EVolution: The rise of software-defined vehicles and pay-as-you go mobility services
As technology continues to advance, so too does the cost of passenger vehicles, driven by the proliferation of increasingly sophisticated features. Over the past decade, vehicle prices have surged more than the consumer price index and are nearing $50,000 in the US. Consequently, the future of vehicle ownership appears to be trending towards a flexible, as-a-service, on-demand, and on an-as-used based model that aligns with the evolving preferences and financial realities of consumers. The transition to electric vehicles (EVs) and software-defined vehicles (SDVs) presents a unique opportunity for vehicle manufacturers to reshape their business models and make mobility more affordable in their home markets, and for billions of underserved customers in emerging markets. This shift is further fueled by the growing prominence of in-vehicle payment systems, which simplify the purchasing process and facilitate impulse purchases of new features or services, while also enabling recurring revenue streams through subscriptions and microtransactions.
Golden goose machine: Embracing a software-defined future
The transition to electric vehicles (EVs) presents a unique opportunity for vehicle manufacturers to reshape their business models and secure future profitability. While traditional gas-powered cars rely on a complex network of 2,000 to 3,000 parts, generating revenue through servicing and parts sales, EVs offer a streamlined design with 30 to 40 components. This may lead to a 40% drop in ICEV aftersales revenue from the traditional OEM parts business.
It's not a complete “engine failure,” though. EVs still require care, albeit less frequently and in different ways. Replacing worn tires, maintaining brakes, and ensuring battery health remain essential.
However, this shift presents a new horizon for vehicle manufacturers. EVs pave the way for game changing new revenue streams from software-defined vehicles (SDVs). EVs are essentially computers on wheels, and SDV features like over-the-air software updates, and personalized in-car services offer significantly higher gross margins compared to traditional car sales and parts.
Gross margins for SDV features are still an evolving landscape. However, some analysts predict 30% to 50% gross margins for SDV features, significantly exceeding the average 3% to 10% for traditional car sales and 20% to 30% for original manufacturer parts.
Examples of high-margin SDV features include “over-the-air software updates” for additional features or bug fixes; advanced driver-assistance systems (ADAS) for premium features like adaptive cruise control, enhanced lane departure warnings, and various levels of autonomous driving capabilities; and personalised in-car services like navigation add-ons, streaming or concierge services that can be conveniently consumed as needed on the vehicle dashboard.
Higher SDV margins are a result of lower manufacturing costs, better scalability, and more recurring revenue streams. Many SDV features involve software updates and digital services, eliminating the need for expensive physical components and associated manufacturing costs. This translates to higher gross margins as development and maintenance costs are often lower than physical production. Software-based features can be easily scaled and customised for different types of vehicles and user preferences. This adaptability allows for broader market reach and the potential for tailored service packages with higher margins for specific features.
Unlike one-time sales of hardware features, SDV features can generate ongoing revenue through subscriptions, microtransactions, data monetisation, and service-based models.
One thing's certain: In-vehicle payment systems are a key enabler for innovative monetization strategies in the fast-emerging SDV business. These systems create a frictionless experience by allowing drivers to easily purchase features and subscriptions, directly from their car, eliminating the need for external transactions. This convenience facilitates impulse purchases of new features or services, while also enabling recurring revenue streams through subscriptions and microtransactions. For instance, drivers can subscribe to get access to specific ADAS functionalities or pay a small fee to temporarily unlock additional horsepower, all within the comfort of their car's interface.
Integrating in-vehicle payments not only simplifies the purchasing process but also opens doors for future business models where vehicle manufacturers tap into data monetization through partnerships with various service providers. As connected car features and software-defined functionalities become more prominent in the fast-evolving automotive landscape, a robust payment system ensures future revenue streams and a competitive edge.
The end game: making mobility more affordable for billions
In-vehicle payments can be a catalyst for unlocking significant vehicle demand. This rings especially true for underserved and emerging markets where vehicle ownership is unaffordable for the majority and vehicle-as-a-service (VaaS) and mobility-as-a-service (MaaS) are key to delivering new mobility options to huge populations.
In the US, personal vehicles are only driven for 4% of their usable time and more than 70% of trips are taken alone, resulting in an average vehicle occupancy of 1.1 people. Low utilisation combined with the high cost to own a vehicle – ownership averages 75% of vehicle cost – makes mostly parked vehicles a bad investment and money pit for individual car owners.
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Over the last decade, vehicle prices have increased 15% more than disposable income and 31% more than the consumer price index. The cost of a light vehicle in the US averaged $29,151 in 2013 and has increased by 59% to $46,290 in 2022. Early estimates for 2023 drive the average vehicle price close to $50,000, making vehicles an increasingly unaffordable investment even for average earners.
Vehicle ownership is even less affordable for most people living in some of the largest future markets for vehicle manufacturers. In emerging markets, disposable income per capita normalised for purchasing power parity ranges between 10% and 20% compared to the US.
While many mobility service ventures of traditional carmakers have been failing in mature markets, on-demand mobility is the key to serving billions of new customers in emerging markets. The most valuable asset in the value creation process for the trillion-dollar global mobility-on-demand market is the automobile. Hence, vehicle manufacturers are literally sitting in the driver’s seat for designing superior VaaS and MaaS experiences and offering easily consumable on-demand packages with highly flexible and valuable ownership and trip-related services.
However, vehicle manufacturers do not hold all the leverage, and they will ultimately need to decide how far they are willing to explore the on-demand business, which is clearly off the beaten path of building and selling vehicles. Beyond the key enabling technology for in-vehicle payments, vehicle manufacturers must master – by building, partnering or buying – three strategic capabilities to successfully scale on-demand mobility businesses:
Regardless of what elements of the value chain for on-demand mobility service vehicle manufacturers ultimately decide to own, the rise of VaaS and MaaS models has the potential to fundamentally reshape the automotive business and profitability mix and seamless in-vehicle payments are a key enabler.
Greasing the wheels: Creating frictionless in-vehicle payment experiences on a global scale
The automotive industry is undergoing a significant transformation with the rise of electric vehicles (EVs) and software-defined vehicles (SDVs). In-vehicle payment systems are emerging as a critical component of this transformation, enabling drivers to seamlessly purchase features, subscriptions, and services directly from their car. However, building a global in-vehicle payment system presents a unique set of challenges that extend beyond the technological aspects.
In-vehicle payment systems offer a frictionless experience for drivers, eliminating the need to visit external platforms or dealerships to make purchases. This convenience can drive impulse purchases and unlock recurring revenue streams for automakers through subscriptions and microtransactions for features like real-time map layer updates or on-demand entertainment services. Furthermore, in-vehicle payments can facilitate data monetization by integrating with telematics data to create usage-based insurance options or enabling location-based services like nearby charging, coffee shop or restaurant recommendations.
In-vehicle payment services are not just a fad; they're a strategic necessity for automakers in today's rapidly changing automotive landscape. By offering seamless and secure payment solutions, they can unlock new revenue streams, create more convenient and enriching driving experiences, collect valuable data, and lay the foundation for a future-proof business model. It's about staying ahead of the curve, meeting changing consumer preferences, and shaping the future of mobility.
Designing, building, and operating a global in-vehicle payment systems that is user-friendly, compliant, secure, sufficiently flexible, globally scalable, and economically viable requires deep expertise, careful planning, innovative solutions, and collaborative efforts across the own organization and with a highly complex global payment ecosystem.
But the art of building in-vehicle payment systems, we will address in another paper.