The upcoming problems for AirBnB in the US… and how to fix them

Inter-railing around Europe is usually the domain of students trying to “find themselves,” or attempting to seem cultured when they tell their friends they have visited the Louvre, Prague Castle or other grandiose symbol of Europe’s rich history. I went inter-railing around Europe attempting to do just those things, but I came away with something that may (I hope I’m right in saying this) actually be of interest to people: namely, an understanding of issues facing AirBnB; issues that need addressing if AirBnB and other asset-sharing businesses are to achieve their ambition of changing how we as consumers, consume.

If the term asset-sharing business is drawing a blank, I have created my own working definition of what an asset-sharing business is:

Asset Sharing Businesses are businesses that allow consumers to maximize the utility of their assets (goods or services) by lending them out to other people through disinter-mediated channels, in return for either real or social currency.

 

Put simply, asset-sharing businesses allow people to rent out things they own, using the internet as a medium to cut out any middle man, unlocking value in their existing assets. More and more people are learning about asset-sharing businesses, along with the undisputed leader and darling of the sharing economy, AirBnB, the “community marketplace for unique accommodations” whose hockey stick growth has spurred an entirely new bunch of entrepreneurs who start their pitches with, “It’s basically an AirBnB for ____”. Founded in San Francisco in 2008, AirBnB were one of the pioneers of the sharing economy as they built a platform that allowed property owners to rent out their spaces, from one room to the whole property, for as little as one night.

There is excitement at the prospect of a lucrative business model that also has the potential for wide-ranging social benefits, such as using market resources in a more efficient manner, creating new communities while enriching existing ones, and increasing access to vital goods and services to those who need it most.

While much has been written in praise of AirBnB, along with many other emerging asset-sharing businesses, my jaunt around Europe brought to light two issues that must be addressed before asset-sharing becomes part of the mainstream public’s day-to-day lifestyle. The first is overcoming the psychological hurdle of letting go of the complete control of one’s most intimate and valuable possessions, such as one’s car or home. This issue is particularly problematic in America. The second, and more imminent concern, is the threat of corruption by the users of asset-sharing businesses, both those lending out their assets, and those using them.

The first revelation came midway through a 4 hour train ride from Paris to Amsterdam. A book I was reading (How the West was Lost, Dambisa Moyo) argued that part of the reason for the 2008-09 housing crisis was a result of 60 years of US Government’s pro-homeownership policy, which created incentives for people to invest all of their savings in housing. Moyo argues that because housing is a low-performance asset, many people would have been better off renting homes, and investing the remainder of their savings in assets offering higher returns. Though it is a thought-provoking point, the subsequent conversation I had with my American friend is what may concern asset-sharing businesses: when I asked him why more people didn’t rent homes in the US, he proudly replied that owning a home is part of the American dream, and that the idea of owning and controlling one’s possessions is ingrained into the psyche of a majority of Americans across the country. This is an issue for asset-sharing platforms starting in America, and this theory that Americans are less likely to rent or rent out their possessions is already being corroborated by AirBnB’s latest worldwide statistics. Published in June to demonstrate the explosive growth the company is witnessing, the stats show that Europe has nearly twice as many AirBnB listings as North America (105,000 vs. 55,000). This despite the company starting its operations first in the US. There are, of course, other factors that come into play, such as higher job insecurity in Europe leading more people to rent out their spaces as an additional source of income, but it is clear that the concept of renting out one’s own apartment has significantly more appeal across the pond than in North America.

The ramifications of the idea that US consumers are more wary to consume collaboratively than their European counterparts are actually quite significant. The US is still the world’s largest economy by some way, so in terms of potential revenue, it is still the most important single market for any start-up. More than this, the majority of funding available to start-ups around the world is to be found in the US. While asset-sharing start-ups are currently enjoying a bit of a love affair with VC’s, if there were to be any negative news regarding growth of asset-sharing businesses in the US, it would have a much more severe impact on funding than negative news elsewhere.

These thoughts were lingering in my mind as we checked in at our AirBnB destination in Amsterdam, where I was immediately confronted with a second concern for asset-sharing companies that presents the biggest immediate challenge to their continued growth.

“Oh, and by the way,” Our host said to us as she was completing the check-in, “if any of the neighbors happen to talk to you, could you please tell them you are just my friends? Technically, I shouldn’t be sub-letting this apartment.” The three weary travellers had no choice but to comply.

The legality of the operations of asset sharing companies such as AirBnB are hazy at best, purely because this business model is so new and innovative, but as the company’s operations reach the mainstream public, there will be more and more questions about how the sharing economy is to be legislated, as many existing laws seem unable to deal with the intricacies of asset-sharing. A recent setback was the City of San Francisco ruling that AirBnB have to pay 14% hotel tax on all rooms rented out in the city. The city’s determination to categorise AirBnB as a hotel is an example of existing legislators failing to comprehend that this is a brand new type of business, and a brand new legal framework needs to be built to accommodate it.

More damaging could be the revelation that many hosts are renting out rooms or whole properties when they do not in fact own them. Just days after our initial conversation with our Dutch host, we attended a party hosted by AirBnB for Hosts and Guests staying in the city. The event was a success, and everyone left with AirBnB occupying a prominent position in their hearts. I left in the knowledge, however, that our host for the next 2 days was not alone in using the service to sub-let their apartment. Another two people confided in me that they loved the service because they could sub-let the apartment without having to go through any agents, as the act was technically in breach of their own rental contract. All anecdotal evidence, of course, but symptomatic of a wider issue.

AirBnB has already overcome the first major incident that could have impacted consumer confidence in the service, that of the ransacking of a hosts apartment in San Francisco, June 2011. With their $50,000 guarantee extended to $1,000,000, AirBnB have now allayed most hosts’ fears: that of leaving their most valuable material possession in the hands of a complete stranger. But what happens if a landlord’s tenant sub-lets the apartment out, only to have a similar problem to the host above? Are AirBnB liable to be sued? Other asset-sharing businesses are similarly at risk. What if a teenager rents out their parent’s car on Relay Rides, the peer-to-peer car sharing network, which then is involved in a crash? Are Relay Rides liable?^

In a broader, sharing economy context, the implication of a corrupt use of the service could be lethal to a movement whose entire business relies on trust between the firm and each of the two parties involved in a transaction. So far, the vast majority of collaborative consumers have placed trust in each other and have been rewarded with extremely gratifying experiences. Asset sharing companies rely on the fact that renters and “rentees” create an online profile, and can communicate with each other prior to accepting any deals, with the terms of the deal completely transparent to each party. Before we see mainstream adoption of asset-sharing platforms, however, more needs to be done to authenticate the owner of the good, and more needs to be done to measure the “trustworthiness” of people who will rent the good, as the rigorous contracts which protect asset-owners in normal rental circumstances often don’t exist with online, collaborative consumption companies.

Fortunately, help may be available in both departments. CVTrust is a start-up which uses a patented tool to verify and validate candidate’s résumés. This tool makes it easier for recruiters to filter out job seekers who may wish to embellish their CV with factual inaccuracies. CVTrust works with schools to validate candidates’ claims. If the same principle could be applied to asset ownership, then consumers could use a service such as AirBnB and be able to see if the person they are renting from is in fact the owner of the asset, which would halt the sub-letting culture that poses a huge threat to the industry.

On the other side of the coin, asset owners may soon be able to rate the trustworthiness of the people they are potentially lending their assets to, by looking at their TrustCloud rating. TrustCloud is well known within the Sharing Economy, but is relatively unheard of outside of it. By allowing TrustCloud access to your social media accounts, and by allowing it to view reputation measures such as your eBay rating, the company builds up a rating score out of 1000 on what it considers to be your trustworthiness. The idea is that your TrustCloud score can act as a credit rating for trust, offering asset owners a better picture of who they are potentially renting their assets to. Unfortunately, the TrustCloud rating service shares the same problem as traditional credit ratings for consumers, namely that if you do not sign up early and establish your TrustCloud rating, it may be difficult to use asset-sharing businesses if asset owners are relying on TrustCloud to filter out any suspect characters. However, TrustCloud still offers a much better system for establishing who is trustworthy than anything today, so its integration into asset-sharing businesses could boost the growth in the sector.

Adding these tools to the arsenals of asset sharing businesses will help the sector reach a more mainstream audience, who have thus far been wary about giving near-strangers access to their property. At the same time, any potential users of asset-sharing businesses can put their minds at ease, safe in the knowledge that the owner of any rented property has been vetted and authenticated.

The first concern for asset-sharing businesses is changing the psyche of American consumers to allow them to relinquish control of their property. There is no simple solution to this attitude, rather asset-sharing businesses need to establish trust throughout the US in their business model, to the point where the potential threat of damage or theft is effectively zero. Addressing corruption within the industry would be a major step in the right direction, and implementing services such as those CVTrust and TrustCloud can supply would help propel their growth even higher into the stratosphere.

Shops, hotels and rent-a-car dealerships beware, the asset-sharing businesses are one step closer to world domination.

Ross Garlick

3 Comments on “The upcoming problems for AirBnB in the US… and how to fix them

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  2. Pingback: Happy Birthday, RossRambles! | rossrambles

  3. Pingback: Ramble of the day: The Limits of the Sharing Economy | rossrambles

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