3 minute read 4 Feb 2019
bus driver charging electric bus

How payments will enable next-generation mobility services

By

Kai-Christian Claus

EY Global Payments Leader

Strategic advisor for leading players in the global payments industry. Enthusiast with passion and energy.

3 minute read 4 Feb 2019

Trends defining the future of mobility will also impact the payments industry, which traditionally has had few direct links to the automotive sector.

Within the automotive industry, traditional companies are radically reshaping their business and operating models as three major trends disrupt their sector:

  1. Environmental concerns are driving the transition from combustion engines to electric vehicles.
  2. Urbanization and socioeconomic change are seeing consumers move from owning to sharing a vehicle.
  3. Digitalization is putting artificial intelligence, not humans, in the driving seat.

Together, these trends are defining the future of mobility. In this future, human driven, gas-powered vehicles may be largely replaced by shared, self-driving and hydrogen- and electricity-powered vehicles. This transition and its impact on automotive producers and suppliers are the subject of much discussion. But less attention has been given to the repercussions on the payments industry, a sector that has, until now, had few direct links to the automotive industry.

Frequent and complex mobility-related transactions

Traditionally, the payments and automotive sectors came together at just two points:

  • When a consumer purchased a vehicle, usually via a bank transfer, or other mass-payments transaction, or through leasing or a loan,
  • When a consumer fueled or maintained a vehicle and made payment via credit card or cash in both cases, the related issues involved have long been solved, meaning that the automotive sector has not been at the core of recent payments innovations.

But traditional payment situations are set to be supplemented with new and more complex payment events, including:

  • Self-driving vehicles that automatically pay for tolls or parking
  • Shared-vehicle usage charges and payments
  • Electric-vehicle recharge costs and payments for injecting electricity into the smart grid

While buying a car was once the second biggest investment most persons would make in their lifetime, the changes to mobility mean these large investments are being replaced by many, much smaller, more complex transactions. Developing payments processes to successfully handle these transactions will not be easy — but for whichever party does this, the prize will be high.

Enabling payment technologies will help overcome key challenges

But designing payments processes around these new mobility scenarios will require overcoming several challenges that, though not new to the payments industry, will need to be carefully considered in light of the mobility context:

  • Convenience: The new mobility changes mean consumers are paying many different merchants more frequently, usually online. This can be a tedious process if each transaction must be resolved individually. But payments processes have adapted to these conditions, most notably with the introduction of e-wallets or pass-through wallets in an e-commerce environment. These enable customers to pay in a convenient way at multiple different merchants without having to enter the payment details again and again.
  • Multisided markets: The future mobility market will be multisided. With so many merchants, different payment processes and multiple consumer touch points, resolving payments becomes more complex. This issue is being addressed through the replication of master-merchant services from an e-commerce environment, which can be leveraged in multisided markets to enable payment of diverse services, such as parking, toll and electricity charging in a homogenous way.
  • Authentication: Issues of authenticating payments have not yet completely been solved, especially with increasing regulatory requirements emerging in Europe (i.e., two-factor authentication). The introduction of voice payments or the use of biometrics could help solve this problem within the automotive sector.
  • Costs: The issue of cost has become less relevant over recent years since competition has increased, and interchange fee caps have been introduced in many parts of the world. But reducing costs is still important, especially for low-value transactions. New payment rails like instant payments, payment initiation services or Blockchain can help keep costs low in this context.

Incumbents in the automobile industry take the lead

Whoever can best overcome these challenges can unlock the significant potential for offering innovative payment services within the future mobility space. Several players have already positioned themselves to solve these problems. Most prominent so far are incumbent automotive manufacturers, many of which have already established a payments related entity. Several automotive industry suppliers have also entered the payments space, which is perhaps a logical move since these companies are natural aggregators when it comes to generating economies of scale. 

But beyond the obvious players, many nontraditional players are entering this untapped market. These new entrants include navigation companies, enterprise software providers and even electricity utilities. Although we’ve yet to see any company actually get a comprehensive solution in place, some have successfully launched payments services for specific uses, such as a global payment service provider collaborating with an international oil and gas company on facilitating mobile payments at their fuel stations.

Interestingly, the big, traditional players in the payments industry have yet to identify mobility as a future priority market. Within the banking sector, the most notable exception to this may be the collaboration between a Swiss bank, a German manufacturer of automotive parts and an energy company, on their development of an e-wallet for mobility purposes. Acquirer and payment-service providers (PSPs) have acknowledged the market but have yet to develop dedicated offerings that specifically meet the evolving payment requirements of the automotive industry.

The difference in speed of players from outside and within the payments industry is somewhat surprising as the nature of the problem to be overcome is one not just of technology but of scale. Since payments in the automotive sector will always take place within a two-sided market, any new form of payment will succeed only if enough customers want to use it and enough merchants want to accept it. 

In this way, automotive-industry players have a key, competitive advantage — customers (both consumers and merchants). Building a strong customer base from scratch takes time, capital and risk. Instead, payments providers may consider partnering with automotive players to have instant access to a large customer base. For automotive players, the benefits of such collaborations would include gaining new know-how in an unfamiliar domain, such as payments regulation and the risks of running a payments system.

The rapid transformation of the automotive sector may present the next big opportunity for growth in the payments industry, with incumbents in a prime position to seize the potential of next-generation mobility. But they’ll need to act fast and explore innovative pathways, including collaborations, if they are to succeed against nimble new already building their assets and capabilities.

To learn more, download our global payments newsletter (pdf).

Author contributions are from Jan Lettow and Maximilian Roskosch.

Summary

The fast transformation of the automotive sector may present the next big opportunity for growth in the payments industry, with incumbents in a prime position to seize the potential of next-generation mobility. 

About this article

By

Kai-Christian Claus

EY Global Payments Leader

Strategic advisor for leading players in the global payments industry. Enthusiast with passion and energy.