The Sharing Economy: Creating New Opportunities for Banks
The rapid advances in technology have been reshaping the ‘marketplace’. Normally described as the evolution of the market, in many ways, it is actually a “return-to-the-past”, in that technology is enabling markets to operate as they did previously – removing intermediaries and putting economic actors in direct contact with one another once again. One example of this has been the rise of the ‘sharing’ or ‘collaborative’ economy— where economic ecosystems and platforms enable direct end user-producer contact, for transactions involving both human and physical resources.
The growth of the sharing economy has been rapid. There are currently over 9,500 companies active in the market, according to Mesh. PwC predicts that by 2025, the five key sectors of the sharing economy — staffing, finance, car sharing, travel and music and video streaming — could generate $335 billion in annual revenue, up from about $15 billion today.
And then there are the e–commerce giants. Although companies like Alibaba don’t quite fit the description of a Sharing Economy business, they do run on the principle of the Sharing Economy; that is to say everyone has something to offer and something to gain by participating.
While the sectors they serve are increasingly varied, the business models of peer-to-peer companies are quite similar. And their technology platform is absolutely vital to their success: By enabling individual providers to do business directly with consumers (to rent a room, or sell used furniture or charge for a car ride, for example), the technology platform helps them avoid or drastically reduce the biggest expense items of traditional companies: inventory, fixed assets and labor costs. In effect, as Tom Goodwin mentioned so succinctly, Uber, the world’s largest taxi company, owns no vehicles. Alibaba, the most valuable retailer, has no inventory. And Airbnb, the world’s largest accommodation provider, owns no real estate. The revenue comes from the fee the company charges people to use its platform (which usually includes such risk-reducing benefits as background checks and online reviews)
New business models come with new cash management challenges. With no assets and zero inventory, a sharing economy company does not face the same banking challenges as the usual corporate. The sector can offer attractive returns if banks take a carefully designed, tailored approach. Banks need to devise sustainable combinations of credit and auxiliary products and services, as well as a detailed understanding of customers’ needs, so that they become credible for cross-selling. There are four key areas where banks can assist sharing economy companies today.
- BUILDING CASH STRUCTURES TO APPLY CASH FASTER
AirBnB has roughly 2.5 million listings across 191 countries in its site. To support this, a complex banking structure is needed, involving thousands of accounts across hundreds of banks, and millions of payment transactions across a wide range of currencies. Receiving payments from customers and transferring the amount to the property owners after deducting the commission involves multiple settlements and reconciliations that is a cumbersome and time consuming process.
If the users of each property make their payment into the local/country bank account, in some cases it may be difficult for the business to identify where certain payments come from and what they represent. Human nature dictates that some users will not complete the payment details correctly and even when they do it may be that the banks involved (including the clearing bank which may limit the number of characters permissible in the reference field of a payment instruction) might not, have access to or pass on all of, the invoice data.
To solve this, one physical demand deposit account (DDA) could be established in the company’s name and one virtual account could be created for each country. Below each country level, one virtual account could be set up for each property in each country. This hierarchy of accounts may sound complex but in reality there is only one physical account supporting that structure. In the example, the user pays into the property’s account, upwards to the country account and on to the physical account. Payment at the property’s end shows immediately in the physical account. Also, the allotted account number is used as an identifier which eases subsequent integration of account data into the ERP and TMS systems, potentially facilitating the full automation of payments and collections processes. The solution thus helps the company to gain complete visibility of its cash and liquidity, while reducing accounts receivable (AR) and reconciliation issues.
With “On Behalf Of” structures like POBO (Payment On Behalf Of) and ROBO (Receivable On Behalf Of), businesses could conceivably bring down their complex banking structures into just a single physical account in a single bank. This could also help them expand their business in regions where they don’t have a physical presence, while potentially reducing their operating costs.
- MAKING IDLE CASH WORK HARDER TO INCREASE INCOME
The car sharing sector generally follows a model where the payment to the car partners is done by the company on a weekly or monthly basis. Thus, companies like Uber and Ola (in India) have access to their drivers’ cash for a duration of a week or sometimes a month. They are increasing looking to their banking providers not just centralize their cash operations but also to ensure the optimum use of this cash while they have it.
Liquidity management (especially multi-currency) in a volatile economic environment can be a challenge but banks can provide tools to help mitigate risk, lower costs and maximize returns. Setting up optimal bank account structures – based on the companies’ particular needs – can be the first step to ensure that the company has funds available to meet all commitments in the right place, at the right time and in the right currency. Liquidity management tools such as cash pooling can help these companies by bringing their account balances together to improve liquidity and helping to get to grips with their overall cash position. Investment sweeping services would enable the company move their idle cash to an interest-earning deposit account which would help them earn interest on that overall balance or pay interest on any residual borrowing outstanding on their current account(s). In regions where its use is permitted, notional pooling delivers a similar end result to sweeping without the physical movement of funds enabling the company’s business accounts to remain separate and so avoid inter-company borrowing. Interest is calculated on the net overall balance across the group of accounts. Cash management services such as Sweeping and Notional Pooling can thus help the company minimize borrowings and optimize interest payments on the available funds.
- PREDICTING CASH FLOWS TO PLAN SHORT AND LONG TERM FUNDING REQUIREMENTS
Sharing businesses receive more venture capital funding than any other business, overtaking social media platforms in recent years. Nearly $20 billion has been invested in this sector in just the last two years. The companies use the cash for marketing, partner payouts, and subsidies to attract new users to its platform. A significant part of the funding also goes towards strengthening regional presences and investing in new geographies.
When planning the short- or long-term funding requirements of its business, it is important to forecast the likely cash requirements and project profitability. This is where banks can help. With cash forecasting tools, banks can help the companies identify when it may run short of cash. Companies can match their funding sources to their capital flows which ensures that the business has access to the cash it needs to meet its ongoing obligations.
Efficient cash flow forecasting can also help in strengthening the credit rating of a corporation. Cash flow analysis is one of the key indicators demonstrating the financial health of a company and its ability to meet its obligations and to cope with unforeseen events. Therefore, cash flow forecasting increasingly influences the external financing alternatives available to corporations.
- PROVIDING FINANCING TO GROW PARTNER ECOSYSTEM
Banks can also provide solutions which assist sharing economy companies to grow their partner ecosystem by offering credit lines to the sellers who might have limited access to capital. China Merchants Bank recently implemented an innovative solution that enabled its corporate client, Alibaba, to offer credit lines to sellers with good credit. The facility provides low daily interest rates, flexible interest collection and low entry requirements. Within two months, over 80,000 lines of credit were issued to over 900 clients. Companies like Uber and Ola have launched vehicle financing programs for interested parties in India which helps the taxi hailing ecosystem since interested drivers are often not eligible for a loan directly. Under this plan, the companies will be partnering with lending companies as well as car manufacturers to provide easy solutions for drivers.
With major players such as Uber and Airbnb expanding their reach and the market valuations of leaders in the sharing economy hitting tens of billions of euros, growth in the sharing economy is only just beginning. To counter the disruption to their business, traditional industry players have now joined the party. The hotel booking website Expedia recently bought vacation rental site HomeAway, an Airbnb competitor, for $3.9 billion. Marriot International has partnered with office space sharing firm LiquidSpace to offer their unused conference and meeting spaces to those who may need short term or last minute office space for a team meeting or a conference. Alibaba is investing at least 100 million yuan this year to develop a digital flea market in China with the firm already having launched a used-goods mobile app called Xianyu (Idle Fish) in 2014 that has more than 100 million registered users currently. Some of the key players in the sharing economy sector have already started collaborating with Fintechs. AirBnb has partnered with Airplus to provide virtual payments option to its customers. Banks need to demonstrate that they can provide these businesses with the help they need to grow. To succeed they need to take a focused, technology-supported approach to each chosen market, rather than a one-size-fits-all approach or risk losing this prospective goldmine to their competitors.