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Challenges of new sharing economy platforms

My rather short stint with Kaktus App (check my bio) allowed me to dig deeper into the world of sharing economy. Here are the major problems that I’ve encountered and that every new sharing economy platform will face.

Customer trust

One of the biggest challenges for every new sharing economy platform is to convince new users that it’s stable, serious, safe to use, and there to stay – in other words, that it can be trusted. After all, trust is one of the main pillars of the sharing economy.

When starting, it’s not easy to spot and fix all aspects of the service that may indicate to customers that there may be something risky about using it – put differently, it’s difficult to get them all right.

The trust problem new platforms face is slightly related to a certain standard that people nowadays got used to using Uber, Airbnb, and other established sharing economy platforms where the providers (and even customers) are screened very thoroughly to secure safety and integrity of both sides and customers are often insured or have other forms of guarantee if something goes wrong.

New platforms probably won’t be able to afford to have even the more fundamental things on such level, which brings me to the next point.

Chicken and egg problem

Who should new platforms try to acquire first? Providers or customers?

If providers, what are they going to tell them when there are no customers out there yet, and it can take weeks or even months to get first order? 

If customers, who will be they able to choose from and hire when there will be no providers?

This problem has another sub-problem: Since new platforms should obviously go for the providers first, what kind of providers should they focus on getting? Where are they going to set the bar?

If they decide to set it too low (anyone can register and start offering the service) they will end up with a lot of low-quality providers which will be an instant turn-off for the potential customers, will damage their image and can even get them in trouble if some provider does something illegal. Even if they manage to get a few solid providers along the way, they will be lost in the sea of low-quality ones.

If the bar is set too high (long registration process, waiting period to get approved, check of the government-issued ID) much fewer providers will register because a) they just won’t spend so much time registering on a platform that is just starting and has no customers and b) they won’t trust the new platform enough to send them copies of their IDs – after all, nobody knows how they are going to use them or how securely are they going to be stored.

It also depends on how exactly and at what terms is the new platform going to connect people – you don’t need a voiceover artist from Fiverr to have a verified government ID, but you’d expect that an Airbnb host will.

Payment processing

The sharing economy is considered a high-risk business model by virtually every payment gateway, which may be even compounded if a new platform is simultaneously in one of the high-risk industries for payment processors as well – for example, travel. 

This means:

a) Some will decline to work with new sharing economy platforms outright

b) Some will work with them only if they can demonstrate that they have a history of processing a significant amount of money (couple tens of thousands) in few consecutive months without a huge percentage of chargebacks or other problems

c) They may have to go with a payment gateway that is focusing on high-risk businesses and has much higher processing fees

d) They may have to go with a small or little well-known one that often has various technical or financial limitations (no/bad integration for mobile devices, limited analytics, long payout period combined with high and long-term rolling reserve, etc.) forcing them to make various workarounds in the payment process – every unnecessary or unusual step during the payment process will have “oh shoot what’s this” effect on some customers that will better leave because it won’t simply look right.

Long payout period and rolling reserve (payment gateway holding a certain percentage of the money for a certain time before releasing it to the platform) will also cause problems with sending money to providers – how can a platform pay them when they don’t have (all) the money available yet? 

It can either have a bunch of money set aside to pay providers faster or pay them with huge delays. And don’t forget there are various operating expenses the platform has to pay for, too.

If their chargebacks to transactions ratio gets above a certain percentage, the payment gateway will deactivate the payment processing (often with no heads-up), and the platform will suddenly have no way to process the payments. Getting a new payment gateway can take 1-2 weeks (assuming they can find one), so it’s not like they can just switch to another one unless they have it fully operational and ready to be used in reserve.

If the new sharing economy platform isn’t based in the US or another well-developed country where most payment gateways have chosen to operate, it is at a big disadvantage and potentially in big trouble – some countries are simply no-go zones for payment processors.

Uncertain future of contractors

The vast majority of providers on the sharing economy platforms are the platform’s independent contractors, which means that the company is not responsible for anything but paying them. People that “work” for a sharing economy company full-time have no employment benefits employees use to have (for example subsidized health insurance and retirement plans) and some part of them want the government to take action to ensure the same or similar benefits for contractors, too.

We’ve seen this recently in California where they passed the AB5 law restricting contractor’s working hours, which is probably not really what contractors wished for since a lot of them outside the sharing economy industry were let go by the companies they were previously “working for” as contractors (the now-famous case of Vox letting go hundreds of freelance writers), even though the original idea was to “force” companies to hire them as regular employees.

Even after what happened in California we can expect another efforts to push (not only) sharing economy companies to classify their contractors as regular employees, or at least provide them the same or at least similar benefits. If this happens, sharing economy companies will see a huge increase in costs. A regulation like this will destroy one of the biggest advantages sharing economy platforms have over traditional companies.

Additionally, it will probably cause the need to raise the bar to entry for new providers on sharing economy platforms because companies wouldn’t want to provide employee-like benefits to everybody who signs up. The original idea of a sharing economy was that people are going to be doing this part-time as a gig and nobody will complain about not having employment benefits because everybody has a full-time job that provides it. With the rise of sharing economy more and more people had seen that it’s already big enough to replace their full-time job – and that’s where the problem started.