While 5-10 years ago most people had never heard of the term sharing economy or knew exactly what it meant. Fast forward to today, and the reality is very different. Our modern economy includes an economic model that includes a sharing economy. But what exactly does that mean? Below is a summary of what a sharing economy is and how it affects your everyday life.
A sharing economy has many facets, but is a mode of consumption whereby goods and services are not owned by a single user, but rather only temporarily accessed by members of a network. A shared economy can also be called an on-demand economy, circular economy, gig economy, peer-to-peer economy, and a collaborative economy. Each of these has its own unique definition and nuance that we will dive into. Sharing economies allow individuals to make money from their assets and share as a service. The easiest example is Lyft or Uber. Individuals can use their car to provide a taxi service for a fee. Another great example is Airbnb. Homeowners can rent spare bedrooms or homes when they are not using the asset and thus are sharing their underused asset.
Below is a summary of all of the types of a sharing economy
- Collaborative economy: focus on collaborative forms of consumption
- On-demand economy: focus on “on-demand” goods and services
- Gig economy: focus on workforce participation and income generation via “gigs”. These are single or one-time projects or tasks.
- Freelance economy: focus on workforce participation and income generation by freelancers, who are independent workers. Major companies include TaskRabbit, Care.com, and Upwork. While traditional full-time employment may never go away, these talent marketplaces allow for more flexible and sometimes more interesting job employment. If you have a unique skill, these platforms allow you to earn money by providing them a needed service. The biggest advantage here is this creates a more liquid marketplace for knowledge and talent. It gives the employee a big advantage to take his or her career where he or she wants to.
- Peer economy: focus on peer-to-peer (P2P) networks in the creation of products or services. Lending Club and other similar sites like it allow people to lend one another money, with much lower interest rates and fees than traditional credit cards or bank loans. Investors earn solid returns and borrowers get more competitive rates, all facilitated by the platform. The peer economy has grown tremendously over the last few years as many borrowers are unable to borrow from a traditional banking institution. Now a borrower can go to Lending Club and borrow from an individual directly. The platform itself is not taking any lending risk as it only provides a “location” for individuals to borrow and lend money. This does create risk for individual lenders as they are putting their own capital at risk and may be lending to people who may not pay them back.
- Crowd economy: focus on economic models powered by “the crowd”, such as crowd funding. The most common companies are Kickstarter and Indiegogo. Entrepreneurs, artists, and other individuals can reach out to the community for potential funders and can have a set fundraising amount. The biggest difference in crowdfunding vs. peer to peer lending is the recipients usually are not expected to repay the funds back. Sometimes you can receive merchandise or equity, but many times you are giving money as a grant or charity contribution.
- Digital economy: focus on anything powered by digital technologies
- Platform economy: focus on anything powered by tech-centric platforms
A lot of companies could easily fall under multiple definitions described above. TaskRabbit is a great example as it would fit under the on-demand economy, gig economy, and collaborative economy.
A big reason for the huge growth in the sharing economy is the gathering of data and algorithms that drives the details needed for the individual companies. Uber would not be able to succeed without sophisticated data to be able to provide a competitive rate.
Sharing economy as a part of the financial system
Many banking institutions are expecting for the sharing economy to be embedded deeply within the financial system. Today most financial institutions manage transaction from end to end and put their own capital at risk. With a sharing economy evolving, financial institutions may play more of an intermediary role as peer to peer transactions grow. FinTech companies have already started offering peer to peer lending platforms, often in partnerships with traditional banks. Also a number of peer to peer companies are targeting investing as well, with a focus on student debt, or connecting debtors and investors. These companies are building platforms that enable ordinary individuals to raise funds and take loans from investors directly.
This aspect of the sharing economy is still relatively new and consumers should proceed with caution. However the evolution will continue and this may become mainstream within 5 years.
Advantages of the Sharing Economy
- Cheaper Goods and Services: Sharing economy makes everything more efficient which means it will reduce costs for services and goods. This also saves times as you are cutting out a middle man and you are hiring directly from the source.
- Extra Income for Providers: Another great advantage is the owner of the asset can bring in extra income by selling or renting an underused asset. By giving rides or selling your unique knowledge or skill set, you are receiving additional income. This can supplement or replace your traditional job.
- New Opportunities: Sharing economy provides goods or services that may otherwise have been unattainable. The biggest example here is finding a loan from an individual if you were denied one from a traditional bank.
- Stronger Communities: Sharing economy’s main premise is about bringing individuals together and collaboration. Sharing economy brings people together which can help improve and grow communities.
Disadvantages of the Sharing Economy
- Privacy/Safety Concerns: The sharing economy requires people on both sides of the transaction to forfeit some privacy. This can create issues if one of the parties acts inappropriately. For example, if you rent out a bedroom on Airbnb, an individual could steal items from your room.
- Limited Guarantees: If you decide to participate in the sharing economy, you are taking risk that you will not get paid, usually with limited recourse.
- Cooperation: While this is an advantage and disadvantage, a sharing economy requires cooperation on each side of the transaction which can create issues and tradeoffs.
Overall
Sharing economy is here to stay and it will continue to grow. The past couple of years have seen a tremendous growth in technological changes which has helped the sharing economy grow.