#Automotive Finance

Car-as-a-service: driving revolutions

Jan 21, 2020 - 5 min read
Also Available in : Português
Yann Metz-Pasquier, EVP, Digital Banking Global Business Unit at Sopra Banking Software

A new subscription model could be about the change the way we approach car “ownership.” But just how successful will Car-as-a-Service become, and what are the challenges facing the model in becoming mainstream?

A fourth way of accessing car “ownership”

To buy, lease or rent. These three models have traditionally been the standard options to “own” a car, whether on a temporary, long term or permanent basis. However, the emergence of the subscription model over recent years is starting to gain momentum.

The auto industry is going through a major evolution, following in the footsteps of other sectors, including media, hotels and fast food. All of which have gone through digitally enabled disruption, powered by technological innovations and fueled by changing customer behavior.

Thanks to the success of these innovations, customer expectations of getting around are driven by the disruption in other industry sectors, and we now expect a personalized, on-demand service at the click of a button – similar to Netflix, but for getting us from A to B.

Car-as-a-Service (CaaS), where a monthly subscription fee gains you access to an entire fleet of various vehicles, is potentially the auto industry’s solution to the changing customer expectations and behaviors.

However, CaaS is just a part of a wider shift from “owned” transport, with high overheads and low usage, toward a service delivery model that could help lower consumer outgoings and maximize usage.

Where CaaS could play its most valuable part of the Mobility-as-a-Service (MaaS) movement is where it’s offered as part of a combination of services from public and private transport providers, easily managed via a single portal or gateway, allowing users to switch seamlessly between different transport modes on one single subscription platform.

A recent KPMG report seems to confirm that MaaS is going to be a key part of our transportation future, estimating that “as the mobility ecosystem evolves, its global value is forecast to grow to more than $1 trillion by 2030.”

A natural step for an evolving consumer

The shift to a subscription model is already suiting customers who see shared usage and a service model as the norm in other areas of their lives.

A recent Cox Automotive survey shows that consumers see the need to own a car as decreasing, with nearly 60 percent of respondents who say that access to transportation is a must, also saying that owning a vehicle is not – a 13-point increase from 2015. Key to this was the cost of ownership, with 48 percent of respondents saying owning a vehicle isn’t financially viable.

Asset utilization is another key driver of the MaaS model, with sustainability and increased profitability top of many providers’ minds. A US survey found that American cars are parked for 95 percent of the time, with a similar UK study by the RAC Foundation finding that the average car on the other side of the pond is parked 96 percent of the time.

The move to “pay-per-use” for vehicles and transport could include “pay-per” mile, hour, ride and vehicle/transport switch, as well as the opportunity for consumers to dictate these preferences. Such flexibility would likely see an increasing number of consumers becoming comfortable with the CaaS model.

With a growing proportion of consumers seeing ownership as unnecessary, the combination of having access to the right vehicle at the right time, driving sustainability and higher utilization bringing costs down, we could see the model become more mainstream in the near future.

The companies driving the service

CaaS has, unsurprisingly, garnered wide attention in the auto industry. Major players such as BMW, Porsche and Volvo are already offering “luxury” subscription plans, usually in the region of 1,000 to 3,000 USD per month. However more affordable options are now emerging, including Hertz My Car, launched in June 2019, aimed at the more general motorist.

Fair has gained a large media following since its inception in 2015 because of its CaaS model. Fair’s ability to offer car options with no long-term commitment, and the ability to add insurance, roadside assistance, routine maintenance and warranty, all via the Fair app, has so far proved successful.

US rideshare company Lyft has also introduced an all-access subscription option, providing 30 free rides a month. At the same time, Lyft has quietly rolled out a more traditional car rental service in three Californian cities. Lyft’s vision to provide a world in which vehicles are only shared, rather than owned, could mean the merging of their ride share and car rental services into one single subscription is only a matter of time.

Roadblocks along the way

It’s hard to imagine that CaaS won’t continue to grow in the short term, and it may even become the most popular method of car “ownership” in the future. The advantages for the end user are broad and include flexibility, low entry barriers and increased convenience.

However, while CaaS may become the most popular method of car “ownership,” it could face increasing competition from the MaaS model, with ride hailing, public and private transportation, and multimodal services. As the latter becomes more affordable and more widely used, and more convenient partnerships are formed, it could trump CaaS and become the most efficient and affordable way to get around.

Furthermore, while many emerging consumers are on board with a sharing economy, the fact that car sales in the US are at their highest level in 40 years shows that outright ownership of cars isn’t going anywhere fast. It proves that some consumers simply like having their own car, and that is unlikely to change anytime soon.

A technology-powered revolution

While the idea of CaaS is straightforward, the operational side is far more complex. Dealerships, ride share and taxi firms and rental firms – any business, in fact, offering a subscription-based model – require a sophisticated, centralized platform that, among other things, manages portfolio and payments in different markets, with regulatory and currency differences, as well as providing a user-friendly interface.

Fifteen years ago, this type of operation wouldn’t have been possible, but due to the advancement of specialist software providers with all-inclusive platforms and increased APIs, the operation of CaaS has become a reality.

CaaS in the future

As car usage and ownership trends evolve, there will be many new opportunities and challenges for the industry. Areas to watch include:

  • The global car parc, and its future. It will be particularly interesting to see how used vehicles are integrated into the CaaS model, and whether that will become a price differentiator for competition in the ecosystem
  • Residual values, and how fleet-based portfolios and subscription usage vs. ownership usage affect residual values
  • F&I services, and whether models such as Fair become more common. Will finance and insurance be bundled into a subscription deal, rather than being an added service?
  • The insurance challenges the subscription fleet portfolio owner will face with multi usage and multi users of the same vehicle
  • How the power shift between manufacturers, dealers, hire companies, fleet owners and finance companies will change
  • How financing, auditing and management of the fleet that makes up the subscription portfolio will work
  • The evolving mobility ecosystem, and what non-traditional and non-linear value chains will look like in the future

Continuing the conversation

It’s hardly surprising that Forbes reports CaaS is expected to take a 10 percent market share of the auto industry by 2026. This is a huge growth given the model barely existed only a couple of years ago. At the heart of it are changes in consumer behavior, and the technology that enables simple but effective ideas.

The area continues to be a hot topic in the industry, and there are plenty of new opinions, research programs, terminologies and reports being published. The common theme is change, and we all need to be part of the solution to enable the transformation, offering value-driven outcomes and services. Watch this space!