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3 min read
Andreas Mai and Andy Davis

Traditionally, vehicle manufacturers have focused on selling new ICEs with little recurring revenue beyond parts and warranty services. While ICEVs currently boast higher initial gross margins, EVs hold the promise of higher long-term profitability. This is thanks to a favourable market outlook and, more importantly, the opportunity for higher-margin recurring revenue streams.


To date, in-vehicle payments have mostly aligned with trip-related services like energy, food and coffee, retail, parking and tolling, none of which are typically owned by vehicle manufacturers. 


A pie chart of The next frontier in-wehicle payments services market by application


In the future, ownership-related services and SDV features will likely factor more prominently in the profitability mix. As vehicle manufacturers control the underlying value creation processes for both, they can secure higher gross margins.


Trip services: Driving experience, not profits

In terms of purchase frequency and profit potential, convenience stores and coffee shops top the list of trip-related services, grossing margins between 20% and 40% while fast-food chains sometimes exceed 50%. Up until now, this has made trip-related expenses a crucial source of profit to augment petrol stations’, otherwise, meagre gross margins. Despite their importance in delivering relevant services to vehicle users on route, vehicle manufacturers will only be able to capture a fraction of these profit margins. 

 A bar graph of The next frontier trip related services typical gross margins


The emergence of EV charging promises attractive gross margin potential. With estimates between 20% and 40%, EV charging also creates the opportunity to boost the profitability of parking operations, particularly at attractive locations with easy access to food, coffee or coveted retail chains. Unless the vehicle manufacturer owns the charging business (like Tesla), the ability to boost the profitability of vehicle manufacturers with charging is limited. 


In-journey media consumption, whether paid directly or ad-sponsored, remains a fringe application for in-vehicle payments for now. In the US, 70% of car rides are solo excursions, and with an average passenger vehicle occupancy of 1.1, the opportunity to catch valuable ears and eyeballs is limited. At some point in the future, autonomous vehicle operation will likely free up a meaningful portion of the approximately 300 hours the average driver spends per year in the US. Only then, it might make sense for vehicle manufacturers to offer in-vehicle video streaming services that leverage ad placements. 


The common factor of trip-related services is that the profit-sharing opportunity is limited for vehicle manufacturers because partners own the value-creation process. The profit-uplift potential for vehicle manufacturers gets further compressed when accounting for the cost of in-vehicle payment processing, which can range between 0.25% and 2.9%, depending on payment method and provider. 


Perpetual mobile: The treasure trove of high-margin ownership services


Ownership accounts for nearly 75% of the annual cost of driving a vehicle. Consequently, vehicle manufacturers have made it a priority to pursue attractive margins in vehicle finance or leasing, insurance, extended warranty, and parts-related service, maintenance and repairs. 


Traditionally, vehicle manufacturers and dealers bolster vehicle sales profits by capturing additional margins through financing and leasing entities and by reselling new vehicle insurance at the point-of-vehicle sales. Adding in-vehicle payment options allows vehicle manufacturers to directly sell more ownership-related services after the initial vehicle sale and create recurring revenue streams with vehicle insurance, dealership referrals, and other high-margin services (i.e., extended warranty and car wash).  


However, the larger future profit pools for vehicle manufacturers are SDV features and vehicle or mobility-as-a-service packages where vehicle manufacturers control most of the value creation and, therefore, can command a larger share of profit margin.  

How will these innovations impact the future of automotive? Stay tuned for the next instalment of the series.

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