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

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
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