From Ride-Hail To SuperApp, By Way Of Fintech

~9 min read

When ride-hailing companies first hit the consumer landscape more than ten years ago, they were hailed as revolutionary for introducing user-friendly apps to share rides with complete strangers. Over time, users became accustomed to the embedded payment model employed by rideshare firms. Across emerging and developed markets alike, anybody can download an app, order a ride, and pay via the app. Embedded finance quickly became commonplace, and in the last few years, seamless payments have led to the birth of the “super app”, allowing users to perform (and pay for) a variety of functions from a central integrated hub. Given this context and today’s competitive landscape, are ride-hailing companies positioned to embark on the fintech-infused, all-in-one, super-app evolution journey? Or will they continue to focus on the transportation sector, which is evolving in its own right?

Transportation network companies (as ride-hail giants have come to be known) in the United States, Southeast Asia, and China have all expanded beyond ride-hailing services, and the pandemic has only encouraged aggressive pivots. For instance: early ride-hail pioneer Uber is focusing on food delivery service Uber Eats; In Southeast Asia, Grab in Singapore and Gojek in Indonesia have begun offering more financial services with their apps; and in China, Didi Chuxing, who currently controls 90% of the ride-sharing market, will soon face stiff competition as Alibaba and Tencent team up to create their own ride-sharing company to complement their already brimming portfolio of services.

Along For The Ride-Hail

Even before COVID ravaged the global economy, many ride-hailing companies were already pivoting. With mergers, acquisitions, and regulatory challenges presenting different challenges region by region, global economic forces are pressuring ride-hailing companies to take a hard look at how they can optimize their platforms.

Uber, which began as a car service, has expanded to bike and scooter rentals in the U.S. and Europe. In some areas, the Uber app also includes public transportation options to encourage users to be increasingly reliant on their app for everyday routines, even if the tech company isn’t profiting. The firm later added food delivery to its services as a separate platform, which has now been folded under the umbrella Uber app, promoting both rides and food delivery while enabling embedded payments for both.

In the past year, revenue for Uber Eats outpaced Uber rides, which plummeted as much as 85% in some areas, for the first time as people sheltered in place during the pandemic. Uber’s focus on food delivery has widened further with its purchase of Postmates for $2.65 million in July 2020. With the acquisition, Uber will control 35% of the U.S. food delivery market share, second to DoorDash which dominates 45% of market share. However, Uber Eats charges restaurants between 30% to 35% commission, which is higher than many competitors in other markets.

“Many of these mom-and-pop restaurants will be driven out of business if they have to pay such a high commission. So, they’re recreating their own network where mark ups are a lot less. The food delivery companies can make up the revenue in volume rather than taking huge cuts. It’s a pricing strategy that has worked in Asia and delivery companies can grow in that direction.”
David Hsu, Ph.D., Professor, The Wharton School of the University of Pennsylvania

Uber also has plans to expand its delivery options to include groceries, home goods, medications and pet supplies. The company is already delivering groceries with its acquisition of Cornershop, which is active in Mexico, Canada, Chile and Peru.

In spite of these efforts, Uber has yet to turn a profit. Uber’s CEO has said that by 2021, the firm is projected to be profitable (pandemic considerations pending). The passing of Proposition 22 in California in early November, which will allow drivers to remain independent contractors, also boosted Uber's prospects; along with competitor Lyft and DoorDash, Uber poured more than $200 million into passing the proposition, indicating its importance to the company's future:

“Proposition 22 will have material-lasting impact for Uber and rideshare companies. They will likely take this and be proactive about building this new flexible approach that offers more benefits to drivers in other states and possibly other countries as well.”
Ygal Arounian, Vice President, Equity Research, Wedbush Securities

In the U.S., these firms have been testing the waters with financial services by offering payment and insurance options to their own drivers. Uber offers auto insurance that only activates when drivers are actually on the job. Meanwhile, Lyft drivers receive free banking services so they can immediately access their wages as a way to retain drivers. Uber has also introduced Uber Cash, which allows customers to store credits and buy gift cards, encouraging customers to engage within the Uber ecosystem and bringing Uber closer to SuperApp status.

Grab & Go

At the same time, transportation network companies in Southeast Asia have successfully incorporated digital financial services, and in many cases have surpassed the U.S. companies in the number of services they offer.

A few factors play a role in the success of the region’s players in expanding their financial operations. A large percentage of Southeast Asia's population remains unbanked, and digital payments are considered safer than cash. The middle-class population totals over 600 million people with smartphones and widespread connectivity. Indonesia, in particular, has the fourth largest population in the world and is home to the largest internet economy in the region. Sheer population size and socioeconomical factors translate into a huge potential for digital financial services to take hold, which could be driving the region’s tech companies to endeavor to become SuperApps.

The two biggest players are Grab in Singapore and GoJek in Indonesia, both of which started as pure play ride-hail companies. They have both quickly branched out to offer multiple fintech services in their race to become SuperApps.

“As ride-sharing companies add features such as food and last-mile product delivery, providing payments capabilities is a next logical step in their push to integrate into customers’ lives. And, as often happens in fintech, once a company establishes itself in a portion of the value chain, they often expand into other financial service areas.”
Robert Siegel, Stanford University Graduate School of Business

In Singapore, Grab started as a taxi-hailing service but has expanded by partnering with other companies to provide travel services, video-on-demand, movie tickets, and many other offerings. Their digital wallet, GrabPay, has gone beyond the payments model and offers microloans, insurance, installment plans, and buy-now-pay-later plans. GrabPay has 100 million users and recently raised $850 million to expand its financial services.

Worth about $14 billion, Grab has a few notable backers include Alibaba, Microsoft, Toyota, Uber and SoftBank. In 2018, Uber sold its Southeast Asia business to Grab, which gave Uber a 27.5% stake in the company. The terms of that deal stipulate that Grab must IPO or give Uber $2 billion by 2023.

In Indonesia, GoJek started as a motorbike taxi-hailing service and now offers ride-share, as well as deliveries for food, groceries, medicine, and even massages. They also recently launched GoScreen, an advertising service with digital billboards on their motorcycles. The mobile billboards not only advertise for micro, small and medium-sized businesses, but they also provide location- and time-based measurement data for businesses and consumers so they can retarget consumers.

Their digital wallet, GoPay, has a majority market share of digital payments in Indonesia, handling 54% of the country’s e-wallet transactions. The fintech arm reached $6.3 billion in transaction volume with 240,000 online and offline merchants last year.

Recently, Grab and Gojek have been in merger talks, negotiating on-and-off over the past two years. One key sticking point is whether to combine operations, or for Grab to take over Gojek’s operations in Indonesia. SoftBank, which is Grab’s biggest investor, is in favor of the merger.

But Alibaba, not to be outdone, is considering investing $3 billion in Grab. The Chinese tech giant is also a majority stakeholder in Lazada, an e-commerce leader in Southeast Asia. A Grab-GoJek merger will pose more antitrust issues with Alibaba’s potential investment if the Chinese tech giant is a major stakeholder both in Grab and Lazada. With all of these complicating factors in play, it’s difficult to say whether the merger will go through as talks continue, and regulatory agencies in Singapore will likely push back.

Transportation network companies may see Alibaba and Tencent as models of SuperApp Success. Both tech giants used embedded finance models to successfully expand from nonfinancial models into digital financial services.

The firms are also major investors in China’s largest ride-hailing company, Didi Chuxing. Didi is in fact the world’s largest ride-hailing company, with 550 million users across Asia, Australia and Latin America. In China, Didi dominates 90% of the ride-sharing market. The company hasn’t expanded to financial services as of yet, but that may change in the future. In addition, Didi is expected to IPO on the Hong Kong stock exchange at a $60 billion valuation in 2021. However, if Ant's experience is any indicator, unexpected regulatory challenges could be in store.

“Regulators in China are very wary. They see the power of U.S. tech companies, like Facebook and Google. Alibaba and the Ant Group can be quite powerful, which contributed to regulators in China halting the IPO in the 11th hour.”
David Hsu, Ph.D., Professor, The Wharton School of the University of Pennsylvania

Embedded Value

As these transportation tech companies established themselves, they realized the intrinsic value of storing a payment method on a smartphone app. It allowed users to pay for their ride and tip their drivers without ever taking cash from a wallet or handing over a credit card. Transactions and payments were integrated seamlessly. This expedient model has naturally allowed for these transportation companies to easily pivot beyond ride-hailing.

“The phenomenon is similar to what we saw with smartphones themselves more than ten years ago, which were launched with a very specific purpose in mind, but have since grown to become a sort of Swiss army knife that can do many things. This also shows how important transportation is in society. Organizing personal transportation means organizing a good part of a consumer’s life.”
Sven A Beiker, Ph.D., Stanford University Graduate School of Business

The overall experience is a marriage of convenience for the customer, saving time and hassle. For many, the benefits outweigh the risks as long as firms can foster trust and maintain respect for privacy and boundaries. Given this trust, the possibilities are boundless; by eliminating interruptions to customer activities (from ride-hail to food delivery to P2P payments to e-commerce), technology companies can improve customers’ interactions with their software platforms, and thereby build a customer base and optimize pricing for the benefit of the customers. At the same time, the companies acquire data about a customers’ spending habits, buying preferences, potential for credit, loans, insurance, and many other financing options.

“You can have a super app, which can give companies a tremendous number of data points on your consumer behavior, which means they can predict your behavior about the books you buy, the movies you watch, groceries you buy, and your cash flow. Tech giants, like Alipay, can do a better job of figuring out what financial services fit your needs or wants because they can create a more complete profile of you as a consumer.”
David Hsu, Ph.D., Professor, The Wharton School of the University of Pennsylvania

Machine learning, automation and the Internet of Things can quickly leverage the information accumulated to open new revenue streams for tech companies. Loans, insurance, advertising streams, and product pricing are just a few of the customized financial offerings that will pop up on a consumer’s radar. Customer databases themselves will be extremely valuable, as avenues to monetization will only diversify with time.

“Owning the data and analyzing the data is a big part of the success here. Knowing what customers are doing on a day-to-day basis is an extremely valuable asset. There is a dark side though. On the one hand, a continuous and integrated chain of experiences is highly convenient for the customer. On the other hand, data privacy and data protection are a real concern. We need to make sure there is transparency, and users know what is happening to their data.”
Martin Ihrig, Associate Dean and Clinical Professor at New York University’s School of Professional Studies

When a consumer pays for goods and services through an app, it’s a natural transition to see offers for credit cards, loans, installment plans, buy-now-pay-later options, or line of credit. There are hidden ramifications though. These options can affect credit history and tempt consumers to buy more than they can realistically afford. In spite of these negatives, the embedded finance model, in concert with trusted brands, has the potential to make digital financial services accessible to many, including underserved populations.

Pivot Or Die

Transportation network companies in the U.S., Southeast Asia, and China are transforming themselves by leveraging their embedded finance models on multiple fronts. With profit hard to come by - pandemic or not - pivoting is not only smart, but necessary.

Southeast Asia may be home to the most successful examples of pivots from traditional ride-hailing into SuperApp territory. In China, Didi has turned a profit in ride-hailing, though regulatory boundaries loom. In the U.S., Uber is focusing on food delivery to supplement the ride-sharing business, while Lyft has yet to expand into the restaurant delivery business. All of these trusted ride-sharing companies have the potential to leverage their embedded finance platforms to expand even further.

The degree of success varies with the region, and with the tech companies themselves. Certainly, embedded finance and seamless payments have played a pivotal role in how transportation network companies have evolved from their original footprint. What the future holds for these global transportation network companies remains to be seen as potential mergers, regional market characteristics, and regulatory forces determine what will lie ahead. But make no mistake: everyone wants to be a SuperApp, and fintech may be the fastest way to get there.

© Mondato 2020

Image courtesy of Daniel Bernard
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Mondato is a boutique management consulting firm specializing in strategic, commercial and operational support for the Digital Finance & Commerce (DFC) industry.
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