Photo by Denis Dervisevic
In a two part series, we delve into the reputation economy and its impacts on small business finance and banking. In today’s first post we explore the basic concepts and thinking behind the reputation economy and its growing relevance in B2B and B2C transactions.
If you’ve ever been fortunate enough to see David Birch from Consult Hyperion speak, you’ll hear him argue that if you really want the big picture stuff when it comes to upheavals in finance, you shouldn’t really listen to the technologists, you should listen to the social anthropologists. In his opinion, they help technologists understand the impacts of technological change.
And one of the growing areas of discussions taking place across the anthropological community right now is the rise of the reputation economy, and its increasing intersection with technology.
It’s evident that more and more of the offline activities we engage in, especially those that add or detract from our reputation, can and are being digitised. Our reputation is becoming a digital asset, which we can trade off in order to grow our wealth. We see this in play today when we choose to transact with Airbnb hosts with good reviews, or book a ride with an Uber driver with a five star rating. A better reputation is a golden ticket to wealth creation for many small business owners or ‘sidepreneurs’.
The idea of reputation being intrinsically linked to our ability to ‘get ahead’, either personally or in business, is hardly new. But the ability for us to harness and amplify the digital version of our reputation out to hundreds, if not thousands of weak connections is. And the impact of this on small business owners and their customers is profound.
Take Uber for example. Through its rating system, drivers can harness the power of the crowd through passenger reviews to increase their rating, making them more likely to be selected by people like me for future bookings. The irony is such systems work just as well in reverse, with Uber drivers able to rate their passengers as well. Say I were to upset or disagree with a driver, it’s quite possible I may receive a negative review, resulting in being denied passage in the future, or during peak times.
The old dictum of ‘the customer is always right’ is vanishing. Now the degree to which both parties – seller and buyer – demonstrate mutual accountability towards each other is tracked for eternity online. Many argue these advances are a good thing for the social fabric of society, allowing us to engage safely in global commerce like we would with trusted business owners in our own immediate village or town.
But is there a dark side to the digitisation of the reputation economy? Literary giant Bret Easton Ellis certainly thinks so, making a strong case in an article for the New York Times titled Living in the Cult of Likeability. His argument is summed up eloquently in the following quote:
“The embrace of the reputation economy is an ominous reminder of how economically desperate people are and that the only tools they have to raise themselves up the economic ladder are their sparklingly upbeat reputations — which only adds to their ceaseless worry over their need to be liked.”
Easton Ellis’s article deserves to be read in full so as to truly appreciate this passage in context. Ellis also speaks to the online ‘gaming’ of our reputations – in which many of us engage in to some degree via social networks.
But to step away from the subjective elements of our reputation to the objective ones, then there are often cold, hard facts that can be found that do define whether or not we stack up in the eyes of others. And when those others are banks and the reputations in question are those of small business owners, then generally speaking this is our credit score.
Today the standard industry credit scoring model is one dimensional and lacks nuance. The bank views the word ‘reputation’ as to how its deposit or loan book contributes to its standing in society, rather than how it can meaningfully contribute to the standing of the businesses it serves in the wider community.
The first wave of innovation in fintech will see banks and financial providers find better credit scoring models that use alternative data. Companies like Aire and Sofi fall into this category. Kreditech is another, as covered by Bernard back in June.
The second wave of innovation will be fintech banks that want to find ways to use data to enhance the reputation of their own customers. Today the most basic form of this idea in action is comprehensive credit scoring. However the applications and arguments around this are generally skewed towards helping financial institutions better price their own risk, rather than actively improve the reputation of a small business owner.
I think there is room for a fintech bank who’s reputation improves when their customers’ reputations improve at an individual level, not a macro one. I’m imagining a bank that actively participates in helping a small business owner build a valid, verified and non-gamified reputation that they can use to enhance their interactions with their own financial web of customers and suppliers. This is what we’ll explore in next weeks post.