Can Airbnb’s Dispute Resolution & Reviews Disrupt Courts and Credit Bureaus?

What is the real power of Airbnb? On the surface it basically a website and app. Obviously that’s the case for almost every consumer Internet product. Currently Airbnb is a platform for home dwellers to host guests in the excess capacity that exists within their homes. To make this exchange possible, the iPhone needed to have been invented to allow people to move around within the city and “see” capacity that was previously shielded from view. Additionally, Airbnb created a new “credit” system whereby both hosts and guests could build reviews to see if they lived up to their promises. This aspect of building trust is the new credit. Hosts will react with great vigor if they begin to receive bad reviews for not delivering what they advertise. The power of this model is evident with the great transformation happening in the developed world’s leisure markets. Highly travelled cities such as New York, Paris and Barcelona have begun to have vast swaths of prime real estate converted to a high throughput areas where domiciles were previously use at much lower intensity rates. However the platform potential extends much more broadly than even Airbnb currently anticipates.

Rather than solely disrupting the real estate and leisure markets, they are creating a new platform for commerce that would be dramatically disruptive in the developing world. The developing world suffers from poor and weak governance, which severely stunts commerce. The lack of identity verification for most of the developing world prevents basic banking and credit development. The underdeveloped court systems make basic small dollar commercial disputes prohibitively expensive to resolve. Even in highly developed judicial systems such as the United States, taking a merchant or customer to small claims court is onerous and inefficient. What Airbnb has done, is to create a platform where they can bypass the small claims court systems and use digital tools and call center operators to execute arbitration decisions. Taken into other areas of commerce outside of real estate and leisure, this innovation could have profound effects on developing economies.

Rather than this being an example of some breakthrough radical invention, this is a case of the stars aligning to allow a massive leap in commerce. Here are the ingredients that will allow these changes to take place. First, real ID verification and social networks. While Airbnb has used software to verify ID cards that have been issued to users in the developed world, this will not work as effectively in the developing world. While great strides have been made in countries such as India in attempting to give the entire population ID cards, including biometrics iris scans, governments in the developing world are simply not as effective at this task, which has always been a central hindrance to commerce in these countries generally. Even in the United States, large segments of the unbanked and immobile rural population lack proper ID cards, which has been highlighted in recent election law changes. However facial recognition technology, biometric thumbprints, and GPS can act as a verification method. The software can recognize your face, your location, and your thumb print in a three part connection at would begin to build a verified ID. With the machine learning techniques, software can be incredibly effective at rooting out fraudulent activities at a much higher rate then even credit card companies. With the addition of adding the social network verification, Airbnb has an incredibly effective model to identify individuals. This enables Airbnb to create a base ID to enter the Airbnb platform. Additionally with a pin code and SMS verification, you have a very secure system. Once the user has been verified, consumer credit begins to take effect after the first few transactions. With hosts and guests verifying each other using the five star ratings method, plus endorsements from other users, Airbnb begins to create a reinforcing network effect for unbanked consumers. Currently, Airbnb has relied upon each user in the developed world having a credit card to make payments. However, if they were to branch out and allow consumers in the developing world to buy credits the same way that cell phone operators allow their customers to buy a prepaid cards, Airbnb would open and enormous market. Wherever cell phones exist, Airbnb exists.

Much in the same way that Amazon Web Services was spun out as an enormous Internet utility business, Airbnb’s dispute resolutions platform has immense potential for both the developed and developing world. In the United States, businesses have begun to shift towards binding arbitration clauses to extricate themselves from highly onerous litigation. Consumers have few alternatives to turn to when seeking resolution to many types of small commercial transactions. Legislators have created mandates such as ‘Passengers Bill of Rights’ in the airline industry where consumers feel trapped with oligopoly providers. The high transaction costs involved with any form of litigation prevents each party from turning to courts to resolve the issues. Consumers who do not honor their obligations are turned over to credit bureaus, whereas companies are either penalized with poor Yelp reviews or are insulated through their oligopoly status.

While Yelp reviews have provided a powerful incentive for small businesses to maintain their reputations, they are a one sided affair where companies have little recourse with unfair customers. Additionally, Yelp has no power to satisfy reviewers who would be placated with some level of financial reimbursement. This is where the power of the platform reveals itself. Positive reviews provide an incentive for suppliers to deliver on their promises, the threat of being denied access to the marketplace platform can provide the necessary leverage against unreasonable consumers to regulate their behavior. Airbnb’s ability to induce good behavior by both parties is extremely powerful. Coupled with dispute resolution capabilities verified through digital evidence, such as digital photos and receipts, Airbnb could extend its platform to a variety of services in the developing world and enable exponential growth in small businesses. Amazon Home Services has made an attempt at creating a platform for plumbers, carpenters, and electricians. However they have not designed their platform to be mobile first and Airbnb’s existing network effect could allow it to extend its reach beyond the leisure are and real estate markets. If Airbnb does not extend their platform into this untapped market, Amazon, Yelp, Task Rabbit or some yet unknown startup will.