July 10, 2020
In this post, I discuss the FASTag program in India. To provide a brief background, FASTag seemed to come up in most of my discussions with startups, and I wasn’t able to find credible sources around program size, stakeholders involved, and more. So I decided to compile as much information as possible. I hope this will help startup founders, multinational corporations, banks, investors, and other stakeholders in the ecosystem.
Electronic toll collection (ETC) is a concept dating back to 1959 (see timeline graph). In India, the first ETC was set up between Mumbai and Ahmedabad in April 2013. This was a closed-loop solution on the bank's acquired toll plazas. In December 2016, NETC FASTag was launched with multiple banks across all 300 toll plaza with an open-loop interoperable model.
FASTag is a simple-to-use, reloadable tag that enables the automatic deduction of toll charges and lets you pass through the toll plaza without stopping for cash transactions. 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, and air pollution, to name a few benefits.
At the ETC lane, a toll plaza server collects many details including (but not limited to) NETC tag reader (tag ID), weight-in-motion (helps in pricing for different weights), automatic vehicle classification (AVC) for tiered pricing, image cameras for vehicle image to resolve disputes, and more.
Now that we have understood how FASTag works from a consumer perspective, let’s look at key stakeholders in a FASTag ecosystem:
On the NETC side, as of March 2020, around 673 national and state toll plazas are live and active for ETC. With 17 million FASTags issued, 988 million in transaction volume and 210 billion in transaction value is being processed on this ecosystem, with FASTag penetration at 65%.
There are 26 issuing banks and 10 acquiring banks in the ecosystem, as illustrated below.
On the acquiring side, ICICI seems to have the highest market share in terms of the number of plazas—around 30%; its transaction volume/transaction value market share is around 50%. This means ICICI has a great relationship with the biggest, most frequently used toll plazas and is doing more business than others. ICICI Bank has also invested aggressively early on in building out toll products ahead of NPCI. At the core, ICICI and IDFC are infrastructure-supporting banks. Hence, a toll operator borrows money from the likes of ICICI. The toll collection is contractually escrowed in the same bank, making FASTag a natural extension product in the payment flow.
Apart from ICICI and IDFC, Paytm, Axis Bank, and others have anywhere from high single-digit percentage share to mid/high market share of the transaction value. Paytm used app distribution to make FASTag payments simple and easy for retail vehicles. This means Paytm may have a higher share of transactions but a lower share of the total transaction value.
On the issuing side also, I believe ICICI has the highest market share. That being said, I don’t have much 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 only 30% of transaction values. The four/six-axle trucks and two-axle buses & trucks are the other two big categories for transaction value market share (around 50% combined) despite having mid/high single-digit percentage share tags issued. This should be an attractive category for startup founders to focus on as the category digitizes in the coming years.
To understand how big FASTag TAM is for startups, it is important to understand how the ecosystem works. As shown below, the FASTag system works similarly to a four-party open-loop card network with an acquirer, switch/network, and issuer.
As a vehicle passes through a toll plaza, vehicle stats (tag ID, WIM, AVC) are captured and processed by the acquiring bank. NETC Switch, operated by NPCI routes transactions properly between acquiring and issuing banks and money, is deducted from related wallet/account (current account, savings account, credit card).
Operating this system at scale needs investments, and that comes in the form of MDR-type (merchant discount rate) models. The Indian government is spending a lot of money to promote the system at the moment. As illustrated below, in a typical 100-rupee transaction, various parties are paid as follows:
Now that we have understood how payments work for the FASTag ecosystem, let’s take a quick look at historical data to understand adoption and growth trends. As illustrated below, FASTag is witnessing rapid growth in the number of tags, transaction volume, and transaction value. The year 2020’s V-shape dip/recovery is due to COVID-19.
To estimate TAM, I will use February 2020 data as a baseline. In February 2020, FASTag’s total transaction value was around Rs. 1841 crore. About 1% of this number means startups could have potentially earned Rs. 18.41 crore, assuming 100% penetration within issuing banks.
Since some volume always stays within the existing banking system and will never be partnered with the 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 February 2020’s data results in an estimated Rs. 220 crore TAM for startups (please note that 2020 is not a typical year; hence, this number will be smaller for 2020). This TAM is growing faster, and I won’t be surprised to see it grow to 5x–10x in the coming years. However, it is not big enough to scale 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, and more to capture a larger pie of overall logistics value chain. FASTag’s payment ecosystem is just an enabler in this. The opportunity startup lies in building on top of it using toll data for vehicle activity, miles driven, speed, and more.