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Is cab/ride hailing commission high? Any alternatives?

June 05, 2020 / SENTHIL RADHAKRISHNAN

In this article, we will compare ride-hailing with another popular marketplace used by most of us, i.e. stock exchanges. Most of us have hailed a taxi on our smartphone and done equity trading on an exchange through a stock broker.  How do these 2 marketplaces compare? Ride hailing market places are companies like OLA, Uber, Lyft, and Grab. Equity stock exchanges are companies like NSE, NYSE and Nasdaq.

What is a market place? A market place is a medium where two parties exchange goods and services. In ride hailing the buyers are passengers who need a car ride and sellers are cab drivers.  In ride-hailing market places the technology platform like an OLA decides the price of the service on behalf of the two parties. The inputs for the price are real-time demand, distance, and traffic intensity.

There various types of stock exchanges are order driven, quote driven or a combination (hybrid).  In order driven any sale or trade will happen only if the buy order matches (price, quantity, stock instrument) with the sell order.  In quote driven the exchange has trading desks that provide a counter offer to any buyer’s or seller’s order. The ride-hailing model has aspects of both types of exchanges. In an order driven exchange there must be a matching buy/sell order for a trade to happen. Similarly, in a ride hailing platform, a ride is not provided if there isn’t any unoccupied cab available near the location of the ride requester (buyer). But the pricing model of the ride hailing platform is like a quote driven exchange. In quote driven exchanges the pricing is a 2-way quote (for buy or a sell order) whereas in cabs it’s a single quote to the ride requester (the ride hailing platform quotes the price on behalf of the driver).

If one looks at the trade lifecycle there are 3 key parts – pricing or quotation, trading or agreement of T&C (terms and conditions) and delivery of service or asset. In ride-hailing market places the delivery of service is a cab ride.  The driver must accept the ride request for the trip to get confirmed.

Before a stock can be traded, stocks need to be listed on an exchange based on predetermined rules and brokers need to be registered to get access to the exchange. In ride hailing platforms cabs and drivers need to be onboarded to provide rides to passengers. Their onboarding process is about verifying documents on government rules for taxis/cabs. The ride types or service options available is determined by the marketplace platform provider.

There are differences between a stock exchange and a cab hailing market place. To trade in a stock exchange one must go through a broker, it’s not direct. The entire trade lifecycle takes about 2 calendar days, but individual legs take a few seconds and one can do multiple trades at a time. In ride-hailing, since it’s a service the ride journey takes few minutes to a couple of hours. The buyer and seller can do only one trip/ride at a time.

The commission or fees charged by exchange and ride-hailing platform are quite different. In an exchange the commission charged is often a fixed low fee for any traded value. In ride-hailing cabs (in India) the commission is 20% of the ride value. Since this transaction goes through a payment network another 1-3% goes in transaction charges. So, the actual commission is about 17-18%. Ride hailing companies do provide services like customer service (UBER India doesn’t have a customer call centre), ride tracking on a map for the duration of the trip and voice calling services between the driver and passenger.

Is the commission percentage high? It does look high given that ride-hailing companies don’t guarantee the service and it’s a simple software solution. It does feel that matching a buyer and seller on a large scale for a commodity service shouldn’t have such a high commission. The other value additions involved in the service are information like driver rating, ride history and software based passenger safety features.  Are high marketing costs, legal fees and other overheads pushing up the commission charges of ride-hailing companies?

In ride-hailing drivers can register on multiple market place platforms (In India there are 2 big platforms). Since this involves using two different mobile apps by drivers, it results in them using only one app (platform) at a time. A consequence of this is the number of drivers are split across platforms and this fragments driver availability reducing the probability of ride match or ride from occurring. Should ride-hailing platforms make their systems open so that drivers are visible on all platforms at the same time? This will benefit passengers (ride buyers) and drivers (ride sellers).  A lot of trades happens outside stock exchanges based on the price distributed by the exchange.  Stock exchange also earn income for price discovery. Should ride-hailing platforms let other platforms do the ride-matching based on prices quoted by them?

While it’s still early days in the life of cab/ride-hailing companies one can expect a lot of change in the future. Electric cars could add a bit of complexity to the service as they need to be recharged regularly.  Autonomous cars could reduce complexity as driver acceptance is not required and could also lower the costs. The other question that comes up is do we need ride-hailing entities (middlemen or brokers)? Can they be disintermediated? What is the alternative solution?

Bitcoin blockchain’s design and cab hailing functionality seem like a good fit. The aspects that make it a good comparison are: driver’s rating/ride history can’t be altered on a blockchain and buyer/seller broadcast and matching model is there in bitcoin blockchain technology. While no operator is required for day to day management of the blockchain infrastructure, one or more trusted entities would be required to on-board driver and vehicle details to ensure the data logged in the blockchain isn’t corrupt. Theoretically bitcoin technology infrastructure and the rules governing it are meant to be self-managed or self-regulated there is a group called “Bitcoin core” who oversee new software/product releases. In addition, product changes, must be accepted by most the of the bitcoin miners for a feature to go live.  So, could Bitcoin’s blockchain be that better alternative to cab hailing platforms like OLA, Uber? Only time will tell.