The sharing economy; a new business model

In Chile, this new paradigm will help bring about improvement opportunities for different sectors of the economy, changes in consumer behavior and greater competition. 

The arrival of new online services offering passenger transportation, such as Uber and Cabify, have significantly changed the way millions of customers perceive private transportation.

Uber Technologies Inc. was created in San Francisco, California, just seven years ago. By taking advantage of the iPhone produced by Apple Inc., the founders developed an online application for smartphones that allowed customers to reserve a driver of a private car and to pay for the journey automatically using a pre-registered credit card.

The innovative part was not only in being able to request a taxi via a mobile app. It also included the fact that the service itself was provided by a vehicle licensed to that effect and driven by the car’s owner, who held a full driving license and who was already registered on the app as a supplier, in addition to them having fulfilled certain other basic criteria. Users soon discovered that these kinds of apps enabled them to access quicker and often cheaper transportation.

The concept grew rapidly and currently operates in 66 countries and 449 cities, including Santiago, Buenos Aires and Sao Paolo. In June 2016, Saudi Arabia invested US$3.5 billion in Uber, giving the company a market capitalization from Goldman Sachs of over US$60 billion.

Since its launch in Chile, in December 2014, Uber has incorporated more than 25,000 private drivers, which compares to just 24,500 licensed taxi drivers. Uber and its competitors are merely one of the most public examples of a new and important trend in technology: the sharing, or collaborative, economy.

In the past, the growth of the internet has meant the World Wide Web becoming a fundamental part of the conventional economy, with brick-and-mortar stores being replaced by online substitutes, albeit with physical versions maintained as a form of backup. Businesses of the sharing economy, however, play a different role by utilizing technology to link customers directly with suppliers. Cabify and Uber offer passenger transportation, but the companies do not supply this service; rather, they direct independent drivers the way of the customer.

Carlos Cuevas, CEO de Sinbad

Another example is Airbnb, the web platform and app that offers temporary accommodation services. While other online vacation and flight reservation companies are available, such as Expedia and Booking, the innovative part of Airbnb was to provide travelers with the chance of staying in the houses of private individuals. This enabled them to enjoy experiences that would be unlikely through a more traditional system, including lodging on a canal houseboat or in a cabin in the middle of the woods.

However, the true advantage is in the cost: through Airbnb, travelers can find lodging in the downtown areas of places like Manhattan and Paris at a fraction of the price of a conventional hotel. Simultaneously, property owners can obtain a better return renting to travelers for the weekend than those staying on a long-term basis.

Launched the year after Uber, and also in San Francisco, Airbnb now has 1.5 million registered properties throughout 191 countries, including 4,000 in Chile.

Platforms like Airbnb and Uber have taken informal sectors of the economy and revolutionized them by injecting them with transparency through the use of technology.

Carlos Cuevas, CEO of Sinbad, an online platform for reserving vacation homes, notes that the inspiration for his company came in 2012 when he would see tourists visiting his native city of La Serena falling into the hands of incompetent and/or unscrupulous property owners. Similar to Airbnb, Sinbad incudes a comments function so that users are able to rank their experiences and, in the process, help others to avoid lodgings that fail to comply with common standards. By converting each guest into a potential hotel inspector, this process can lead to a better quality of service than that provided by a stressed hotel manager, for example.

Advocates of the sharing economy confidently claim that it is merely in its infancy stage and that it is capable of transforming many more areas of people’s daily lives.

The potential of finance

One of the key areas in innovation in this field relates to the launch of new financial services. Currently, a growing legion of loan-provision platforms among peers (peer-to-peer or P2P lending) is bringing together individuals who either have money to lend or who need it. The result? Investors receive a better rate of return on their investment than they would otherwise obtain from a fixed-term deposit, while borrowers are able to access credit at far lower rates.

Last year, P2P investors from the United Kingdom leant more than 3 billion pounds sterling to consumers and businesses; representing 12% of all loans provided to small and medium-sized enterprises (SMEs) that year.

Launched in 2010, the Chilean company Cumplo is the largest P2P platform in Latin America with loans totalling US$105 million to date, across a network of 1,000 SMEs. By offering loans below the interest rates provided by traditional financial institutions, this business is growing exponentially. The CEO and founder of Cumplo, Nicolás Shea, believes that next year the company will loan US$100 million; i.e., US$42 million more than in 2015. He adds that this amount could reach US$300 million by 2018.

While this website represents only a fraction of the US$30 billion moved by the credit market in Chile, its impact on the sector has been significant. Businesses that once paid annual interest rates of 30% (to finance the payment of bills) or of 40% for credit cards (a common practice for small, family businesses) are now paying between just 10% and 20%. Rather than earning via differences in interest rates, Cumplo makes its money from a small commission charged in accordance with the size of the loans provided.

Nicolás Shea, CEO y fundador

“We are often the first site visited by finance agents each morning who like to check our rates. They then attempt to steal our clients from us by offering them more competitive rates”, Shea explains.

The impact of Cumplo is not only reflected by the lower interest rates offered by its investors, but also by ensuring that all information pertaining to the borrower and their loans is publically available online, including general conditions, interest rates and the names of trustworthy debtors.

“We are substituting financial analysis for collective knowledge of the network, which is far more efficient and free”, states Shea.

The impact of Cumplo on its clients has been equally significant. For example, savings made on interest rates have allowed a number of them to grow much faster than with a traditional loan.

While Cumplo’s competitors are on the counter-attack by improving their services and reducing their costs provided to clients, other sectors that have been shaken by the sharing economy are crying foul.

New regulations

From Parisian taxi drivers to New York hoteliers, traditional businesses are pressuring governments around the world to adopt measures to restrict those whom they consider to be illegal competitors and that are ignoring regulations in order to provide services at reduced prices.

Having gathered in Montevideo, Uruguay in April this year, hoteliers from across South America, including from Chile, attempted to demand their governments implement measures against the informal lodging sector, which, they claim, should comply with the same rules that govern hotels and hostels, including those relating to health and safety and payment of taxes.

In other parts of the world, Airbnb is generating discontent beyond hoteliers. Certain New Yorkers blame the platform for the rise in rent prices in the city, while the local government of Barcelona has ceased to issue permits for short-term rentals for fear that the city will be invaded by tourists arriving as a result of the site.

However, the Chilean government, which is attempting to increase the number of tourists visiting the country, would like to include these platforms and the properties registered therein as part of the tourism industry. Javiera Montes, Undersecretary of Tourism, told bUSiness Chile, “We must create the conditions for them to form part of what is being offered”.

By working with the municipalities of six of the most popular tourist destinations in Chile, the government is seeking to encourage apartment owners to register as official suppliers of tourism services. To that effect, Sinbad provides a free advisory service to apartment owners to legalize their tax situation; so that they are able to charge and pay their own taxes, explains Cuevas.

In April of this year, Andrés Gómez-Lobo, Minister of Transportation and Telecommunications, announced that inspectors from the ministry had begun to audit Uber drivers to check whether they comply with Chilean transportation regulations. Those failing to do so could lose their license and see their vehicle impounded.

In other places, authorities have attempted to accommodate the new technologies. One of the first to do so was in Silicon Valley, where officials have created a new business category for the transportation network, which includes specific requirements in relation to insurance policies.

This year, New York City approved legislation stipulating that Uber must respect many of the same regulations that relate to the city’s yellow cabs, including controls through fingerprint checks for drivers and that their taxis have appropriate access for disabled passengers. Nevertheless, they remain banned in the rest of New York State. In Washington D.C., the local government Council has voted to legalize such services, but only after a press campaign organized by Uber users.

Despite the concerns of taxi drivers and rounds of inspections carried out in Chile, Uber has continued operating and gaining supporters. During a protest against the company on 12 May 2016, Uber offered free transport to all existing customers and agreed to pay all fines levied against its drivers.

The company is convinced that it is not breaking the law or that, rather, its operations are in line with existing legislation. “The service offered by Uber’s partner drivers is private transport and as such is covered by current legal norms”, said Soledad Lago, spokesperson for the company. She added that each driver is responsible for declaring all income generated by the service of transporting passengers to the relevant tax authorities.

Despite its initial tough stance, the government recognizes that regulatory changes are needed to open markets to new and innovative actors, while ensuring they comply with certain basic rules. As Luis Felipe Céspedes, the Chilean Minister of Economy, said to students at Harvard University in April of this year, in reference to innovators of the sharing economy, “We must be capable of affording them the opportunity to pursue creative ways of doing business”.

Also in April 2016, Chilean member of the Chamber of Deputies, Pedro Browne, introduced a bill to Congress to help attract ridesharing applications that comply with the law. Meanwhile, the Senate Transportation Commission held a series of meetings with both sides of the conflict in the interest of finding common ground.

Uber welcomed this change in attitude. “We have to have a debate about new rules and the discussion should relate to a new regulation, and that is the road that Chile is going down at present”, said Lago.

The sharing economy has led to even more important changes. In fact, the most significant of these may not occur in the traditional markets of buying and selling goods and services, but rather might create new ones that link as yet unconnected people and entities to one another.

Iván Páez, creador de Kappo

Iván Páez created Kappo two years ago to encourage people to travel more by bicycle. He became inspired on a trip to Denmark where he saw a six-year-old child cycling to school alone on a well-designed cycle network (and without interference from cars which respectfully circulate in the same area). As a consequence, he asked himself why his own children couldn’t travel to school in the same way.

Rather that pressuring the Municipality of Santiago to construct additional cycle paths, his solution was to create a game for smartphones that allowed gamers to compete against their friends while pedaling on their bicycles. Users of the game are assigned points depending on how far or fast they go and they receive bonus points for safety and bad weather. After all, competition is a strong incentive.

However, another of the motives behind Kappo is to collect information about the users, particularly in terms of when and where cyclists travel. Having collected this data, he plans to compile a genuine real-time live map of bicycle flow around the city. In turn, this kind of resource will be of great assistance to pro-bicycle authorities when the decision is taken to improve the infrastructure for those who choose to embrace this particular means of transport.

Since its launch more than two years ago, the Kappo application has been downloaded by 30,000 cyclists around the world, only half of whom are in Chile. A map on the laptop of Páez shows that users come from different countries, including those from China, the US, Russia and even Iran.

Páez and his team are working with urban planners the world over to better understand the needs of cyclists and explain how to encourage greater numbers of people to swap four wheels for two. The aim is to create a virtuous circle.

“The more cyclists there are, the more cycle paths will be constructed by authorities, inspiring more people to get on their bikes”, explains Páez.

The sharing economy promises changes even greater than better ways of reserving a taxi or finding a room in which to spend the night. These applications have only scratched the surface of the huge potential offered by the internet in terms of linking suppliers and individual buyers transparently and efficiently and without the need for intermediaries.