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After operating in India for a year, global taxi app Uber faces resistance from local radio-taxi operators. Its services are available in six cities: Delhi, Mumbai, Bangalore, Pune, Chennai and Hyderabad. Its network of taxis and customers - most of them highly satisfied - is increasing steadily. Naturally, this worries the Indian taxi fleets. What perhaps bothers them is that Uber has deep pockets, which can help it win over customers as well as small taxi services. In May, it received $17 billion from private-equity funds, and there are talks of an initial public offer in the US.
For Uber, which has operations in over 150 cities across 42 countries, resistance is nothing new. In China, its entry has triggered a discount war among the homegrown taxi fleets backed by e-commerce giants Alibaba and Tencents. Hit hard by Uber, taxi drivers in several European capitals took to the streets in protest. "They slowed to a snail's pace in what Parisians called 'Operation Escargot'. Horns blared around Trafalgar Square in London. In Berlin, taxis massed at the Central Station. All to protest the smartphone app Uber," a report in news website npr.org said.
| TAXIS AND TECHNOLOGY |
What Uber does
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The protest against Uber in India is different - and more sophisticated. Local taxi fleets, led by players such as Meru Cabs and Easycabs, haven't taken to the streets; instead, they have chosen to take on the San Francisco-based and Google-funded entity on turf it may not be very familiar with. The Association of Radio Taxis, their New Delhi-based organisation, has written to the Reserve Bank of India that Uber is violating Foreign Exchange Management Act (FEMA) guidelines and procedures governing credit card payments, The Economic Times reported. "Our association wants a level playing field for all players and a stop on all violations (of FEMA and RBI guidelines). RBI has assured the association that it will look into the allegations," Meru Cabs CEO Siddhartha Pahwa says.
A taxi or an app?
Pahwa's description of Uber as a commission agent or aggregator may seem a bit unusual but it is more accurate than 'taxi service'. It can also help us understand what Uber really is and why it unnerves the established players. Uber is not a taxi service - it makes that clear on its website. "Uber itself does not provide transportation services and Uber is not a transportation carrier." Instead, Uber calls itself an information provider. "Uber offers information and a means to obtain transportation services offered by third-party transportation providers." Thus, Uber signs up drivers and taxi users separately and connects them through a smartphone- or a tablet-based app. Uber makes it clear that it only acts as an intermediary between the customer and the service provider, but it controls the most crucial part of the relationship - the payment.
Every Uber customer is required to download the app on his device. As a part of the registration process, Uber requires the customer to give his credit card details including the CVV (card verification value) number. These details are stored in the Uber servers located outside India. Each time the customer uses the app, it uses its database to access his credit card details and deduct the fare directly through a payment gateway in a foreign location. "This is violation of RBI's guidelines governing credit card transactions, which require a second stage check in the form of a one-time password or verification services such as 'verified by Visa'. RBI circulars have clearly said that exemption for second-stage verification is available only when there is a foreign exchange outgo and merely the presence of an overseas payment gateway does not qualify for such exemption," says an executive with a radio-taxi operator.
While Uber itself does not disclose the exact mode of payment, customers are said to have reported both dollar and rupee payments through their credit cards. There are two ways such payments are made, according to banking experts. In the first, the entire fare is repatriated outside India at the end of the trip. Uber then remits the driver his due after deducting its charges. Uber uses an entity registered in The Netherlands, Uber BV, as its operating firm. That country's favourable withholding tax regime makes it ideal for such cross-border services, according to tax experts. The second method is to remit the entire fare in a non-resident ordinary rupee account in India and then send the sum after deducting domestic payments outside.
Local taxi operators argue that in both the cases, the second stage validation is mandatory, and Uber bypassing it discriminates against them. "The customer experience changes completely when there is no intervention at the end of the journey. This suits passengers when they are in a hurry to attend a meeting or catch a flight. We should also be allowed to do it," the executive adds.
Kunal Lalani of Mega Cabs, who is the president of the Association of Radio Taxis, says: "We were offering payments through credit card. But we had to stop because RBI last October made second-stage authentication compulsory." Lalani says there are no plans to replicate what Uber does but he adds that India-registered taxi fleets are working with banks to evolve a system that will allow them to offer payments through credit cards - one that will be fully compliant with local rules.
As easy as pie
In a way, this attacks the heart of Uber's positioning as an elegant, hassle-free service. Customers have raved about the convenience. Uber, some argue, aims to make commuting more convenient than owning a car. A second-stage intervention either through a handheld device with the driver or even through the mobile phone, especially in place where signals are erratic, can spoil the whole experience.
The second and a more serious allegation that is being levelled against Uber is that the transactions create a receivable for the Indian drivers abroad and thereby alters their assets and liabilities in a foreign location. This situation arises only when Uber follows the first of the two methods of remittance. Under FEMA, a capital account transaction has been defined to include a transaction that alters the assets or liabilities outside India of a person resident in India. For the record, India does not allow capital account transactions. The Foreign Exchange Management (permissible Capital transactions) Regulations, 2000 do provide a list of permissible transactions from an Indian exchange control perspective, but local taxi fleets argue that the transaction being facilitated by Uber does not fall under any of the permissible transactions.
It is not clear how Uber will take on this new challenge. In the past, it has faced legal challenges in the UK and Germany. But, rivals have not succeeded in shutting it down altogether. The UK regulators did not accept the London Taxi Union's argument that Uber was an 'illegal meter'. In July, Hamburg city authorities banned Uber saying its drivers are not licensed to operate, but Uber got an injunction against this move, allowing it to operate pending hearing. An Uber spokesperson said in an email response: "We do not have any relevant information or commentary to share regarding your questions."
Uber does not seem to have any operating firm in India. It is not registered with RBI or any other regulator. Under these circumstances, it is not clear what relief the central bank can provide the Association of Radio Taxis. Another question that the taxi fleets are not able to answer at this stage is how are banks, which are tightly regulated by RBI, executing the Uber transactions if these blatantly violate the rules? A senior executive with a private bank says: "The point of control would be the acquiring bank. Without an acquiring bank, Uber would not be able to access the credit card network and do these transactions. It must be an entity regulated by RBI; we do not know who it is."
