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Trust Debt Is The New Challenge For Digital Marketplaces

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POST WRITTEN BY
Brian O'Kelley
This article is more than 8 years old.

In recent months, technology and business columns have devoted considerable attention to the so-called “sharing economy.” From Uber and Lyft to TaskRabbit and Airbnb, private companies involved in this growing sector (also dubbed the “collaborative economy”) command attention for both their outsized valuations and their self-proclaimed role as bold economic disruptors.

Will they survive backlash from deeply-entrenched interests like taxi and limousine licensees or hoteliers and commercial landlords?  Will they weather close scrutiny over their approach to workforce laws and insurance liability? Above all, is the sharing economy the next great disrupter, or is it just the latest chimera?

In a fundamental way, we’re asking the wrong questions. As catchy as the phrase “sharing economy” may be, these companies are actually engaged in a form of economic exchange that is as old as civilization. They are marketplaces – albeit, digital ones – and they fill the same functions as all marketplaces: to greater or lesser degrees, they offer market participants liquidity, credit, clearing, risk mitigation, and quality control.

The real challenge facing online marketplaces is what I call “trust debt.” Trust debt operates much like “engineering debt” or “product debt” – two widely familiar terms in the tech sector. Inevitably, every company accumulates gaps in technology or product design that ultimately represent lost opportunity cost and require remediation. Savvy entrepreneurs and executives bake these considerations into their strategies, as they understand the importance of incurring some technical debt in the interest of building and taking products to market.  They also recognize the importance of paying down that debt over time.  The same should be true of trust debt.

Whether they are powering the exchange of corporate securities (E-Trade), hand-crafted goods (Etsy), transportation (Uber and Lyft), apartment rentals (Airbnb), everything else (Amazon, eBay) – or even digital advertising inventory! (my company, AppNexus) – all online marketplaces exist to facilitate trade between buyers and sellers of goods and services.

To be sure, companies involved in the sharing economy face a discreet set of regulatory issues. But their ultimate success is dependent on a fundamental consideration shared by all marketplaces, digital or otherwise. That consideration is trust.

The late business guru Stephen Covey once posited that “trust is the glue of life…It's the foundational principle that holds all relationships.” Of near-universal relevance, Covey’s rule is especially applicable to the world of digital marketplaces. How successful marketplaces are in ensuring the quality of goods and services sold on their platform ultimately determines their larger success in keeping and growing their share of market.

Most online marketplaces inevitably incur some trust debt, because they can't predict every marketplace issue and may not be able to afford investments in fraud prevention and quality control in early growth days. These considerations create trust debt, which great companies pay down when they reach scale and raise more capital.

Different platforms have developed different methods for addressing their trust debt.  At one end of the spectrum, companies like Uber rely on a system of collective scrutiny. Drivers and passengers rate each other; drivers can decline to transport passengers with low ratings, just as passengers can cancel trips scheduled with sub-par drivers. For added measure, Uber will remove a driver from its platform if his or her aggregate score falls beneath a certain threshold.

At the other end of the spectrum, online trading platforms like E-Trade facilitate the exchange of highly-regulated products and therefore rely on a thick web of public-sector laws, protections and assurances to maintain confidence in their marketplaces.

In between the two extremes, most platforms have developed an array of additional policies meant to boost confidence in their marketplaces. Some have adopted an insurance model – for instance, Airbnb responded to an issue by extending $50,000 in property damage insurance to all homeowners who list inventory on its site. Others, like eBay, strongly enforce policies dictating what can and cannot be sold in their marketplaces.

I deal with this fundamental marketplace challenge every day. My company, AppNexus, is a leading programmatic platform for buyers and sellers of online advertising inventory. It sounds complicated (and it is!), but at its core, we are like all other digital marketplaces inasmuch as we power the exchange of a particular good.

In its most recent quarterly survey of advertising agencies, STRATA, a leader in customized media management, found that while advertisers have grown progressively more comfortable with online programmatic buying, the market remains stymied by a persistent trust debt. That’s particularly true when it comes to knowing that they receive what they paid for. Some 39 percent and 34 percent of respondents, respectively, identified “quality of inventory” and “transparency of inventory sources” as their top concerns.

What this means in plain English is that advertisers don’t always know that the online impression they paid to serve with an ad is the actual impression to which the ad was ultimately delivered.  For highly technical reasons, many good sell-side actors prefer to “mask” their domains; but it’s hard to differentiate between these good actors and bad actors who are engaged in fraud.

To solve this problem, we at AppNexus have gotten proactive about trust: if we detect that a seller isn’t providing full visibility into the inventory they are offering on our exchange, we remove it before it goes to auction. The policy is in its early days, but the initial results suggest that greater marketplace trust produces better results for both buyers and sellers. Since we imposed new rules, sellers have received higher prices for their inventory, and buyers have seen improved response rates to their ads.

In effect, trust is the rising tide that lifts all boats. At my company, when we ship code, we ask ourselves: “Does this incur or pay down tech debt? Does it incur or pay down product debt?" We're starting to ask the same questions about trust and marketplace controls.

Capital markets are often sensitive to the latest revenue report or forecast, and paying down trust debt can sometimes create a short-term hit to the bottom line. After all, when you remove questionable or unverified inventory and actors from a platform, you reduce market activity and transaction fees; when you offer money-back guarantees and other forms of insurance, you absorb new liabilities.

But the long-term costs of neglect far outstrip these immediate outlays. If market participants determine that your platform is unreliable, they will ultimately abandon it. Great digital marketplaces should acknowledge what has, until now, gone largely unsaid: in the course of building their platforms, they necessarily accumulated trust debt.  Furthermore, they should consider it a mandate to pay down the debt at the right moment, regardless of the immediate cost implications and market reaction. Being penny wise and pound foolish is never a winning strategy.

To return to Stephen Covey’s simple but trenchant observation: what is a market, if not a place where two people shake hands and exchange things of equal value? Where there is no trust, the market will never function as it should.