Part D â Understanding and improving industry performance (PDF ...

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12.3. Characteristics of the payments systems markets The supply of electronic payment systems in Victorian taxis comprises two key activities: • The supply of taxi-specific non-cash payment instruments (such as the Cabcharge charge card) • The supply of non-cash payment processing systems that are used to process electronic transactions including credit cards (such as Visa and Mastercard), debit cards and taxi-specific non-cash payment instruments. The firms providing these taxi-specific platforms, as well as bank-issued or third party credit, debit and charge card providers, are identified in Table 12.1. Table 12.1 Market participants in payment instruments and payments processing markets Non-cash payment processing system providers Four players in the Victorian market Cabcharge Taxi LiveEpay CabFare GM Cabs Payment instrument providers Taxi-specific: Cabcharge, Live Payments (charge cards, vouchers) Third party charge cards: American Express, Diners Club, Motorpass Bank issued credit cards: MasterCard, Visa Card Bank issued debit cards 12.3.1. The risk profile of the taxi industry Taxi drivers and operators are not the ‘merchants’, as are retailers in normal electronic payment transactions. Banks consider taxi operators a high risk as merchants and are resistant to dealing directly with operators independently. To overcome this issue, ‘merchant facilitators’ (such as Cabcharge, CabFare and Taxi LiveEpay) aggregate taxi operators’ transactions and represent them as the merchant ‘interface’ with the banks. These intermediaries effectively become the ‘merchant’ and they pay the merchant fee charged by the acquiring bank when a cardholder pays for a taxi fare with a card. They also incur various operating costs, such as providing the in-cab processing machines, undertaking repairs and maintenance to these machines, and some customer service. Merchant fees charged by the banks are based on risk and the volume of transactions. As taxi merchants are considered relatively high risk and are a relatively low volume transactor, they face higher merchant fees than most other merchants. Discussions with one payment processor reveals that basic merchant fees range from close to one per cent for Visa and Mastercard to four per cent for American Express. Debit card fees are generally lower and are applied on a flat, per transaction basis. As a larger payment processor, Cabcharge is likely to incur lower merchant fees than its competitors, although the inquiry has not been able to confirm this. The markets for payment instruments and payments processing have several characteristics that provide important context for the way services are delivered and that also help to explain why such a seemingly high surcharge can continue to be applied. These characteristics are: • The high risk of providing payments services to the taxi industry • The demand for payments systems services • Network effects. Understanding industry performance CUSTOMERS FIRST 253
12.3.2. Demand for electronic payment services With a surcharge that many consumers and industry players consider to be excessive, it may be surprising that an estimated 40 per cent of taxi fares are paid electronically. One explanation for this can be found by examining the demand side of the market. Consumer demand for payment instruments and payments processing is derived from demand for underlying taxi and hire car services. Payment systems, like taxi drivers, are inputs to the taxi service. Two factors suggest that demand for electronic payments is likely to be inelastic – that is, not very responsive to a surcharge: • Demand for the underlying taxi services is inelastic and therefore the demand for payment instruments and processing is also likely to be inelastic • Service fees or surcharges remain a relatively small part of the total fare. This inelasticity is due to a lack of substitutes for both payment systems and taxis. First, there are no alternative payment methods that provide the same benefits as taxi-specific payment instruments or other electronic payment instruments, particularly for higher value fares. Carrying a large amount of cash can be insecure and inconvenient, and is not favoured by business users in particular. Secondly, the payment system is directly linked to taxi use and competition does not work effectively in these markets. Offering a lower surcharge offers minimal benefit to the operator because, in many situations, this will not lead to more business – for example, for taxis taken from a rank or hailed. Nor is there any discounting in the pre-booked market segment: it is notable that both large metropolitan networks benefit from rebates from Cabcharge derived from the 10 per cent surcharge. Limited awareness of the surcharge levied by payment system operators may also be a factor leading to inelasticity of demand. Feedback from drivers in particular suggests that while business users are aware of the charge, other users are less aware and are likely to confront drivers if they notice it on their fare: Most business people know about the surcharge, and don’t care because the boss pays for it. The general public are the ones who do not understand, and often they will think the taxi driver has put extra on the payment, and this can cause arguments. 8 12.3.3. Network effects Payment instruments and processing systems are ‘twosided’ market platforms. A two-sided platform is one where the platform acts as an intermediary between two groups of customers, creating value from transactions between the two groups. Two-sided markets have some unusual features, but perhaps the most important feature in relation to the taxi industry is the scope for network effects. In relation to payment instruments, the two ‘sides’ are account holders and taxi operators. Account holders want to hold instruments that will be accepted by taxi operators. Taxi operators want to accept instruments that will be used by account holders and taxi passengers. In a similar vein, the two ‘sides’ of the payment processing market are taxi users and taxi operators. Again, the interest is in holding and accepting cards that will be used and processed by users on the other side. These market characteristics give rise to so-called ‘network effects’. Users require different functionality from the payment system, but each obtains value from interacting with users of the opposite group – in fact, the value of the payment service is dependent upon the number of other users using it. This kind of market characteristic will tend to favour concentrated markets, unless the costs to consumers or to operators of holding multiple cards or multiple payments processing units are not too high. The inquiry understands that many taxis in Victoria have more than one processing unit in the vehicle, which suggests a processing monopoly is not a foregone conclusion. In addition, many consumers will hold more than one type of card or payment instrument, which will allow for some competition to develop between processors. In relation to payment instruments, if the market is defined for taxi-specific payment instruments, then Cabcharge has a very strong position in this market. It appears to have largely captured the network effects and has reenforced this by integrating into payments processing and network services. In this instance, an account holder will be unwilling to choose another taxi-specific payment instrument because there is a real prospect that this instrument will not be accepted in all taxis – in particular, those with a Cabcharge processing unit. 8 Christine Coombes, Comment on Taxi Industry Inquiry Facebook page, 2 April 2012 254
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Part D Understanding industry perfo
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The number of licences is restricte
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9.2.2. Quality and safety controls
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Case study New Zealand’s experien
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Case study Singapore’s unique reg
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Case study London’s quality contr
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A report commissioned by the inquir
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Another possible explanation for hi
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From these comparisons, we can obse
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New Zealand is an example of a taxi
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Chapter 10. 10. Taxis, hire cars an
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10.1.2. Substitution with public tr
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Nonetheless, there are market mecha
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10.2.2. Detriments from restriction
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On the other hand, some submissions
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4. The regulatory burden of decidin
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Country licence releases and the pu
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10.2.3. Are there offsetting benefi
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The inquiry conducted research into
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10.2.4. Valuing the effect of licen
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It would also be possible to implem
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Inquiry findings è The detriments
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In its 1999 report, KPMG argued tha
Page 48 and 49: 10.3.4. Effect on taxi operators an
Page 50 and 51: The practices raised with the inqui
Page 52 and 53: Historically, the zones generally r
Page 54 and 55: Merging the taxicab markets of two
Page 56 and 57: A further summary of these data is
Page 58 and 59: 10.5. Regulation of taxi-cab fares
Page 60 and 61: • It exposes taxi operators to a
Page 62 and 63: KPMG argued that these restrictions
Page 64 and 65: 10.7. Vehicle regulations Taxis and
Page 66 and 67: Advertisements The policy to remove
Page 68 and 69: In recent years, NSPs have increase
Page 70 and 71: Some respondents argue that the mar
Page 72 and 73: Driver obligations to the NSP NSPs
Page 74 and 75: There are nine accredited secondary
Page 76 and 77: From 1953, the use of two-way radio
Page 78 and 79: 11.4.2. Mandatory network affiliati
Page 80 and 81: The inquiry considers that there is
Page 82 and 83: Walters FM also said: Until such ti
Page 84 and 85: The ACCC has been called on a numbe
Page 86 and 87: The ACCC also noted that West Subur
Page 88 and 89: This also means that other NSPs and
Page 90 and 91: Metropolitan NSPs charge affiliatio
Page 92 and 93: Figure 12.1 Average fare costs, met
Page 94 and 95: 11.8.3. Affiliation with more than
Page 96 and 97: However, unlike most other goods an
Page 100 and 101: A further key feature of two-sided
Page 102 and 103: Case study Cabcharge penalised for
Page 104 and 105: To compete with Cabcharge, the newe
Page 106 and 107: 12.5.1. Removing regulatory barrier
Page 108: In addition, given the well establi
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