Car manufacturers have been looking at opportunities to diversify and develop value-add propositions and revenues streams for many years. Financial services are a key component of that. Looking at the annual reports of BMW or Volkswagen it becomes apparent that their respective financial services divisions contribute roughly 30% to group profits. The contribution to group sales is much lower, suggesting significantly higher margins in their financial services divisions. But why are we talking about the automotive industry? Last month we saw a very interesting announcement of JP Morgan acquiring a 75% stake in Volkswagen Payments SA, which is part of Volkswagen Financial Services. Like many other car manufacturers, Volkswagen Financial Services was created to facilitate financing and leasing deals to car buyers on the one hand and supporting dealerships with equipment related capital loans on the other hand. It gradually expanded into servicing and insurance products as well as direct car rental solutions. By 2020, Volkswagen Financial Services served 11m financing/leasing contracts, 10.5m servicing/insurance contracts, and managed 1.4m current/deposit accounts. But there is more. Whilst we have not done a full benchmarking analysis of other car manufacturers, we would argue that Volkswagen has taken a very strategic outlook for the division very early on intending to explore other (revenue) opportunities. The development of Volkswagen’s payment platform was a key part to support various use cases:
- The creation of heycar, an online platform for used cars
- The acquisition of Voya, a business travel start-up that can act as a (paid for) digital travel assistant
- PaybyPhone, a well-known parking meter app that allows car owners to digitally pay parking charges across the UK
And then there is mobility. In Volkswagen’s own terminology, mobility “describes the future of transportation services and is much more than just connected cars. Mobility will be using the smartphone to locate, hire, unlock and drive away vehicles in an instance, subscribing to services as opposed to buying vehicles, using data to direct traffic and ease congestion, right through to a single app to book train tickets, flights, and taxis.” To support these cases, there is Volkswagen Pay, a wallet solution to enable customers to make payments, in some instances from within a smart vehicle. According to research group Grand View, in-vehicle payments are expected to reach $4bn by the end of this year. So why does Volkswagen not want to run this growing business on its own? Firstly, there is probably an argument that most car manufacturers have been hit financially by the COVID crisis and selling 75% of the payment business (not the full financial services business!) for a reported low-to-middle double million figure is a nice cash injection. Secondly, it needs to be remembered that Volkswagen operates a multitude of different car brands and operates its financial services business in over 30 markets. Each market has different payment needs, preferences, and other local requirements such as connectivity to local systems. This is where JP Morgan can help. JP Morgan is known for having relationships with other car manufacturers such as Jaguar / Land Rover, but as a big, global corporate bank, it can provide local settlement capabilities. It can provide payment gateway functionality and APM support. At a time when it is pushing its ‘corporate acquirer’ proposition (Note: ‘Corporate acquirer’ is EDC’s terminology for recent developments by JP Morgan, Deutsche Bank or Citibank to integrate traditional merchant acquiring business in its corporate banking offerings), getting access to Volkswagen may well be a nice little benefit on the side. Combining a, from what we understand, well-developed payment platform at Volkswagen with truly global reach and capabilities can really be the foundation to extend its platform proposition to meet future customer demands within the automotive industry and beyond. It is an intriguing link-up in a growing industry.
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