Rental and Sharing-economy - Where does it start and where does it end and how does it relate to the Financial sector?

A few years ago everyone was predicting the end of the consumption-economy and the rise of the sharing (and in extension rental) economy. Today, we see definitely a rise in sharing and renting platforms and products as a service, but not to the extend it has significantly changed the regular economy.
When looking at the sharing and rental economy, you can identify a number of elements, which psychologically push people still to possess their own goods, i.e.

• Convenience: when you are sharing (or renting) an item, you need to reserve it and there is no guarantee it will be available. At the same time, you need to go fetch the product (or get it delivered) and most likely you cannot fetch it 24/7, but rather only during office hours.

• Hygiene: with the Covid-19 crisis still fresh in everyone’s mind, sharing products has a hygienical risk. But apart from the risk of diseases, there is also the feeling you have no idea who used it before.

• Fear for damage: people fear when they rent something they will break it. Obviously there are insurances for this, but even then it’s a lot of administrative hassle and a lot of extra cost. Additionally you need to be confident that the product was well examined when it was returned by the previous user, otherwise you risk paying for damage you didn’t cause yourself. Finally very often there is also a security deposit required to ensure the good is properly returned, which in majority of usages is an additional hurdle (both financially and operationally).

• Price: renting/sharing a product is not always cheaper meaning a careful financial calculation should be made. Often if you need to rent something more than X times, it will be cheaper to buy it than continue to rent it. E.g. renting electric steps (e.g. via Bird, Bolt, Dott, Lime…​) can be ideal if you are an occasional user, but if you use it daily to go to work, you can quickly gain back the investment of buying your own electric step. E.g. a Bird step costs 1€ + 0,20€ / minute. Let’s say you have a trip of 15 minutes on the step to go to work, this means you pay 4€ per trip, meaning 8€ / day. At 220 working days this comes to 1760€ / year. As you can already buy a very good e-step for about 800 EUR, this means you can pay your investment back in less than half a year.

But of course there are also important benefits on sharing/renting, like increasing efficiency (make better use of what we already have), avoiding investing in underutilized assets (allowing to spend this money on other things), avoiding spending time on the purchase and maintenance of the product and of course also environmental benefits(reduce the need for new production and reducing the environmental impact of our consumption). So it remains a trade-off and we can expect that the concerns on renting/sharing will also be more and more addressed when this space becomes more mature.

But before diving further in the details, we should first define what we mean in this blog with the sharing- and rental-economy, as many definitions circulate on the internet.

• Clearly the focus in this blog is on sharing or renting goods and services and this in contrast to traditional ownership or purchasing.

• The difference between the sharing and rental economy is that the sharing economy refers to peer-to-peer transactions between individuals usually facilitated by a central technological platform, while the rental economy is based on businesses (companies) renting out their assets or services for a profit.

E.g. if you look at cars, you could say that Poppy, GreenMobility and Cambio are actually rental companies (even though more decentralized than traditional players like Sixt, Avis or Hertz), while companies like BlaBlaCar, UberPool, CarAmigo, Drivy, Turo, Zipcar…​ are more positioned in the sharing economy.

This means we can identify a whole scale of renting and sharing for a car:

• Peer-to-peer versus central, i.e. sharing versus renting

• Duration: pay per trip (e.g. Cambio or Poppy), rent for a few days or weeks (e.g. Hertz) or long-term renting (which is often in the form of car leasing)

• Service-level: rent/share just the car (e.g. CarAmigo), rent a car with a driver to a pre-defined location (e.g. BlaBlaCar) or rent a car with a driver to your location of choice (e.g. Uber)

This kind of distinction can be generalized in:

• Central versus decentral sharing/renting. We can identify again a whole scale in this characteristic, e.g.

  • In the DeFi model (based on blockchain) the central party is completely eliminated (e.g. Darenta or Cryptober)

  • On P2P platforms you typically have a strong central player acting as a marketplace and bringing suppliers (owner) and consumers (seeker) together (e.g. Turo)

  • Companies renting their own assets can be split between companies offering their products from fixed locations (e.g. Hertz), players offering via online delivery or players renting out their assets on public locations (e.g. Cambio, Poppy, GetAround…​)

• Duration of the sharing/renting

• Renting/sharing just the asset or providing also value-added services on top (in the above example of the car this would be the driver, but it could also be advise, an installation service, a discount on adjacent products/services, a cleaning service…​)

You could generalize this as following:

• Centralization usually leads to less flexibility, higher prices and a less dynamic market (i.e. slower adaptation in the supply-demand curve), but it also gives a lot of advantages, like more legislative regulation and consumer protection (e.g. the owners of Airbnb properties are not subject to the same regulations and taxes as traditional hotels), higher trust and safety (less risk of fraud and scams as you are usually dealing with a known and reliable company, instead of individuals which are usually strangers) and a central customer service.

• The longer the duration of usage the more interesting ownership becomes, although in certain cases there might be fiscal or capital reasons to prefer OpEx (renting/sharing) over CapEx (owning), especially when the cost of capital is high.

• The added-value services which are provided on top can be very diverse and can make it very interesting for both parties. E.g. in the software industry, you initially bought software and paid a one-time license. Afterwards software companies started offering support and regular upgrades, which resulted in a yearly license model. Today those same software companies also take care of the hosting and maintenance of the software, resulting in a SaaS offering. As a result, the fee model has switched more to a usage-based model (e.g. price per user or price per transaction).

While there are many successful sharing/renting platforms for cars (or more in general for mobility, as also bikes, steps, scooters…​) and housing(or more in general spaces for places, as also holiday places, office spaces, parking spaces…​) both in the B2B and B2C space, in other domains the sharing/rental economy remains difficult.
Why is this? Why are certain products more successful in the sharing/rental economy than others?

First of all we could draw a quadrant with 2 axes, i.e. on 1 ax the inverse of "Frequency of usage" of the product and on the other ax the "Price of the product". Obviously the sweet spot for renting/sharing is in the upper-right quadrant, i.e. the expensive products, which you rarely use. A typical example is your car, which on average sits idle for 23 hours in a day.
But we could also work with certain thresholds as of which rental/sharing becomes the better option, e.g. products up to 500 EUR, you should use at least once a month to justify ownership, products between 500 and 2000 EUR, you should use at least every week, products between 2000 and 5000 EUR at least daily and products above 10.000 you should use multiple times per day. Those figures are of course subjective and need to be adapted per country and per customer segment.

But obviously it is not that easy. Apart from those 2 primary factors, we should also take into account 2 other factors, namely

• The urgency/criticality of the product, i.e. when you need the product, how urgently do you need it. E.g. for a car, this urgency can be high, as nobody likes to wait for 2 hours in the cold for a car to come by or if you need to go to work in the morning, you can’t say it was not possible, because there was no car available on the rental/sharing platform. But this urgency/criticality can also work in the advantage of sharing/renting. E.g. bike and step-sharing services with bikes/steps available on public places profit from a lot of customers who urgently need a transportation means which is close to them (often the shared bike/step will be closer to them than the bike/step they own).

• The personal bonding and sentiment associated to a product. The higher a personal connection with the product, the less likely you will want to use a renting/sharing service for it. If you are living alone, you are full-time working in an office and have a busy social life, you could argue your house is underutilized, as probably more than 60% of the time you are not using it. Furthermore this is a very expensive product (most likely your most expensive product). But sharing it (apart maybe occasionally on AirBNB, when you are on holiday yourself for a longer period), is not really an option. Obviously a house is something very personal and additionally it contains a lot of your own personal goods (like e.g. your clothing), which you don’t want to move continuously.

This personal connection is something very cultural, which will likely reduce over time for many products, as people get more used to renting/sharing products. People having a positive experience renting/sharing 1 product will be more inclined to rent/share another product.
The factor of "urgency" should be resolved by faster and 24/7 delivery options on the rented/shared object. Obviously today this might be economically very difficult to accomplish, but with volumes increasing and the potential of Autonomous Vehicles this can become possible.

Until now, we mainly talked about physical goods, but all above principles can also be applied on the financial services industry, as banks and insurers are also players (platforms) intermediating between respectively parties with excess money and parties in need of money and between parties willing to secure themselves against a future risk and parties who experienced the risk and claim a compensation.

As such you see similar evolutions in the financial sector:

• Decentralization versus centralization

  • Full decentralization via DeFi services for insuring (e.g. Union, InsurAce, Solace…​) and banking (e.g. Compound, Aave, YouHodler, Uniswap…​)

  • P2P and Crowdfunding platforms for investing and lending, e.g. Upstart, Prosper, Lending Club, Funding Circle, Kickstarter, Indiegogo, Patreon…​

  • The more traditional players, where of course we also see a difference in centralization, e.g. online banks which offer 24/7 services and don’t have any notion of central branches, compared to incumbent banks with branches, for which you can often only visit your own specific branch and not any branch of the bank.

• Duration: this is quite clear, as banking services exist on all possible terms, i.e. from short-term overdrafts and saving accounts, to installment loans and short-term bonds all the way to long-term mortgage loans and long-term investments like long-term bonds and securities.

• Value-added services: more and more financial players offer all kinds of services on top of their financial products. This can go from discount (e.g. cash-backs) and loyalty programs, to PFM and other advisory services all the way to the integration of their financial products in complex eco-systems, where the financial product is fully embedded in the customer’s journey (e.g. BNPL or SNBL).

The main question in this story remains however when the sharing/rental economy will become fully mainstream and extend also to other products than mobility and spaces.
Apart from the cultural shift mentioned above, I believe following evolutions are also required:

• The sharing/renting platforms should become even more user-friendly in guiding you through every step of the journey and making sure you can have confidence in every step. Especially for new users this accompaniment is crucial, as this kind of services can come with a lot of anxiety and questions when used for the first time. This means following elements should be covered:

  • Careful and user-friendly screening (due diligence) of all parties involved in the service, i.e. for rental companies this is only a screening of the customer, while for a sharing platform both the suppliers (owner) and consumers (seeker) should be screened.

  • Identifying / advising you which product to rent/share

  • Visualization of peer reviews and ratings on both the product and the supplier

  • Giving clear indication of availability (and time to delivery) and pricing

  • Clear guidance and explanation of on-top services, like additional insurances

  • Very intuitive tutorials/videos how to use the product

  • Easy payment options

  • Possibility to input complaints/claims, e.g. object delivered is not clean or is not working or you broke the object and a good follow-up on this.

• Overcome all kinds of legal and risk issues, without too much impacting usability. E.g. when looking at shared steps of companies like Bird, you see continuously new risks and legal concerns popping-up which each time need to be addressed by additional technical checks. Those checks definitely help, but also impact negatively usability and privacy. E.g.

  • People leaving steps badly parked: addressed by asking you to take a picture when you leave the step

  • Customers using the steps drunk: addressed by certain reaction tests (game) to be played before you can use the step

  • Minors using the steps: addressed by ID checks and face recognition

  • Vandalism against the steps: avoided via cameras, surveillance, storage of steps during the night and also users having to take pictures before and after a ride on a step

  • Legal need to wear a helmet: again via pictures it is checked if helmet is worn, but also that the helmet is correctly secured (with lock) after usage.

  • Hoarders collecting dozens of steps for bounties: via AI algorithms and tracking devices, such behavior is identified and the persons applying those practices are banned from collecting bounties

  • Fraudulent credit cards: via AI models fraud can be identified and payments can be pro-actively blocked

  • …​

• Delivery 24/7: instead of having to go collect the product during office hours, you should be able to retrieve a product instantaneously. This will be possible once autonomous vehicles exist. These could be stocks on wheels, which are filled with different objects to rent. When arriving to the customer’s place, a specific box with the rented object could unlock. A real-time communication with the app of the renting/sharing platform should allow to track the vehicle, alarm the customer when the vehicle is close (or in front-off) of the customer’s home and generate a confirmation when you have picked up the product. All those features give a positive, real-time experience to the user and increase the confidence of the user in the process.
  The same kind of autonomous vehicle could also be called to pick-up the product when you are done with it. This would allow to pay only for the time you actually used it. Additionally it avoids you to bring back yourself the item. At the same time, when putting back the rented item in the AV, the AV could automatically take pictures of the object and assess its condition.

• Pricing: when volumes increase, rental/sharing can be limited to just the time of usage (via AVs) and technological evolutions reduce fraud and other issues, the prices will also drop. Especially as sharing/renting can be a very dynamic market when prices can fluctuate almost real-time because on current supply and demand.

Clearly the rental/sharing economy has enormous potential, but there are still quite some hurdles to overcome. Technological improvements, a cultural shift and the introduction of AVs can be game-changers so that this economic model will drastically revolutionize our entire economy.