The Uber-Taxi Medallion Ripple Effect

The entrance of Uber into the ridesharing market disrupted more than just the taxicab industry, it has shaken the financial ecosystem that was supported by those who owned and loaned money for the once-coveted taxi medallion business. It’s a trend seen over and over again in the platform businesses: new players enter and destabilize one side of the platform, which creates the beginnings of the death spiral from which some never recover.

The hit to the prices of taxi medallions during the past year alone shows the true impact of what happens when a free-enterprise system joins an industry that operates in a highly-regulated, unionized industry. Most major cities require a medallion license to operate a taxi or taxi company. Because the supply of medallions was low, the demand for those medallions caused prices to surge for decades. City regulators also cast a shadow on the industry by allowing prices to rise beyond their value for years. But thanks to the “Uber-effect” these past two years paint a different picture for the taxi industry.

According to The New York Times’ data, the price of individual taxi medallions in New York City dropped 23 percent in 2014 from $1.05 million to $805,000. Corporate medallions for companies traded at an average of $950,000, a 28-percent decrease from their peak. In Chicago and Boston the medallion story is worse for owners of the licenses looking to sell. Chicago hasn’t had a medallion sale since November, and when one did sell, it sold for $298,000 — 17 percent below the city’s peak price.

But the lack of transfer of medallions suggests that value of the medallion is still dropping as only 11 medallions have been transferred since July 1, 2014. By comparison, 225 medallions changed hands in a six-month period in 2013. Boston has only had a “handful of medallion sales” The Times reported, and the recent average sale at a price tag of $500,000-$200,000 below the city’s peak price. Lew Snapper, a broker in New England recently told The Times he hadn’t sold a medallion in over a year.

But that’s only the tip of the iceberg. There seems to be demand, now that the prices are falling, but there’s little appetite for financing those medallions.

“It’s totally frozen,” Mohammad Kamran, a taxi medallion broker in Chicago, said about the medallion market. “I have offers from people who want to sell their medallions for one-sixty, one-fifty, but there is no lending.”

Certainly ridesharing app companies have disrupted cabbies’ business, but what’s done to the lenders who’ve supported cab operators in obtaining the medallions? Andrew Murstein, president of Medallion Financial Corp., said Uber has hurt the medallion value but it hasn’t killed the cab business. Instead, it’s making companies like his change direction temporarily. But that’s just the nature of the loan business, he said. He claims that once Uber hits regulatory issues, investors will once again see the value in medallions. Uber is still in store for its share of challenges as it faces a growing number of lawsuits from cab companies across major cities. In NYC, Uber faces limited suspension due to compliance issues, but is currently still operating.

A Seeking Alpha article agreed, suggesting that Uber’s threat to medallions is being overstated by the mainstream media and that medallion finance corporations are being undervalued. The article concludes that ridesharing supply will not impact medallion drivers enough to make them default on their medallion loans or fold their businesses.

“Economic and political forces reside firmly on the side of medallion owners,” Larry Meyers wrote for Seeking Alpha. “The secondary medallion market is correcting due to the uncertainty of Uber and illiquidity of the market, not because of a permanent threat.”

Uber also faced significant backlash after New Year’s Eve surge charges angered riders across the country. The negative press may have helped traditional taxi companies gain some marketshare back, which may eventually give value to the regulated medallion market — but only time will tell.  The companies may have to weather the storm for now, but Murstein is confident the medallion-loan portfolio will bounce back.

“The solution to our low stock price is time,” Murstein told The Wall Street Journal. He also said Uber has gotten away with making claims that slam the cab companies and local government, which he called “self-serving” and “irresponsible.” Regardless of what regulatory pressures Uber and other similar companies may soon face, Murstein said medallion-lending and well-established taxi companies will gain their market share again.

“Uber’s claim shows you the arrogance of their company. Their claims of taxi companies being in cahoots with regulators is laughable,” he said.

Meanwhile, Murstein said he’s placing a larger focus of his lending business on consumer loans for items like boats, RVs, motorcycles and trailers. Because he believes medallion prices rose too quickly in recent years, he slowed his medallion-lending business and has focused about 60 percent of his business on consumer loans. But that doesn’t mean he’s getting out of the medallion lending business. Murstein told The Times that because medallion loans are backed by an asset that generally increases in value, therefore borrowers aren’t likely to default. He also believes that the convenience and nostalgia of hailing a NYC taxi is something Uber can’t replace.

“Owning a NYC taxi medallion is like owning a piece of NYC. I would never bet against them,” he told The Times.

Perhaps for now Uber, Lyft and other car service companies have placed a shadow over the traditional taxi cab market that once thrived on regulation and medallion licenses. The ripple effect has been seen across the industry as medallion values continue to drop and the sales of the licenses hit new lows. But that’s nothing new with how business is done in the free-market enterprise.

New technology-driven businesses have always disrupted the industry they enter. This is particularly true with the introduction of payment and commerce apps that change the way consumers conduct their everyday business — including hailing a cab. But just like every other new business that relies on consumer trust and meeting government regulations, the young ridesharing market faces its share of challenges. Just like Amazon did with retail, Uber has changed the taxi cab ecosystem. But traditional retail is still around, and so are cab companies. Both will have to adapt to continue to be viable in a future dominated by apps and mobile devices and changing consumer expectations.

The value of the medallions has suffered and so the industry must adapt. Or, wait for local governments to regulate the innovators. That’s the waiting game that medallion owners and lenders currently face. But markets change, and perhaps Murstein is right in his assessment of the industry’s future. And just think — by then, a new technology will come along and likely disrupt Uber’s ecosystem. How will the industry react then?


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