How does Uber manage to outpace competitors, or understand how payments and finance work in a company
The economic sharing economy model, which has made Uber one of the most successful startups on the planet, has been made possible not only by disruptive technological, but also financial innovation. Although, unlike the technologies that companies like to talk about so much about, the details of the financial side are usually modestly silent. Is the Uber financial model so unique that it gave the company a fundamental advantage over its competitors in the market and therefore the company does not want to talk about it? Let's try to figure out what the secret is.
Launched in San Francisco in 2010, Uber began to conquer new cities and countries like a viral epidemic, and very quickly faced the problem of how to scale its financial model of reciprocal passenger-to-driver settlements in all regions where the service is present. The main advantage of the Uber payment infrastructure is the fast in-app payment for the trip, the ability to pay in the local currency of each country and regular transfers of taxi drivers earnings to personal cards.
While entering new markets, Uber was forced to tackle two main tasks in dealing with payments: receiving payment from passengers and paying to taxi drivers. And there are two models to choose from: integrate with the local payment service in each new country, or work through their usual partners, one of which at the moment is PayPal, Braintree (a subsidiary of PayPal) and Adyen (a well-known international payment platform). Each model has its advantages and disadvantages, and they depend on several factors.
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Consider accepting payments from passengers on credit cards. If Uber decides to integrate with a local payment platform or a bank during launch, it risks disrupting launch time if integration with a partner is delayed.
It is worth explaining here that when working with cards of international payment systems Visa, MasterCard and American Express, a bank servicing an Internet company (acquirer) and a payer’s bank (issuer) must pay an interchange fee to the payment systems, which is higher if the issuing bank and the acquiring bank are located in different countries.
The main financial institution of the American company Uber is located in the Netherlands. This is done in order to minimize tax payments, since in Holland for non-resident companies there is a reduced tax rate. In this regard, all payments from passengers in non-European countries for Uber are cross-border. Nevertheless, at the start Uber usually prefers to pay large commissions for cross-border payments and work with its international partners than to take the risk of working with a new partner in a new country.
One of the peculiarities of the Uber financial model is that the company wants to earn income by accumulating it in its European financial institution in a certain currency (euro, dollar), and at the same time not causing inconvenience to customers with unnecessary conversions. In this case, PayPal, Braintree and Adyen allow Uber to work with local currencies in different countries and this means that the passenger will always see the cancellation on his card in his local currency. This technology is called DCC - Dynamic currency conversion and is supported by the majority of acquiring banks - participants of international payment systems. Although there are also such issuing banks that charge additional fees for cross-border DCC payments, the choice of a suitable bank, in which it is better to open the card, lies with the passenger himself.
Usually, in parallel with launching new markets, Uber also starts direct integration with local payment systems if the payment infrastructure in the country is at a developed level and does not bear risk in the quality and stability of payment processing and the functioning of financial institutions. This allows Uber to reduce the cost of local bank card payments, as well as introduce payment methods that are popular in this country. But sometimes the reason for the start of integration is not Uber’s desire, but local laws and regulatory acts. For example, in India, Uber was forced to cooperate with the MobiKwik payment system, since the mandate of the Reserve Bank of India requires the use of two-factor authorization when making payments on the Internet, and Uber does not use 3D Secure in principle in order not to complicate the payment process in a mobile application. Another problem that forces Uber to integrate with local payment systems is a large proportion of local cards in use in a particular country that do not work with international payments (so-called domestic cards). In this case, if Braintree and Adyen do not have integration with a local bank in such a country, Uber itself undertakes this procedure.
Another feature of international payment systems is that they do not really "love" cross-border payments to merchants, and often require that the bank-ekayer and the bank, in which the account of the company of the entrepreneur is opened, were located in one country. The exception is cross-border payments within the European Union. Therefore, working with local banks for Uber is an extra problem, since the funds of passengers will accumulate in a country foreign to Uber in local currency, and the company will need to find a way to withdraw these funds from the country. And if the accumulation of funds, in fact, is an investment in the country's economy, and usually passes without problems, then withdrawal of funds requires more bureaucratic delays.
With payroll earnings taxi drivers everything is a little different. Since Uber accumulates all incoming funds in the Netherlands in euros or other European currencies, in order to pay the earnings to the taxi drivers in the local currency of the taxi driver, the company must transfer funds to each country through a cross-border transfer. To do this, the following financial instruments exist (only international systems and the USA are listed):
All other international money transfer technologies are usually add-ons above the basic systems and methods listed above and are derived from them.
In the public domain, there is no information on how and what methods and systems Uber uses for payments to cards, but knowing the basic basic technologies and available information, we can conclude that Uber successfully combines the necessary systems, methods and payment partners in each country in such a way that Reduce the cost of transfer fees and speed up the flow of funds to your account. For example, the Instant Pay technology, which Uber launched in the USA and which represents instant payments to taxi drivers for cards, is essentially ACH transfer within the country to Visa debit cards issued by GoBank. But since ACH is offline, i.e. slow transfer (3–4 days), then GoBank in essence instantly advances taxi drivers, crediting funds to cards and waiting for real funds from Uber to arrive.
Since commissions to payment systems and banks for cross-border transfers in small amounts can “eat up” all revenues, Uber, in order to optimize its costs, does not transfer payment to each taxi driver directly to the card, but aggregates funds in the local accounts of its intermediaries - the local financial institution of that country In which the taxi driver works. To do this, Uber once a week transfers the sum of all trips, minus its commission (20–25%) to its numerous intermediaries, to bank accounts, and the intermediaries, in turn, pay out cards or bank accounts to taxi drivers. As a rule, for the last mile - mass payments already within the country of a taxi driver are used by partner banks that have an API for credit cards and accounts.
As we see from the analysis, Uber does not possess any exclusive payment technologies or preferences in financial markets. At the moment, payment technologies have reached the level when they became available not only to world leaders, such as Uber, Airbnb, Blablacar, as well as to any medium and small business anywhere in the world. And the success of Uber lies in the correct use of these technologies, their composition into an effective financial model.
Global expansion
Launched in San Francisco in 2010, Uber began to conquer new cities and countries like a viral epidemic, and very quickly faced the problem of how to scale its financial model of reciprocal passenger-to-driver settlements in all regions where the service is present. The main advantage of the Uber payment infrastructure is the fast in-app payment for the trip, the ability to pay in the local currency of each country and regular transfers of taxi drivers earnings to personal cards.
While entering new markets, Uber was forced to tackle two main tasks in dealing with payments: receiving payment from passengers and paying to taxi drivers. And there are two models to choose from: integrate with the local payment service in each new country, or work through their usual partners, one of which at the moment is PayPal, Braintree (a subsidiary of PayPal) and Adyen (a well-known international payment platform). Each model has its advantages and disadvantages, and they depend on several factors.
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Acceptance of payments from passengers
Consider accepting payments from passengers on credit cards. If Uber decides to integrate with a local payment platform or a bank during launch, it risks disrupting launch time if integration with a partner is delayed.It is worth explaining here that when working with cards of international payment systems Visa, MasterCard and American Express, a bank servicing an Internet company (acquirer) and a payer’s bank (issuer) must pay an interchange fee to the payment systems, which is higher if the issuing bank and the acquiring bank are located in different countries.
The main financial institution of the American company Uber is located in the Netherlands. This is done in order to minimize tax payments, since in Holland for non-resident companies there is a reduced tax rate. In this regard, all payments from passengers in non-European countries for Uber are cross-border. Nevertheless, at the start Uber usually prefers to pay large commissions for cross-border payments and work with its international partners than to take the risk of working with a new partner in a new country.
One of the peculiarities of the Uber financial model is that the company wants to earn income by accumulating it in its European financial institution in a certain currency (euro, dollar), and at the same time not causing inconvenience to customers with unnecessary conversions. In this case, PayPal, Braintree and Adyen allow Uber to work with local currencies in different countries and this means that the passenger will always see the cancellation on his card in his local currency. This technology is called DCC - Dynamic currency conversion and is supported by the majority of acquiring banks - participants of international payment systems. Although there are also such issuing banks that charge additional fees for cross-border DCC payments, the choice of a suitable bank, in which it is better to open the card, lies with the passenger himself.
Usually, in parallel with launching new markets, Uber also starts direct integration with local payment systems if the payment infrastructure in the country is at a developed level and does not bear risk in the quality and stability of payment processing and the functioning of financial institutions. This allows Uber to reduce the cost of local bank card payments, as well as introduce payment methods that are popular in this country. But sometimes the reason for the start of integration is not Uber’s desire, but local laws and regulatory acts. For example, in India, Uber was forced to cooperate with the MobiKwik payment system, since the mandate of the Reserve Bank of India requires the use of two-factor authorization when making payments on the Internet, and Uber does not use 3D Secure in principle in order not to complicate the payment process in a mobile application. Another problem that forces Uber to integrate with local payment systems is a large proportion of local cards in use in a particular country that do not work with international payments (so-called domestic cards). In this case, if Braintree and Adyen do not have integration with a local bank in such a country, Uber itself undertakes this procedure.
Another feature of international payment systems is that they do not really "love" cross-border payments to merchants, and often require that the bank-ekayer and the bank, in which the account of the company of the entrepreneur is opened, were located in one country. The exception is cross-border payments within the European Union. Therefore, working with local banks for Uber is an extra problem, since the funds of passengers will accumulate in a country foreign to Uber in local currency, and the company will need to find a way to withdraw these funds from the country. And if the accumulation of funds, in fact, is an investment in the country's economy, and usually passes without problems, then withdrawal of funds requires more bureaucratic delays.
Payments to taxi drivers
With payroll earnings taxi drivers everything is a little different. Since Uber accumulates all incoming funds in the Netherlands in euros or other European currencies, in order to pay the earnings to the taxi drivers in the local currency of the taxi driver, the company must transfer funds to each country through a cross-border transfer. To do this, the following financial instruments exist (only international systems and the USA are listed):
- Wire transfer or SWIFT transfer. The most universal way of international transfers, works in most countries. Within the European Union, the cost of transfers is not high, but with cross-border transfers, tariffs increase significantly. Works offline, funds can go 2–5 days.
- Money Transfer and MoneySend are online transfer technologies from international payment systems Visa and MasterCard, which allow you to replenish bank cards online. It is quite moderate in cost services, but work only in a specific list of countries. For example, in the US are not available. The term of enrollment is usually a few minutes.
- Merchandize return is rather not a technology, but a method of replenishing cards from Visa and MasterCard, but already offline, in which funds arrive in 2-5 days. Officially, it is not provided by the acquiring banks and is more similar to a life hack, since it was originally designed to return funds to the card for purchases. But there is an opportunity to pay funds for any cards. The cheapest method of all.
- Quasi-cash is similar to the previous method of offline payment to cards, but is allowed only on those cards from which payment was made, i.e. not applicable to Uber.
- ACH is an offline debit of a bank account, it works only within the United States, a term of 3-4 days.
- WesternUnion, Transferwise, MoneyGramm - international transfer systems. Work with certain countries, quite expensive.
All other international money transfer technologies are usually add-ons above the basic systems and methods listed above and are derived from them.
In the public domain, there is no information on how and what methods and systems Uber uses for payments to cards, but knowing the basic basic technologies and available information, we can conclude that Uber successfully combines the necessary systems, methods and payment partners in each country in such a way that Reduce the cost of transfer fees and speed up the flow of funds to your account. For example, the Instant Pay technology, which Uber launched in the USA and which represents instant payments to taxi drivers for cards, is essentially ACH transfer within the country to Visa debit cards issued by GoBank. But since ACH is offline, i.e. slow transfer (3–4 days), then GoBank in essence instantly advances taxi drivers, crediting funds to cards and waiting for real funds from Uber to arrive.
Since commissions to payment systems and banks for cross-border transfers in small amounts can “eat up” all revenues, Uber, in order to optimize its costs, does not transfer payment to each taxi driver directly to the card, but aggregates funds in the local accounts of its intermediaries - the local financial institution of that country In which the taxi driver works. To do this, Uber once a week transfers the sum of all trips, minus its commission (20–25%) to its numerous intermediaries, to bank accounts, and the intermediaries, in turn, pay out cards or bank accounts to taxi drivers. As a rule, for the last mile - mass payments already within the country of a taxi driver are used by partner banks that have an API for credit cards and accounts.
No gods burn pots
As we see from the analysis, Uber does not possess any exclusive payment technologies or preferences in financial markets. At the moment, payment technologies have reached the level when they became available not only to world leaders, such as Uber, Airbnb, Blablacar, as well as to any medium and small business anywhere in the world. And the success of Uber lies in the correct use of these technologies, their composition into an effective financial model.
Source: https://habr.com/ru/post/322772/
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