The last bastion of cash-only payment in Hong Kong is the taxi industry. Several fintech companies have attempted to introduce mobile payments, but with little success. Three fintechs may have assembled the pieces to complete the jigsaw. But their pieces are different, so their fight will determine what the puzzle reveals.

First up: Wonder, a homegrown fintech owned by New York-based software developer Bindo (and with a minority stake held by Hong Kong Telecom). Wonder got its start in Hong Kong by providing the payment tools to local bars and restaurants.

Second is CabCab, a branch of Mobile Shop, which is one of many local operators of taxi fleets. It seems to have government endorsement.

Third is PayMe, the HSBC-owned and operated QR mobile payment app, which enjoys the backing of the broader HSBC ecosystem.

There are other players too, including Octopus, local fintech D-ash, credit-card companies, and other QR-code-based apps like AliPay and WeChat Pay. But they appear to have supporting roles.

The stakes are not just about taxis.

“Every fintech’s goal is to do lending, which is high margin, but it’s also capital-intensive and requires a lot of risk management,” said Anson Chan, Wonder’s head of strategy and partnership. “If you have the right data, though, payments and acquiring are entry points.”

Which contender can gain a critical mass of taxi drivers to adopt its payment tech?

Fintech v1: terminals

Octopus, the provider of payments tech for most of Hong Kong’s transportation networks, and a local fintech called D-ash made the first attempts to get taxi drivers to use mobile payments.

Their solution was based on installing hardware up front, D-ash with bespoke terminals and Octopus with the Octopus terminal. Drivers weren’t enthusiastic. Sources say D-ash managed to get about 50 terminals placed in cars serving Hong Kong’s outer islands – out of a fleet of 18,163 taxis. D-ash founders didn’t respond to DigFin‘s request for comment.

Octopus has since pivoted to promoting its mobile version’s QR reader. In fintech lingo it has positioned itself as a payment gateway, so others, such as AliPay (both the Hong Kong and mainland versions) and China UnionPay, can work by piggybacking off Octopus’s presence.

“We’ve opened our network,” said Tim Ying, CEO of Octopus. “Riders can choose to tap with their card, or they can choose to use their QR wallet to scan the Octopus reader.”

But the need for extra hardware is still a barrier, so Octopus is now one of several firms that use Wonder as its payment gateway – in effect agreeing to use a rival network.

One reason Octopus is willing to do this is because Wonder is making progress, at least in comparison: it claims to have onboarded more than 500 cars.

Its strategy has been to replace the taxi’s meter with its own device, which can accept many types of payment. For now, it has been subsidizing the cost to taxi owners, but it has had the most success where owners have decided to upgrade their fleets with new vehicles.

CabCab is taking a similar route. Supported by payments fintech EFT Solutions, it is promoting its own meter, which it says is endorsed by the government. It is piloting these on 100 cars and hopes to have 1,000 cars using it over the next six months.

“Replacing the meters is clever,” says a payments consultant. “But these fintechs rely on new taxis or new fleets, and owners willing to invest. The problem all of these players have is that most license holders are not investing in their cars, and no one wants to pay for upgrades.”

Colonial-era cartel

Hong Kong’s taxi industry operates in a cartel-like holdover from colonial times. The government issued 18,163 licenses to operate a taxi, all before 1997. Any driver must rent that license. The income stream from this has made the license holders very wealthy absentee landlords – bids for these licenses can approach $1 million – and they use their clout to lobby against the issuance of new licenses.

The drivers themselves rent 12-hour shifts and must pay for their own fuel and insurance, so they take home very little. Many drivers are poor elderly men or poor mainland immigrants. Drivers have no incentive to raise prices or charge more, including for the privilege of mobile payments, because any extra margin will vanish when the owners increase the rent.

Between the license owners and the drivers are operators of fleets, such as Mobile Shop. In theory these professional groups could introduce economies of scale. However, fleets are also fragmented, with none bigger than about 1,000 cars. Moreover, one car may have two drivers (one for each shift), further fragmenting the industry.

Therefore it is difficult for any payments player to win over cars: there’s always someone in the chain who doesn’t want to pay. The drivers are further hostile to mobile payments because many are on government benefits and don’t want to reveal their income, so cash is best. Also, the fuel stations that cater to taxi drivers, run by SinoPec and Shell, are also cash-based.

Enter Uber

Introducing competition and scrapping the cap on licenses would be the best solution. The government is now committed to showcasing Hong Kong as a digital smart city and fintech hub. It’s not a great look to visitors who, upon landing at the airport, find they need physical cash to get a cab to their hotel.

This hasn’t prompted any serious changes from the bureaucrats, but during Covid the government did distribute consumer vouchers via mobile operators including Octopus, AliPay, HSBC’s PayMe and HK Telecom. The population has come to expect mobile payment options.

Uber’s arrival in 2015 also shook things up. Hongkongers have long used hire cars privately. Uber represented a wholesale challenge. It is illegal, because Hong Kong law requires drivers be licensed. But it is popular all the same, especially thanks to Uber’s payment-through-app system and the way its business model encourages good service. The contrast is embarrassing and may explain why the government (and the taxi license cartel) been so eager to crack down on Uber while looking the other way when it comes to hire cars.

The final change, though, comes from innovation: Wonder and CabCab have built models that seem positioned to meet many of these challenges. Both pass the costs to the riders but offers them convenience. But their offering is not the same.

Innovation

Wonder’s betting that its T+0 settlement capability – which gives drivers e-money in hand with the instancy of cash – is the winning feature.

CabCab’s terminal is designed to read tolls and integrate these into fares.

Both involve complexity behind the scenes. Wonder, for example, is a merchant acquirer for banks such as DBS, and a payments gateway for the likes of AliPay, credit-card networks, and for telcos like HKT.

Its T+0 settlement works by pre-funding drivers. It gives them the fare (out of a virtual bank account provided by DBS), and collects on the receivable (the fare, making its way through the complexities of the payments world) a few days later. Byfin, a fintech owned by Japan’s SBI, provides the working capital for Wonder to pay the cabbies up front.

For now drivers can only receive this pre-funding as a credit in their bank account. Wonder is working on a debit card offering, if it can find a card-payments company to help it.

CabCab also provides the functionality of electronic receipts. Its meter also calculates tolls in tunnels, highways or other areas. Drivers can also add their own fees (eg for luggage) without having to do the math themselves.

In both cases, they are charging riders a surcharge to pay via mobile.

The battle between these two fintechs comes down to what drivers value more: automating various fares, or the instant payment. Both solutions are predicated on installing a new meter, rather than burdening drivers with additional hardware. The meters also mean passengers don’t need a special app: the meter’s QR reader does the work. The cabbies need to install the relevant app to receive their money. (But Wonder is currently subsidizing 10 percent of the rider’s fare if she pays with its QR reader.)

The challenge is to get license owners or taxi operators to agree to a new meter. Wonder’s head start is thanks to offering free installations, but at some point the benefits of the terminals have to speak for themselves. That means both will attempt to deepen their use cases: Wonder is looking to introduce debit cards and go the fintech route; CabCab is looking at features around the taxi itself, such as radio calls and geolocation.

Competition

Other markets have seen their taxis embrace mobile payments – because they were forced to. Australia and Singapore mandated taxi drivers upgrade their meters to enable e-payment. That’s not what’s going to happen in Hong Kong. It also means the MDR (merchant discount rate) that these players can levy will be lower.

Nor is this a simple two-way battle. There are other competitors.

Some are benign. Octopus and virtual banks want to win SMEs but they will find it easier to leverage a fintech’s network.

Other fintechs could become competitors. MicroConnect does many of the same things Wonder is doing, but in mainland China. The company, founded by Charles Li, the former CEO of Hong Kong Exchanges, is expert at turning SME data into financial services. But for now its focus seems to be on larger targets in the mainland.

This leaves PayMe as the third challenger for the taxi prize. HSBC is also in the merchant acquirer business, via Global Payment, a company the bank spun off to specialize in this area. HSBC is notably absent from the list of banks using Wonder as a payment gateway.

The Global Payment/PayMe/HSBC nexus is formidable. Most Hongkongers have PayMe or bank with HSBC or its subsidiary, Hang Seng Bank. HSBC is not looking to replicate the fintechs’ operations with the meters and all that. It doesn’t need to: drivers can simply use PayMe to get cash, anonymously, from passengers. (The same is true of AliPay and WeChat Pay, serving the mainland population in Hong Kong.)

Crudely put, HSBC has half the market. That’s true of many aspects of retail banking (think ATMs). Wonder, CabCab, Octopus and others are fighting over the other half. It is unlikely that HSBC is going to work with Wonder or CabCab. It is more likely it will use its considerable heft to wedge its way into the habits of taxi drivers and riders. (HSBC officials declined to comment for this story.)

HSBC can also afford to underwrite a marketing blitz aimed at drivers and riders. The bank isn’t going out of business if it wants to get punchy in a fight over taxi transport. The same isn’t true of its fintech competitors. It’s not clear, though, how much PayMe wants to spend to wage this fight.

This leaves Hong Kong’s taxi sector a divided market, unlike other places where payment options tend to be standardized. This could be frustrating to passengers wanting to use a certain method of payment. But this is a start.

“Doing this is expensive,” a consultant said of the meter-replacement approach. “So I suspect in a fragmented market, the more founders attempting this the better.” Given the need to also ensure foreign visitors can pay with their own credit cards or e-wallets, he added: “I don’t see a common approach taking shape.”

But this state of affairs may not be permanent.

“We believe this is a winner-takes-all market,” said Wonder’s Chan.

• SEO Powered Content & PR Distribution. Get Amplified Today.
• PlatoData.Network Vertical Generative Ai. Empower Yourself. Access Here.
• PlatoAiStream. Web3 Intelligence. Knowledge Amplified. Access Here.
• PlatoESG. Carbon, CleanTech, Energy, Environment, Solar, Waste Management. Access Here.
• PlatoHealth. Biotech and Clinical Trials Intelligence. Access Here.
• Source: https://www.digfingroup.com/wonder-taxi/