FASTag: TAM for Startups and related opportunity

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In this long form post, I plan to discuss FASTag program in India. As a brief background, FASTag was coming in most of my discussions with startups and I wasn’t able to find a credible source around program size, stakeholders involved etc. so I decided to compile as much information as possible. I hope this will be helpful for startup founders, multinational corporations, banks, investors, and other stake holders in eco-system. 

Electronic toll collection (ETC) is a concept dating back to 1959 (see timeline graph). In India, first ETC was setup between Mumbai and Ahmedabad in April 2013. This was a closed loop solution on bank’s acquired toll plazas. In Dec 2016, NETC FASTag was launched with multiple banks across all 300 toll plaza with open loop interoperable model. 

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Evolution of Electronic Toll Collection (ETC)

FASTag overview:

FASTag is a simple to use, reloadable tag which enables automatic deduction of toll charges and lets you pass through the toll plaza without stopping for the cash transaction. FASTag is linked to a prepaid account from which the applicable toll amount is deducted. The tag employs Radio-frequency Identification (RFID) technology and is affixed on the vehicle’s windscreen after the tag account is active.

Use of FASTag reduces travel time, fuel consumption, cash handling, air pollution etc. to name a few benefits. 

At ETC lane, toll plaza server collects many details including (but not limited to) NETC tag reader (tag ID), Weight-in-motion (helps in pricing for different weight), Automatic vehicle classification (AVC) for tiered pricing, image cameras for vehicle image to resolve dispute etc. 

Now, we have understood how FASTag works from a simple consumer prespective, let’s look at key stakeholders in a FASTag ecosystem:

  • Highway authority – NHAI (National Highway Authority of India) and IHMCL (Indian highway mgmt. company limited) for overview, mgmt. 
  • NPCI – NPCI (national payment corporation of India) and NETC (National electronic toll collection) for payment transaction. NPCI facilitates transaction and settlement between issuing and acquiring banks.  
  • Toll plaza operators, system integrators – They provide infrastructure for acceptance of NETC Tag at ETC lane. 
  • Issuer banks (on consumer, enterprise side) – issuer bank issues the NETC tag to their customers (vehicle owners) and link the tag to appropriate account (current account, saving account, prepaid account, credit card etc.) for toll fare deduction. 
  • Acquiring banks (on Toll plaza operator side) – Acquiring bank facilitates and settles toll transaction for toll plaza operators. 
  • Startups – mostly payment / logistic startups work with issuing banks as extra layer to acquire customers and help in last mile distribution of FASTag. 

On NETC side, as of March 2020, around 673 national and state toll plazas are live and active for ETC. With 17M FASTag issued, 988M transaction volume, and 210B of transaction value is being done on this ecosystem with 65% penetration for FASTag. 

There are a total of 26 issuing banks and 10 acquiring banks in the ecosystem as shown in the image. 

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Issuing and Acquiring banks list (source)

I believe on the acquiring side ICICI has highest market share in terms of number of plazas around 30% and transaction volume / transaction value market share around 50%. This means ICICI has great relationship with biggest, most frequently used toll plazas doing more business than others. ICICI bank also invested aggressively early on in building out toll product ahead of NPCI. ICICI and IDFC at the core are infrastructure supporting banks, so a toll operator borrows money from the like of ICICI and the toll collection is contractually escrowed in the same bank making FASTag as a natural extension product in payment flow.  

Post ICICI, IDFC, Paytm, Axis etc. have anywhere from high single digit % to mid/high teen % market share of transaction value. Paytm used app distribution to make FASTag payments simple and easy for retail vehicles. This means Paytm may have higher share of % transaction but lower share of % total transaction value. 

On the issuing side also, I believe ICICI has highest market share. That being said, I don’t have a lot of visibility here so any pointers around market share will be appreciated. 

From a vehicle class point, passenger vehicles (car, jeep, van) have been issued close to 80% of FASTags but they account for 30% of transaction values only. 4-6 axle trucks and 2-axle bus/truck are other two big categories for transaction value market share (around 50% combined) despite having mid/high single digit % tags issued. This should be an attractive category for startup founders to focus on as category digitizes in coming years. 

FASTag total addressable market (TAM) for startups:

To understand, how big is FASTag TAM for startups, it is important to understand how ecosystem works. As shown below, FASTag system works similar to 4-party open loop card network with an acquirer, switch / network, and issuer. 

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As a vehicle passes through a toll plaza, vehicles stats (tag id, WIM, AVC etc.) are captured and processed by the acquiring bank. NETC Switch operated by NPCI routes transaction properly between acquiring and issuing banks and money is deducted from related wallet / account (current account, savings account, credit card etc.). 

Operating this system at scale needs investments and that comes in form of MDR (merchant discount rate) type model. Indian govt. is spending a lot of money to promote the system at the moment. As shown below, in a typical Rs 100 transaction, various parties are paid as follows:

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  • Consumer pays Rs. 100 to toll plaza operator through FASTag. 
  • NHAI pays a 4% MDR to the following stake holders 
    • 1% to IHMCL for maintaining infrastructure
    • 1.25% to acquiring bank  
    • 0.25% to NPCI / Switch 
    • 1.5% to issuing bank
  • Issuing banks usually work with startups to sign up vehicles for FASTag. In return, they give 1% to startups and keep 0.50% as net take rate. 
  • Startups work with last mile retail partners and share 0.30% with them – netting around 0.70% for startups. 

Now we have understood how payments work for FASTag ecosystem, let’s quickly look at historical data to understand adoption and growth trends.

As shown below, FASTag is seeing rapid growth in number of tags, transaction volume, and transaction value. 2020 V shape dip / recovery is related to COVID-19. 

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Weighted average toll price using FASTag
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Total tags in circulation
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Total transactions using FASTag (in millions)
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Transaction value in Indian Rupee in Cr

To estimate TAM, I will use Feb-20 data as baseline. In Feb 20, FASTag total transaction value was around Rs. 1841 Cr. 1% of this number means startups could have potentially earned Rs. 18.41 Cr assuming 100% penetration within issuing banks. 

Since some volume always stays within existing banking system and will never be partnered with startup ecosystem, it is safe to assume that FASTag SAM (Serviceable addressable market) will be smaller than TAM. How small, I don’t know. 

Annualizing Feb 20 data, results in an estimated Rs. 220 Cr. TAM for startups (please note that 2020 is not a normal year and hence this number will be smaller for 2020). This TAM is growing at a faster pace and I won’t be surprised to see it 5x – 10x in coming years. However, it is not big enough to scale to a tier 1 VC funded startup.

A startup that wants to build a strong moat around this FASTag system should look to engage fleet owners through TMS (trucking management software), fuel card, routing, tracking etc. to name a few things to captue a larger pie of overall logistic value chain. FASTag payment ecosystem is just an enabler in this. Startup opportunity is to build on top of it using toll data for vehicle activity, miles driven, speed etc. 

Footnote:

Special thanks to team members at NPCI, ICICI, FinTech Yatra, YAP, Fleetx, Mytrux and other stakeholders for providing valuable feedback regarding this article and FASTag program in general.


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