Uber and Lyft Are Not a Threat to Medallion Financial's Mojo

Medallion Financial Corporation's (MFIN 1.53%) stock had a rough month. The stock is down about 9% and the decline in its stock price can at least partly be blamed on Uber's and Lyft's success in developing widely popular, app-based car-sharing services.

New apps, which link drivers and people who need a ride, have emerged as a threat to taxicab businesses and investment companies that make medallion investing a key pillar of their business model.

According to Medallion Financial's latest 10-Q filing with the SEC, the company defines itself as a "specialty finance company that has a leading position in originating, acquiring, and servicing loans that finance taxicab medallions and various types of commercial businesses" and it relies heavily on the New York market.

Though the company also focuses on consumer loans, which have relatively increased in importance for the company, medallions remain a key earnings driver.

Source: Medallion Financial Corp. Annual Report 2013

Competition heating up?
Uber, a high-flying new-economy business, certainly believes it has the potential to be extremely disruptive to the existing cab industry structure.

People looking for car rides pretty much connect through the app, circumventing the traditional way of calling a taxicab.

Just recently, Uber managed to get its hands on $1.2 billion from investors in another financing round valuing the entire company at a whopping $18 billion. Clearly, those investors are excited about the earnings prospects of the online car-sharing business and certainly wouldn't mind if their venture capital-funded business ate away some traditional taxicab business profits.

Economics of the cab business
The cab business follows it own rules and regulations and actually makes for quite a good case study in an economics class.

Local governments usually auction off a limited amount of medallions, or taxicab licenses, in order to maximize their revenues and ensure adequate supply of taxicabs in their cities.

The amount of medallions is usually limited, which in turn puts a limit on the number of cabs out on the road which are allowed to operate in a certain district. Moreover, medallions don't come cheap: New York medallions can easily fetch a price of $1 million or more and are a lucrative way for the city to make some extra money.

Source: Medallion Financial, Annual Report 2013

More importantly, the limited amount of medallions creates something very valuable for the cab industry: Entry barriers. Only legit cabs, the ones running on medallions, are allowed to go about their business.

Naturally, regulated industries such as the cab industry are well organized and are determined to protect their apple pie from unwanted competition.

Are Uber and other online car-sharing services a serious threat?
This seems to be the central question. If one wants to get a feel about how much of threat Uber and Lyft are to established taxicab businesses that thrive on medallions, one has to look no further than to the widely coordinated, trans-national demonstrations of cab drivers throughout Europe two weeks ago.

From Berlin to London to Madrid, cab drivers caused traffic disruptions as they made a concerted effort in raising awareness about online competition that is intended to circumvent existing taxicab regulations.

Source: Wikimedia Commons, Taxicabs in Germany

What to expect going forward
Investors should expect the fight between Uber and Lyft on one side, and taxicab associations on the other, to heat up going forward.

Taxicab associations can be expected to leave no stone unturned in order to make sure existing monopoly regulations are enforced. In addition, they are also likely to slam app-based car-sharing services with lawsuits in order to deter them from undermining their cartel-like industry structure.

Taxicab regulations also differ somewhat from city to city and while some cities may allow Uber (maybe based on restrictions that drivers must have additional insurance protecting passengers in case of accidents), other cities might very well come to the conclusion, that the existing medallion-framework needs to be protected as an essential public good.

Though Uber and Lyft appear to have a disruptive tool at hand that could cause some serious turmoil in the taxicab industry, cities are likely to stick with their medallion model in order to provide safe and regulated transportation services. This could be a quick downfall for Medallion Financial is not imminent. 

Looking ahead
Uber, Lyft and other smartphone-based car-sharing services can expect to face serious headwinds from the organized taxicab lobby as well as city governments, which ultimately need to do their bit to ensure public safety and which also have a strong incentive to protect their revenue sources.

Though unconventional alternatives to the taxicab business are appealing, regulatory obstacles are a main risk for Uber and Lyft and, ultimately, should benefit traditional medallion investors such as Medallion Financial.

If ride-sharing apps indeed become sort of a disruptive force in the taxicab industry can only be determined longer-term. 2014 medallion prices, however, should send further signals as to how medallion investors really see the threat of Uber and Lyft.