Sharing of assets between people inside their communities is not new. People have been doing it for thousands of years. Every person would have shared their cars or bikes with friends and acquaintances many times. So, unknowingly, we have indulged in a sharing economy. But, we might never have thought of making our assets earn for us. Even if we had done so, it would have been on a minuscule scale. For example, you have car rentals or home rental services in almost every town in India.
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The Changing Times
In the olden days, it was challenging for asset owners to find those seeking the use of their assets. The people who needed them used to search for those providing such services. However, things have improved today with the advent of the internet, big data, Artificial Intelligence, etc. making it easy for asset owners to advertise the availability of their assets for people wishing to avail of their services. This change in the dynamics gives rise to a new kind of economy known as the sharing economy. You can also refer to it as peer-to-peer economy, collaborative consumption, or even collaborative economy.
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The sharing economy, also defined as the P2P economy, bases its activity on acquiring, providing, and sharing access to assets or services with interested customers, often facilitated by a community-based online platform.
In simple words, a sharing economy is a platform that brings asset owners and consumers together, facilitates dealings between them, and charges a fee for their services. Sharing economy platforms are found in almost all sectors today.
Examples of sharing economy companies
Suppose you have a house in Shimla, whereas you reside in Delhi. The chances are high that you keep the Shimla asset locked. Then, maybe, you visit the hill station once a year. Otherwise, the investment remains unutilized. The sharing economy concept allows you to make the asset earn a return on its investment, thus turning it into a productive asset.
You can partner with sharing economy businesses like Airbnb and rent out your house to tourists. While Airbnb takes its commission, your home can earn a sufficiently high income to sustain its maintenance and ensure a decent margin. Thus, you convert your idle asset into a money-spinning proposition. It is one of the positive aspects of a sharing economy.
The Crucial Takeaways of this blog
Before discussing the sharing economy concept, its examples, pros, and cons, this article has some critical takeaways.
- The sharing economy concept involves short-term P2P transactions involving the sharing of idle assets/services and facilitates collaboration between the two parties.
- Generally, a sharing economy involves an online platform to facilitate convenient interactions between the buyers and sellers.
- Today, you have sharing economy platforms in various sectors, but significant challenges need overcoming, primarily on the regulatory front. Besides, there can be concerns about abuses and damage to property.
An asset is fruitful only if it performs. An idle asset is as good as a dead investment. Yes, the asset’s value might increase with inflation, but the acquisition does not become productive if left idle. Shared economies can come to your rescue by allowing individuals or groups to make money and benefit from underused assets. We have discussed the example of an occupied house making sufficient income to sustain its maintenance and generate a profit.
The sharing economy had its issues in the past because of the unavailability of a common interacting platform between the owner and the user. However, the growth of the internet, the digital age we live in, AI, and big data, contributed to creating sharing economy platforms facilitating comfortable interaction between all the concerned parties. Business-to-business transactions benefit the most from such shared economies. However, other platforms have also joined the sharing economy to benefit every party to the transactions mutually.
Here are some examples of shared economy businesses.
Besides the accommodation sharing platforms like Airbnb, the sharing economy has its takers in various other sectors.
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Working of shared economy
Vehicle Sharing Platforms
Vehicle sharing networks like Zoom Car allow users to hire cars on rent for self-driving. This platform is different from Ola and Uber, where users can rent taxis, auto-rickshaws, and even share rides on a one-time basis. The Zoom Car rental platform enables users to rent cars for longer durations. The facility is as good as driving your private car. The only difference is that you do not own the asset but pay rent for its use.
Generally, you hire a car filled with fuel for your use and pay rent based on the period you use the vehicle. You are expected to refuel it to the maximum when you return it to the car rental company.
Individuals can also offer their private cars on the platform subject to satisfying specific conditions like (a) the vehicle should not be more than two years old, and (b) the total mileage should not exceed 30,000 kilometers.
This vehicle sharing platform allows car owners to earn income on their cars that usually lie idle.
Not every small business enterprise can invest in long-term fixed assets like office premises. So, they take office spaces for rent. However, that does not strictly fall under the definition of a sharing economy. But, sharing office spaces with other businesses does come under the purview of a sharing economy. So, today, you have sharing economy companies offering co-working platforms for small business setups, entrepreneurs, freelancers, and even work-from-home employees in major cities.
Fintech companies offering P2P lending
One of the best examples of a sharing economy setup is P2P lending. Fintech companies offer P2P lending platforms that bring lenders and borrowers on a common interactive platform and facilitate easy lending/investment. Such lending platforms can benefit individuals or businesses who might otherwise not be eligible for loans from traditional financial institutions because of inadequate or poor credit ratings.
These P2P lending companies offer cheaper loans to individuals or businesses than those provided by traditional banking entities. A fine example of a P2P lending company using the sharing economy concept is Bharat Pe’s 12% Club.
Bharat Pe has launched a unique 12% Club that enables investors to earn up to 12% per annum on their investments. Similarly, it lends these funds to borrowers at 12%. So, your next question would be how the company makes money if it allows borrowing and investing at the same interest rate. The 12% Club offers 12% simple interest on investments made on the platform. As the interest amount is not reinvested for lending, the investors can withdraw their earnings at any time. At the same time, it lends to borrowers at 12% compound interest. Thus, the company makes money because of the difference in the interest calculation method.
However, P2P lending in India is regulated strictly by the Reserve Bank of India. Therefore, they have to follow stringent norms.
- The maximum lending amount per lender across all P2P platforms cannot exceed Rs 50 lakhs. However, if a specific lender lends more than Rs 10 lakhs, they have to produce a “Net Worth Certificate” from a practicing CA certifying a minimum of Rs 50 lakhs.
- The maximum exposure by a single lender to a specific borrower cannot be more than Rs 50,000 across all P2P lending platforms.
- The maximum lending period cannot exceed 36 months.
- P2P lending companies should have a robust process for screening borrowers and updating data to minimize loan repayment defaults.
Fashion Platforms – Renting clothes
Stitching a new wedding dress for the couple can cost anything upwards of more than a couple of lakhs today. Spending such an exorbitant sum on clothes that you might rarely wear is a criminal waste of money. However, you also need to wear quality clothes for your wedding. So, is there a solution to this problem?
Yes, the sharing economy offers an excellent option in fashion platforms where interested persons can hire clothes for the wedding and return them after the event. The fashion sharing economy platforms are beneficial to entities that rent or sell their clothes. Besides weddings, cinema shooting requires people to wear varying costumes. These platforms prove handy by renting out clothes at attractive rates. The cinema producer need not purchase entire wardrobes of clothes for a single scene in the film.
Freelancing Platforms – Ideal for the freelancing community
Today, a majority of the workforce is into freelancing. Freelancing workers are available in varying fields such as content writing, academic writing, app development, data analysis, etc. It would be practically impossible for freelancers to find regular clients and vice versa without using the sharing economy platforms like Upwork, People Per Hour, Freelancer, Fiverr, Truelancer, etc. These platforms bring the freelancer and the clients together on a common engagement level where both parties benefit from the interaction.
The sharing economy concept works well for the freelancing community because,
- It enables them to contact clients that they would never have managed to otherwise.
- It ensures a steady stream of work to generate continuous income.
- It guarantees that clients will not shy away from paying for their work. The sharing economy platform uses an Escrow account for transferring payments from the client to the freelancer.
- It also benefits clients because they can choose from an extensive pool of talent.
- It can lead to long-term commitments for the client and the freelancing community.
- These platforms protect the interests of both parties.
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E-commerce retailers like Amazon, Flipkart, Myntra, etc., are shining examples of sharing economy businesses. These platforms do not stock any merchandise sold through their channels. Instead, they facilitate interaction between the manufacturer/seller and the purchaser. As a result, the purchaser gets quality goods without moving out of the house. Likewise, the seller receives good business without having to scout for customers. Besides, e-commerce retailers benefit from commissions, advertisement rights, sponsorship deals, etc. Thus, the sharing economy concept offers a win-win situation for all parties.
Similarly, the grocery selling apps like Grofers, Big Basket, Jio Mart, Swiggy Instamart, etc., are sharing economy companies facilitating the easy sale of groceries. The customers get branded goods at reasonable prices by ordering online from the privacy of their homes. The sellers benefit because these platforms ensure easy movement of perishable goods to customers they need not search for.
The food delivery apps Swiggy and Zomato are also examples of sharing economy businesses because they bring customers and restaurants together on the same platform enabling customers to order food online from their homes.
Sharing Economy – Some Criticisms
We have discussed what the sharing economy concept is. Besides the examples discussed in the blog, several instances of shared economy entities are flourishing today. However, while this concept benefits the customers and the service-providing entity, it has drawbacks. Therefore, we shall quickly skim through them to better understand the concept.
- The Government has stipulated regulations for the sharing economy business entities. However, unlicensed business entities offering such services might not follow the rules or pay the necessary taxes. Thus, it gives them an unfair advantage to provide reduced pricing compared to the regulated companies.
- There have been mischievous incidents like placing hidden cameras in bedrooms/bathrooms, unfair treatment of ridesharing contractors by their respective platforms, and damage to vehicles leased out by customers.
- There has also been racial and religious discrimination in letting out homes and rooms by the parties.
- People have misused P2P lending platforms by availing loans based on fictitious income and business records, leading to defaults. In addition, it automatically affects investors’ interest rates, leading to a lack of trust.
- Another area of concern is in maintaining data privacy. The internet has made customer data accessible to all. As a result, malicious actors can take advantage and commit crimes like identity and credential theft.
Sharing economy businesses are comparatively new in India. But they have caught up at a tremendous rate. Today, a significant majority of the population prefers to deal with such business entities as it benefits customers and service providers equally.