Searching for an object lesson on why banks and businesses need to adapt and change?
Consider New York City’s iconic yellow taxis and the pricey medallions cab owners must have to join a crowded, competitive public transportation market. In short, cowards who fear competition need not apply.
For non-New Yorkers, here’s a primer on how the city’s taxi medallions work. Taxis are operated by private firms. Without one of the medallions issued by the New York City Taxi and Limousine Commission, it is illegal to pick up passengers on the street in response to a street hail. In short, in the Big Apple, operating a taxi without a medallion is illegal.
According to the Heritage Foundation, the medallions are not a license to drive a taxi. It is a license to operate one. Few individual drivers hold medallions. For the most part, owners hold a number of the medallions and operate a fleet of taxis. For the owners, revenue is generated by leasing the medallions to the drivers by the shift. As a result, according to the conservative think tank, regardless of whether the shift is busy or slow, the driver still owes the lease fee, guaranteeing profits for the owners. Meanwhile, drivers who lease the medals bear most of the risk and costs. Drivers must earn about $100 per day just to cover the lease fee and break even. This doesn’t include gas and incidental costs.
Read the Heritage Foundation’s take on medallions here: www.heritage.org/transportation/report/taxicab-medallion-systems-time-change.
The costs rarely drop because there are more available drivers than taxis in the city.
Those medallions, once pricey to purchase, have taken a big hit of late, thanks to relatively new kids on the block, Uber and Lyft. The value of medallions has also taken a hit because of the declining quality of the customer experience in traditional taxis. Trashy taxis, surly drivers, cash-only payments and the like triggered a hard turn of potential riders to the ridesharing services.
And in some cases, the results have been tragic. Increased competition has blasted medallion worth out of the water, with value crashing from $1 million to $130,000, forcing many of their owners into bankruptcy.
In the most tragic cases, four owners who poured all they had into the once-coveted medallions took their own lives.
But the unvarnished truth is, rich, powerful people tapped into the medallion market. President Trump’s now-convicted former lawyer and fixer Michael Cohen owned several.
While it may be cynical to say, the fact is that when the rich and powerful take a big hit, government is all too eager to get involved. Last December, in the case of the minimized medallions, the city’s Taxi and Limousine Commission set a minimum pay rate for ride-sharing companies like Uber and Lyft of $26.51 per hour before expenses ($17.22 after). It’s a financial fender bender for ridesharing, coming four months after the city imposed a limit on such vehicles.
At the end of the road, riders will get hit in the wallet.
It may have seemed a noble gesture, if the commission set wage rates alone. But paired with its limits of rideshare services, it appears for all the world that the city is trying to protect the wealthy medallion owners, instead of allowing the market to work.
What the hail – as in hail a taxi – does this mean for community banks?
Uber, Lyft and their fellow travelers offered a service that drivers of the iconic yellow taxis couldn’t – “e-hailing.” Clean vehicles. No cash required. Traditional taxis are only allowed to pick up passengers that hail cabs on the street. (Remember Audrey Hepburn in “Breakfast at Tiffany’s? She knew how to hail a cab – just whistle).
So, while the city appears to be adding regs to benefit cab medallion owners, its own rules have helped to drive down ridership. For example, supply caps and price controls imposed by the medallion system have meant higher fares for cab rides compared to those in deregulated markets. And a limit on supply means a shortage of taxis.
And the cost burden on drivers who lease medallions endangers public safety. Under pressure to make profit beyond their lease, fuel and other expenses, drivers sometimes engage in unsafe driving to pick up new fares as quickly as possible.
While the lease system has been in place since the Great Depression, some other cities have shied away.
The Heritage Foundation cited a report compiled for the city of Washington, D.C., when it considered adopting a medallion system.
According to the report, restricted supply and high hurdles to taxi ownership lead to unmet demand for service, longer wait times for customers, unclean vehicles, poor service and discrimination. (Drivers would refuse service to certain types of customers, for example based on race).
The lesson is simple: Adapt, adjust and anticipate changes in financial technology. Ally and similar institutions in the expanding fintech universe pose a real challenge to brick-and-mortar branches, especially in an era where it seems folks spend more time snuggled with a cellphone than with their spouses.
Consider this as well: While government rode to the rescue for the yellow taxis and the big banking players on Wall Street, there may not be a willingness to do the same for small banks, especially with a change in the House leadership in 2019.
No business – from Silicon Valley to the concrete canyons of the Big Apple, from Main Street to Wall Street, can afford to put the brakes on ideas and innovation.
Look under the hood of wisdom and you’ll find a truth more than 20 centuries older than the automobile:
“Where there’s no vision,” the prophet counsels, “the people perish.”
Fill up the fuel tank for your bank’s innovation strategy. After all, the traffic’s picking up.
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