By: Rodney Lester, Adviser Ratings
The consumer advocacy group CHOICE is currently involved in a stoush with the taxi industry after it found that services offered by "ride-sharing" company Uber were cheaper and offered overall, a better experience when compared to taxis. This dispute is just the latest example of a traditional industry being challenged and disrupted by new market players - emanating from what’s been termed as the “sharing economy”.
Even if you haven’t got your “finger on the pulse” or “your ear to the ground”, chances are you’ve heard the term “sharing economy” bandied around in the media (as we’ve seen - usually with accompanying mentions of Uber or AirBnB). So what is it?
Apparently it’s new, it disruptive and it might just alter the way we interact in the economy – including how we use financial services. PwC estimates that the sharing economy currently generates up to $15 billion in global revenue today and believes that number will rise to a whopping $335 billion in the next decade.
Terms like the “sharing economy”, “collaborative consumption” “and “peer-to-peer” services describe the technologically driven changes we can expect to see in the way we consume goods and services. It basically involves people sharing or lending things directly with each other, usually via the internet. This last point – “via the internet” is key. After all, this type of activity is actually as old as civilisation itself.
Sharing knowledge, skills and resources is precisely how humans started the progression from wandering bands of hunter gatherers to where we are today. There was of course a “cost” or “debt” to be paid with ancient interactions, it’s just that when we lived in small groups we could keep score of who helped who (and who was owed a favour) in our collective heads. Somewhere along the line, probably not long after the domestication of plants and animals, the idea of “money” was created in order to help formalise and keep track these debts (here is a fascinating account of the history of debt by the anthropologist David Graeber).
In the modern sense, the “rise” of the sharing economy is a big deal, because it has the potential to disrupt so many of the formalised institutions we take for granted. Not only businesses themselves, but laws and regulations which are often put in place (with good reason), are also struggling to keep pace with rapid changes in the way we trade.
eBay was one of the modern peer-to-peer models spawned by the Internet, and has influenced the sharing economy business models that have followed. Transparency and trust are vital in the sharing economy. Historically, in a small village, people learnt quickly who can be trusted to return or reciprocate an item or favour. In a modern sense, the Internet allows the same level of trust to develop through sharing knowledge and experience. As Jason Juma-Ross notes in an article for PwC;
“…people are not just sharing assets; they’re sharing knowledge and experiences with their peers using ratings and reviews. These socially-based recommendations are often regarded as more trustworthy than traditional marketing, the corporate press release, or the advice of the broker”.
One could imagine that a snake-oil salesman travelling from town to town may have had a problem with his business model if he had to contend with social media and the internet.
The internet has allowed networks to be set up to connect people to trade, enabling direct transactions locally and across the globe that previously required a formal, trusted (and often institutionalised) middleman. The "middlemen", whether taxi services, hotels or banks - which face direct competition from peer-to-peer lending networks - are facing competition from areas that would have been impossible before the internet. This is the heart of disruption.
This technologically enabled disruption poses challenges not only for companies whose established business models are under threat of annihilation (think video stores), but also for government's legal, taxation and revenue models. The market decides if an idea or business model will be successful via the demand it satisfies or creates in the community. Once the key aspect of trust is achieved, the explosive pace of growth that the internet allows for these new models to achieve scale, threatens to leapfrog legal and tax regulations, indiscriminately blowing holes in business and government revenue alike.
It remains to be seen whether the architects of modern sharing economy businesses simply usurp the current middlemen, establishing themselves as “captains of new industry”, taking their “clip” and depositing it in a tax haven with an agreeable climate. As long as the people using the service perceive they’re getting value for money, they will continue to grow.
The Internet and associated technological advances will continue to change the way we trade, often in ways that were impossible to envisage. Established businesses and governments can fight to keep the status quo, but ultimately, in many cases, they will have to adapt. How we respond to these challenges will go a long way in determining our future prosperity.