Trust and Transparency in Marketplaces 

There is a lot written about the need for online marketplaces and exchanges to build trust and provide transparency to all participants.  Examples of issues experienced in the past are:

• Battles fighting fraud at both eBay and PayPal
• Alibaba’s high-profile (and ongoing) attempts to reduce fraud and counterfeiting
• Uber’s battles over rider and driver safety
• Highly publicized Airbnb horror stories
• Peer to peer lending’s need to adequately measure and communicate risk

Effective trust and transparency systems are an absolute necessity to the success of marketplaces and the “sharing economy” generally.  Such systems can include ratings, fraud detection systems, participation requirements (e.g., minimum FICO scores for peer-to-peer lending,) insurance plans, escrow, and a variety of other mechanisms.  But most observers overplay the difficulty of establishing such mechanisms.  Indeed, in many industries, new marketplaces and exchanges actually have an advantage over legacy businesses in establishing trust.  I believe the “new kids on the block” are advantaged for two reasons:

• The new “kids” are competing against companies we are already conditioned to expect are screwing us, so the competitive bar is low
• The new marketplaces often connect us to another human being, not a company.  And humans are less likely to cheat us than businesses or the employees that represent them

 

 

 

 

 

 

 

 

We Expect Most Institutions To Screw Us

If you are not yet this cynical, you are either very young, not very observant, or extremely lucky.  Here are a few recent examples from the news or my personal life in just the past two weeks:

1. S&P, the grand-daddy of ratings agencies, committed fraud in rating the mortgages associated with the financial crisis.  Shock of all shock,  it turns out S&P worried about losing market share by lowering the rating their clients’ products!  (S&P’s defense was essentially that they offer opinions and free speech, not really ratings we should rely on.)  It is only a matter of time before Moody’s (can anyone say duopoly?) will be found to have done the same.
2. Read any recent articles about trying to cancel your cable contract?  Ever tried to cancel almost any subscription service?
3. Ever looked carefully at the bill you got from the hotel (resort fee?), cable company (extra services or equipment or speeds you never see), or cell phone provider.  You will find errors (always in their favor) and you will find correcting these errors is deliberately difficult and time-consuming.
4. Car buying is now more transparent (thankfully), but after you reach agreement on the car price you get to the discussion of the service options and extended warranties.  Good luck with that!
5. Banks cannot deposit all of your funds until after several days(!), but overdraft fees can be assessed instantaneously.   (Banks make 61% of all the profits they make on consumer checking accounts from overdraft fees.)
6. During the financial crisis, when banks knew they were under a microscope, some of these same banks (even well-regarded ones) foreclosed on people with forged documents.

I could go on and on, but it is sounding too “rantish”.

Almost every time we make a purchase, especially an infrequent one, the seller is at an advantage.  Some sellers do every they can to take advantage of this “asymmetry of information” and some try to reduce it.  Amazon is successful for many reasons, but one is that they give you options to consider.  And Amazon Prime makes the whole shipping and handling game go away  Schwab, Fidelity, and Vanguard are similar providers in financial services.  Unfortunately, these companies tend to be the exception, rather than the rule.

The bottom line is that the new marketplace players–Etsy, eBay, Uber, LendingClub, Kabbage, OnDeck, AirBNB, elance-odesk,  etc. all have to establish the trust of their users, but they are competing, in many cases, against a set of institutions that have already lost our trust!

People Screw Us Less than Companies Do

Ethicists, management gurus, and every human being alive knows that groups of people, including corporations, generally behave worse than individual people do.  There are many reasons for this, with fancy names like Social Bond Theory, The Galatea effect, The Pygmalion effect, etc.  But you do need not know the names of the reasons to be intimately familiar with the phenomenon.  You just have to have worked somewhere with more than 50 employees.  Large groups of people are capable of very bad behavior towards each other and especially their customers.

While all of these new marketplaces are companies themselves, many are relatively unobtrusive in helping us find other people, not companies, to do business with.  And not surprisingly, these real people, with real first and last names, and real addresses seem to act more responsibly than big companies.  At least that has been my experience and I bet yours too.

Summary

I’m not naïve.  I know there are fraudsters, con-people, “evil-doers”, etc. on these marketplaces.  I’m just saying that part of the appeal of these marketplaces is that we find other humans a lot easier to deal with than companies.

 Sunday’s New York Times (Gretchen Morgenson) had a great example of this phenomenon.  Wells Fargo, considered one of the better banks, was recently found guilty by a judge of foreclosing on mortgagors using forged documents.  In his ruling on the case, the judge noted that the Wells employees did not seem too concerned about their actions.  He quoted a bank representative as testifying : “I’m not here as a human being, I’m here as a representative of Wells Fargo”.  Think about that one for a second.

These days, even a little humanity will go a long way in establishing trust.