The sharing economy is a system in which people share assets or services, typically over the internet. These could be anything: cars, accommodation, food, transport… even finance.
The term first appeared in the early 2000s, when resources, employment and purchasing power were all declining due to the recession. However, populations were growing fast – and so too was the internet. The logical outcome? This peer-to-peer sharing of assets and services.
Since emerging less than 20 years ago, the sharing economy has exploded. In 2014, the global value was $15 billion (£11.7 billion), but that figure is set to reach up to $335 billion (external link)(£261 billion) in 2025 according to PwC.
While China is currently home to the largest sharing economy in the world (600 million participants in 2016 alone), the European country with the fastest growing sharing economy is the UK. By 2025, PwC projects total transactions in the UK sharing economy could reach £140 billion, up from an estimated £7 billion in 2015 and £13 billion in 2016.
‘The sharing economy has truly arrived. It’s a really exciting opportunity,’ says Justin Balcombe, Managing Director and Partner at Boston Consulting Group (BCG). But as he’s quick to point out, it also has some serious challenges.
One of the biggest hurdles for the sharing economy so far has been regulation – or, more accurately, the lack it. Due to its informal nature, regulating businesses can be difficult, as can representing industries and protecting consumers.
The sharing economy has also grown at such a fast rate that the lines between employment and self-employment have become blurred – in some cases, creating entirely new employment sectors where income can be difficult to categorise. For example, is an Uber driver a contract worker, an employee or a combination of the two? The answer isn’t clear.
The result is confusion from all sides; be it from the workers themselves, from the companies that employ them or from the government. A study (external link) published by NatCen for HMRC claims that the sharing economy presents a serious risk of lost tax revenues ‘due to the disruption of traditional business enterprise, and the non-declaration of income by providers in the sharing economy who are not aware of their tax liabilities’.
Unsurprisingly, this kind of risk makes HMRC nervous. But according to Balcombe, the biggest challenge facing the insurance industry isn’t tax – it’s new usage models. ‘By and large, the traditional insurance market is constructed on the basis of annualised income,’ he says. ‘Now overlay the sharing economy, which is working very much on a usage and time-based model. Breaking usage down from an annualised model to an hour-by-hour, or even minute-by-minute segment – there lies the challenge. But, also the opportunity.’
Nothing ventured… nothing gained
Balcombe raises an important point: is the opportunity worth the challenge, or indeed the risk?
For investors, the answer is an unequivocal ‘yes’. BCG claims an estimated $23 billion (£18 billion) in venture capital funding has poured into the sharing economy since 2010, with ride sharing and accommodations being the two most popular areas. Start-ups offering shared workspaces, storage, delivery and logistics platforms are in third with nearly $2 billion (£1.6 billion), while vehicle sharing ranks fourth, with nearly $810 million (£631 million).
However, of the $23 billion (£18 billion) raised in venture capital funding since 2010, just two companies have collected more than 50%. They’re the undisputed giants of the sharing economy, Uber and Airbnb, and are valued at $72 billion (£56 billion) and $38 billion (£30 billion) respectively.
Balcombe admits he hasn’t previously seen a disruptor of similar magnitude hit the finance industry, ‘an Amazon of insurance’ as he puts it. But he still believes that traditional markets will continue to be hit by waves of ‘niche segment operators’, who, like Airbnb and Uber, see opportunities in different parts of the supply chain. These will be the people who say, ‘We think we can do things better, we think we can do things at a lower cost, and provide faster and more efficient services.’
Despite the potential, however, the future is still uncertain. And not just for the finance industry, but for the entire sharing economy. Some optimists believe it will bring about the fourth industrial revolution. Others say it will be the end of consumer civilisation as we know it. Maybe it’s neither, maybe it’s somewhere in between, but either way, the sharing economy will continue to grow, and fast.