Ride-hailing stalled taxi loans – could it jump start CU lending?
When Uber began in 2009, most were skeptical. You would hear people say things like, “I’m unsure if I can trust someone I don’t know and get inside their vehicle.” Fast forward a few years and it was a mainstay. The idea even spawned similar companies like Lyft, Relay Rides, Sidecar and Zimride. Ridesharing, car sharing, carpooling; everything regarding how we get from point A to B shifted.
Ride-hailing companies were a disruption. The taxi industry, in particular, was hit hard. Lawsuits were filed, but most of them were unsuccessful. It’s not because taxi companies had a weak case, though. The concerns were legitimate. Obtaining a taxi medallion was a lifeline for owners. Many would purchase one in hopes of driving for 10 years or so, then selling for a nice profit. The license fees varied, but you could expect to pay anywhere from $80,000-$200,000 to get started.
Tucked inside the medallion fee were municipal fees and taxes required by law. Ride-hailing companies are exempt from paying those fees. Taxi drivers felt they were at a disadvantage. Hence, the lawsuits. However, most courts ruled in favor of ride-hailing companies. As a result, markets sprouted all over the United States and abroad.
Today, many taxi drivers are upside down with regard to their taxi medallion equity. What initially began as a solid investment is now seen as an albatross, of sorts. Many are scrambling to survive, but find it impossible now that they owe several hundred thousand dollars against the medallion license. This was not a problem when medallions were expected to appreciate. Yet, Uber and others disrupted the market, making medallions almost worthless. As a result, business loans for taxis flatlined.
The taxi medallion should be taken as a cautionary tale for credit unions. Ten years ago the taxi medallion seemed almost risk free but – as we are witnessing – nothing is completely risk free. Diversification of credit union loan portfolios is a must. In addition, as technology advances, businesses must adapt in order to remain relevant.
As this reality continues to unfold, it seems to be the end of one lending chapter and the beginning for another. A rising opportunity presents itself for credit unions to lend to those who drive for ride-hailing services.
However, all was not roses for Uber and Lyft drivers, either. Many drivers who sought auto loans from credit unions were denied for a variety of reasons. Drivers heard everything from “You need to obtain a business license” to “Using your vehicle for ride share creates a depreciation risk factor for the vehicle itself.”
The business license argument was dead almost as soon as it was issued. Uber, Lyft and other ride-hailing services do not require drivers to obtain a business license, since they are considered independent contractors. As a result, credit unions could service the loan as a traditional automobile note, rather than a business note, which would require further documentation. If your credit union prefers not to offer loan for ride-share purposes, verbiage would need to be added to the consumer lending documents.
The latter argument has discrimination overtones, which makes it easy to overcome. Drivers for ride-hailing services are allowed to set and maintain their own schedules. Therefore, it is impossible to determine just how much wear and tear a driver’s vehicle will incur during its use for business purposes versus normal wear and tear.
So what does this mean for credit unions? Lending to drivers for ride-hailing services could be a boon for credit union lending for three main reasons, and they all have to do with market expansion and competition.
- Taxi loans are at a standstill: As taxi medallions become less of an asset, credit unions and other financial institutions are hesitant to write business loans for drivers. Add to that a depressed equity market for medallions, and a flat lending market makes sense.
- Ride-share as a side job is growing: According to the Brookings Institution, use of ride-hailing services grew by 63 percent from 2014 to 2015. Since that time, Uber and others have expanded to offer additional services such as food delivery, further adding to the workforce. All of these drivers are going to need a vehicle, which means they will also need a loan.
- Quality standards: Ride-hailing companies have minimum standards that must be kept. Because of this, clunkers are frowned upon. As a result, drivers may need to trade in their vehicles more often to meet quality standards if they want to continue to make money as a driver.
Credit unions hoping to capitalize on this opportunity must start by ensuring their consumer lending forms are up to date and integrate easily with a variety of data processors. Make sure your consumer lending package is current and stands compliant to lend to potential borrowers who work as drivers for Uber, Lyft and the like.
Regardless of how you view the issue, the impact cannot be denied. Ride-hailing services have great lending potential as an industry. Newer vehicle requirements, sector growth and expansion are all in full motion. Make sure your consumer forms position you to take full advantage of the lending potential endemic to the market. While taxis may have seen their day as far as business loans are concerned, ride-hailing is positioned to take its place. In fact, it could be the lending boon the entire credit union industry has been looking for.