JPMorgan's Volkswagen deal is a big bet on in-car commerce

JPMorgan Chase is taking a 75% stake in Volkswagen Payments, a unit of the automaker with expertise in artificial intelligence, the "internet of things" and other innovations.

The Volkswagen deal, which is expected to close in early 2022, comes as in-vehicle technology becomes more of a launching point for other tasks such as in-car shopping. Chase hopes that in addition to handling payments for motorists, the Volkswagen technology can provide services for other purposes such as B2B payments or new customer-facing payments that use some of the same technology that powers in-car finance.

In this way, even the automotive industry is fostering fintech innovation. And if Chase doesn't hitch a ride, it could find itself left by the curb.

"What financial institutions are realizing is that starting with the largest corporate clients and moving downstream, they are getting disintermediated for payment services," said Erika Baumann, research director for commercial banking and payments at Aite-Novarica Group. "Losing the payments also means losing the deposits and making the spread on loans less profitable."

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The top automotive trends for 2021 include mobile technology, web connectivity, IoT, artificial intelligence and data analytics, according to StartusInsights. A proliferating market of fintechs are using the same types of technology to lure businesses away from banks by offering low cost connections for payments, as well as ways to build an enrolled base of users.

Chase did not make an executive available for an interview by deadline, but in an email the bank's PR office said "this deal will provide the foundation for [Chase] to connect ecosystems across a variety of sectors." Chase, which did not disclose the value of its investment, also has auto financing partnerships with Jaguar Land Rover and Subaru.

The Volkswagen deal comes at a time when consumers expect a seamless digital payment experience regardless of the industry — and the auto industry is focused on this in particular, according to Chase.

Volkswagen Payments launched in 2017, and supports auto financing as well as the purchase of fuel and parking, among other types of transactions. The automaker has developed artificial intelligence-driven technology that helps motorists locate services based on past payment and driving data. The Volkswagen unit additionally offers subscriptions for in-vehicle entertainment and supports insurance payments.

"Volkswagen was creating a payments marketplace for its owners, which represents a great opportunity to establish an ongoing relationship with owners while monetizing their purchasing power," said Tim Sloane, vice president of payments innovation at Mercator. The strategy is similar to that of payment service providers such as Marqeta, i2c and Galileo, he added. Payment service providers supply the technology that embeds payments behind a menu of other services.

The card networks are also attempting to address this trend by focusing on value-added functions, such as security and data analysis, in addition to payments. Visa, for example, earlier this year agreed to spend more than $3 billion on separate deals to acquire the account aggregator Tink and the cross-border fintech CurrencyCloud. And Mastercard has pushed services that allow digital currency projects and fintechs to test new payment technology.

"If we look at what the card networks have done to expand their world from very card-centric to putting together an end-to-end payment network, that is a good indicator of how critical the market opportunity is with payments," Baumann said.

Chase's recent payment initiatives include Request for Pay, which is similar to the Zelle peer-to-peer network but geared toward business payments. Chase has positioned Request for Pay in part as a service to expedite payments tied to automobile purchases, along with other use cases.

The bank made an internet-of-things deployment earlier this year through a partnership with Timex to support payment-enabled watches for use at merchants that accept Visa contactless cards.

"The marketplace is also ripe for becoming an IoT-driven environment," Sloane said, adding that Volkswagen's technology monitors the owner's established pre-set levels of service, with the automaker's payment marketplace supporting services such as oil changes. This makes Volkswagen's payments marketplace a "hub," according to Sloane. Discover has a similar service in partnership with Car IQ, which powers automatic recurring transactions on a virtual card.

Payment companies and automakers have been developing in-car commerce for the past several years, with signs that the pandemic-driven push to contactless transactions in most retail categories has reached in-car payments. Mastercard has partnered with General Motors, and Visa has partnerships include SiriusXM. Automakers such as GM have built concept cars designed for gig-economy use. In Asia, the ride-hailing app Grab rapidly transformed into a provider of many financial services.

In-car payments are expanding at a 16% compound annual growth rate, according to Grandview Research, which says in-car payments have jumped from $328 million in 2018 to a projected $4 billion in 2021.

"Many of the large car manufacturers have made investments into payment firms over the last 5 years or so," said Gareth Lodge, a senior analyst at Celent.