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Care to share?

Is the sharing economy hurting traditional businesses, Ian Vella asks.

The late 2000s saw the introduction of a novel business model, as social media started allowing groups of people to discuss how they can better utilise resources.

Car pooling was the first offering to gain traction in this new sharing model, as it allowed people to save on fuel and maintenance while minimising parking problems. At first, it was just a great idea how to save money and help the environment. But then, as usually happens, someone noticed a potential for turning a profit and the Uber service – which allows anyone to act as a taxi driver using their own car to transport people for a fee – started being offered in San Francisco, US in late 2009.

Since then, Uber has expanded internationally, in the process disrupting the traditional taxi service. At the same time, and also in San Francisco, two friends launched another app to allow people to share spare rooms in their home with travellers on a budget. Airbnb soon became a phenomenon and developed into a service which allows anyone to rent a vacant space, whether it’s just a room or a high-end villa.

Today, both Uber and Airbnb enjoy billion dollar valuations. But for many, the companies’ growth has come at the expense of traditional businesses. In fact, controversy follows these business models wherever they go. When Uber tried to introduce its business model in Spain, Portugal and Brazil, protests erupted and the courts declared that such activities constitute unfair competition.

Despite such resistance, the sharing model is still growing as, given the choice, it seems that a lot of users prefer such services to traditional ones. Uber drivers have been described as more courteous and they keep their cars cleaner when compared to other taxi companies. Since Uber drivers are self-employed and not just company employees, most are younger and more efficient. Uber contractors acknowledge that competition exists and they can only beat it by offering a better service, unlike taxi drivers in some countries, including Malta, who are accustomed to operate in a sheltered business environment.

Uber has not reached our shores yet, but Airbnb has and it seems that it’s already disrupting Malta’s accommodation business and gaining significant market share. According to statistics published by the National Statistics Office, 25 per cent of the bed stock used by tourists consists of private accommodations.

Currently, there are over 1,000 residences in Malta and Gozo being offered on Airbnb, ranging from an unused room to villas and farmhouses. Most are probably unlicensed, which means that, unlike hotels and licensed accommodation, they don’t pay any tax on their operation and income. If caught renting out property without the necessary permits, they are liable to a fine of up to €23,000. However, it doesn’t seem that the authorities are doing much about it.

The Malta Hotels and Restaurant Association was recently quoted in the media as saying that those who advertise their accommodation on Airbnb are not playing by the rules and are operating with an unfair advantage. MHRA has warned government about the proliferation on unlicensed accommodation, claiming that this is resulting in a substantial loss of revenue both for its members as well as the state, in the form of due taxes.

It is evident that it would be problematic for government to enforce all unlicensed accommodation. Therefore, the MHRA is piling pressure on government to intervene and try to stop Airbnb from operating unrestrictedly in Malta. However it seems that the MHRA is underestimating one very important principle: Airbnb is not renting out properties as a company. Rather, it is a platform where people who are offering accommodation can advertise their services to interested parties. The onus for registering with the authorities and to pay taxes is solely on these individuals once they agree to the terms of service, thus regulating it as a company might be difficult.

When you have more than 1,000 such offerings available locally, government might not be properly equipped, especially in terms of human resources, to enforce. It would make more sense if instead, local authorities were to embrace Airbnb and regulate all Airbnb users. This would be a win-win situation: competition with licensed accommodation would be fair and government would collect the taxes due.

Of course, Airbnb users might see the bureaucracy involved in setting up a licensed operation as a hurdle. However, the Malta Tourism Authority could assist in helping individuals get the necessary permits. This model has already been tried and tested successfully in other countries.

The next revolution, currently gaining traction in the US, is the complete revamp of the lucrative business of money lending. Traditionally people go to banks to get loans to buy a house or in the case of businesses to seek finance. However, following the 2008 economic downturn and the consequent loss of trust in the banks, people started to seek alternative funding on websites such as lendingclub.com, where prospective borrowers make their pitch and those with cash to invest might agree to fund their projects.

By eliminating banks, borrowers typically get lower interest and default rates and lenders a better return on their investment. Peer-to-peer lending is becoming so popular that the loans funded to date on lendingclub.com add up to more than $11bn. While peer-to-peer lending doesn’t as yet enjoy the same popularity in Europe that it has in the US, crowdfunding – which also removes banks from the financing equation – is gaining trust in Malta.

History has taught us that any new business model that offers an efficient service at advantageous prices will carry on, despite the resistance. It’s like with online shopping. While in the beginning, traditional retailers tried to put up barricades, now they embrace it. It’s the same with the sharing economy – traditional businesses will have to adapt and compete.

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