Bad Regulation May Well Kill the Sharing Economy
Ankur Gautam wrote a thoughtful piece on sharing economy a while back (Uberocracy: How the Sharing Economy Is Changing Everything). Ankur (rightly) points out:
“Technology is rapidly transforming how we produce and consume goods and services. By cutting down transaction costs, it has made sharing assets cheaper and easier than ever. You can share a car ride from one city to another on mobile-based apps like Blabla Car, choose rooms provided by private individuals on Airbnb and pay for everything online. Online social networks have been helpful in addressing security concerns by providing a way to check up on people and build trust, while online payment systems have gained trust of the masses over time. Sharing economy provides new opportunities for enterprise, and competitive enterprise is at the heart of spontaneous order.”
While thus arguing for further growth of the sharing economy, Ankur signs off with a note of caution expressing concerns about consumer protection and safety, and how as a consumer it would interest him to see how vigilance mechanisms can improve to factor in these concerns. This post takes off on that note does some loud thinking on these issues.
Our regulators have displayed (typical) risk aversion with regard to the sharing economy. We are failed, thus far, in evolving an appropriate legal framework, and it wouldn’t be a stretch to say that our regulatory bodies lack the incentives to assess the subject of their regulation and risk neutrally. In evolving a regulatory framework that is suitable for the sharing economy, we are confronted by many challenges and a legal vacuum. As important as it is to evolve regulations in response to these challenges, we need to be cautious that we do not over-regulate the sector; only to end up with one that is unsuitable to its needs and dynamics. Bad regulation, left unchecked, may well ‘regulate away’ the benefits of the sharing economy.
Let’s start with Uber: When Uber first commenced operations in India, riders had to merely store their credit card details on to the app and the billed amount was automatically debited to the card on completion of their ride. These mechanics for paying for the Uber rides were the same as how people paid in the United States and elsewhere. There was however one issue; the RBI regulations required “two factor authentication”[1] and the Uber payment process relied only on single factor authentication.[2] The RBI took note of this “violation” and immediately asked Uber to comply with the two factor authentication requirement. Indeed, the Governor went on record to state: “If there is a rule on the book, we don’t allow it to be violated simply because the innovation is cool.”
In sum, an innovative sharing economy participant/platform was mandated to comply with existing regulatory architecture potentially at the hidden (and disperse) costs to the consumers/riders using Uber. The point I am making here is not that payment security should have been discounted altogether[3], but that the regulator should have used the opportunity to engage Uber and other stakeholders to examine how existing regulations could be altered to enable the convenience that Uber’s erstwhile payment process engendered while retaining the same payment security standards that two factor authentication entails. In other words, instead of force-fitting sharing economy business models to existing regulatory architecture, the RBI should have used the powers to alter the regulatory architecture to facilitate a shared economy catalyzed business model. [4] At the very least however, it could have enabled consumers to “opt out” of two factor authentication requirement for small ticket transactions (Most Uber transactions are necessarily small ticket being intra-city). This is all the more so because the RBI regulations already exempt small ticket Point-Of-Sale transactions (“card present” transactions) from two factor authentication. (Purchases of goods/services through the internet such as Uber however are “Card Not Present” and are not exempt).
The Uber episode is not the sole example of regulatory sloth. Another business model spawned by sharing economy is the so-called P2P lending. This basically operates like Uber of consumer finance. Say you have some spare cash that you want to put to work, lending platforms acting as borrower-aggregators will intermediate that cash to borrowers that need it for say, purchasing a vehicle or refurbishing their homes. The credit history and other details reflecting upon their repayment capacity are disclosed by the platform to potential lenders and lenders fund the borrowers based on this assessment. The critical feature being that the platforms take no risk and should the borrower default, the loss lies entirely with the lender. Thus, the platform itself is a risk-neutral fee earner. Also, the ticket-size of loans is small, the borrowers being retail. Yet, a Deputy Governor at the RBI stated in a recent interview that the RBI will float a concept paper as a step towards potentially regulating it since “risks may emanate from such innovations.”
I can give more examples but I am sure the readers get the picture. Why do regulators prefer risk-aversion? For one, there is a collective action dilemma in that the benefits of “good” regulation are diffused and shared by consumers and other participants but the costs are concentrated (The costs of such regulation being borne by regulators.) If P2P lending were to thrive, the sector as such would benefit including a whole host of retail borrowers (who would probably go to the gray market for borrowing at usurious rates in the absence of these platforms). If only one P2P lender were to ‘fail’, however, or face large scale defaults at the borrower end, the masses and (rent-seeking politicians) would cry fraud and blame the regulator for laxity. Thus, the regulators are always likely to be rationally risk-averse.
What is clear, however, is that the sharing economy has thrown up the “platforms” business model and the regulatory architecture is drafted with the “products” business model. With the benefits that the sharing economy promises, we cannot let regulatory risk-aversion reduce consumer welfare.
The solution lies in legislations that require regulators to propose evidence-based regulation. It should not be enough for the RBI (or for that matter, other regulators) to state that a particular innovation poses risks but show (through a cost-benefits analysis) how regulating an activity is beneficial net of costs it imposes through a consultative process with the public. Such “process democratization” is already entrenched and enforced in developed economies and is slowly taking root in India too. Of course, we cannot expect regulators and influential voices therein (including Dr. Rajan’s) to accept this new regulatory normal. The aforementioned rational risk aversion will likely mean they lean towards status quo. But as Ankur Gautam pointed out, the sharing economy is here to stay. At stake is the very concept of consumer choice and liberty. The war is worth fighting for.
(Mandar Kagade is a Policy Analyst at Bharti Institute Of Public Policy, Indian School Of Business)
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[1] However, it appears from the tenor of that the Governor assumed his critics meant the RBI should have disregarded payment security altogether.
[2] In this specific case, the RBI could have explored alternatives to two factor authentication (like Near Field Communication for example).
[3] Long story short, two factor authentication requires a two-step identity verification of the user. When you purchase stuff on Amazon and use your credit card/ debit card to pay, at the first instance, you feed in your card details- first factor and then use either an OTP/password to authenticate- the latter being second factor.
[4] Uber did not require the Users to authenticate the transaction the second time over using (say) an OTP.
