of third parties will become the norm and expect for Uber to participate in any way possible to maximize relevance and data capture, whilst minimizing costs. What will also matter more over time is the the overall value proposition of any platform, whilst also ensuring the safety of data. AI and ML to throw some additional buzzwords in the mixer, will also play a key part in success stories and profitability.
Conclusion — it’s all about the data
Stepping back, it’s easy to forget about how much the frictionless payments experience among Uber’s initial product offering created a catalyst in and of itself for the mass adoption of the app. Whilst the company then set off witha focus on transport (or so it seemed) and moved steadily into complimentary verticals such as food delivery, it is now clear that the end-goal is so much more.
Whilst Uber has the hurdle of operating in “more developed” markets vs. the super-apps that have gained such traction across Asia, there is a legitimate strategy emerging that mirrors Grab, GO-JEK and others. In many ways, Uber’s future also looks similar to that of the traditional banking industry; partnering with leading players to create a marketplace for everyday goods and services. Further, in creating a single app within which consumers want to spend more time (because they are incentivised to), Uber can seek to operate the payments ecosystem more independently and more cost effectively.
As laid out above, there seems to be much more than initially meets the eye with Uber. They have tremendous scope to add new partners and capabilities, which in turn will drive increased volumes. For example, the aforementioned healthcare example was not an obvious move. And they are also ticking social boxes whilst they’re at it — never a bad thing.
The cherry on top of the cake will be the data that can be derived from payments and financial services — that is not to mention the revenue generating potential from idol cash balances and/or the potential to capture interchange from spending offline and outside the app. The social element then re-emerges when it comes to personal finance management and how Uber should be able to help you manage your spending on/in Uber. Similar to what we’re seeing at forward thinking banks — owning the relationship and seeking to serve the customer, not own the customer, is going to be the winning strategy over the next decade.
Can Uber become better than the banks at being a bank — the above evidence suggests yes!
