Digitization and Platform Economy Create Challenges to Regulators

I saw a fourth motorcycle accident on our street in Western London in the past 15 months. All the motorcycle riders in the accidents have been food delivery people driving with a learner’s license. I was told food delivery competition has gone totally berserk in London.

It is one example of a new business model, where everyone can be an entrepreneur. We see digital and business model disruption now in many industries from taxis and food delivery to finance, just to mention some, and there are also many regulatory questions to be solved. Are these normal growing pains of a new market, or something more complex?
New business models are coming to disrupt many traditional markets. They offer more options to consumers, better efficiency and more competition. Often these new solutions are also coming to businesses that have been regulated, like finance, taxi traffic, restaurant or hotel business. These new companies also offer new models to work, often enable more entrepreneurial models, but at the same time they don’t offer similar traditional employee positions as many traditional companies.

As a result, many new services have also encountered employment law issues, e.g. Uber has faced many disputes about the legal status of its drivers around the world and Airbnb has been at the centre of discussion on hotel regulation and the local rent level problems.

The easy solution is to say that all new services and companies should follow old laws and regulations. It means that Uber should work like the old taxi companies, Fintech services should work like the old finance services and bankers, and food delivery should have employees and delivery cars like old courier firms have.

The problem is that, if we only follow the old rules, there is no development. No one can really claim that the old finance sector, taxi services, or courier services are perfect. Many people are totally frustrated with traditional corporate positions. We also witness that thanks to automation and machines fewer people are needed in many industries. It is also important to create new jobs and working models in new services and industries. For example, Uber (and similar companies) and food services offer jobs and earning to many people who could be without work otherwise.

Disruption always creates its own problems. One part is that new companies with venture capital money often want to buy market share, which can also create temporary businesses that are not sustainable. For example, people who follow the food delivery market in London have been told that when UberEats entered the market, it started to buy experienced drivers and market share. It had forced other competitors to go for unprofessional, low-cost delivery guys, who have gotten a motorcycle somehow and don’t even have a driver license, but start to drive with a learner’s permit. It then can contribute to those accidents I have seen, and also creates fights between drivers, when they try to earn their living. Often they have no guaranteed compensation.

Even free markets need some regulations and limits. They are also needed in many new digital businesses. The problem is often that the old industry and many regulators just want to keep the old models and rules, not really try to learn about new models and adapt regulations rapidly enough to new models and to accelerate innovation. It then creates situations that old players want to protect the old rules, and new players lack suitable rules to follow.

Fintech has quite positive examples in this development. Many Fintech firms have actually wanted to get regulation for their new models and they have started to talk with regulators. In some countries this has worked well, in some other countries regulators have been too old-fashioned to go for these approaches, and caused harm for finance services in their country and sometimes created also risky services to consumers, when they were allowed or forced to operate outside regulation. Regulator Fintech sandboxes are excellent examples to allow innovation and develop new rules together with innovators and companies.

Laws, politicians and regulators always follow behind innovation and businesses in new developments. Many examples show that it would be better if lawmakers and authorities were active in following development and looking for new models within their industries.

Often the old regulation is simply not compatible with new business models, and it is much more harmful to deny the development and force innovative companies to run in a gray or black area. Digitization, AI and automation are part of the disruption that economies face, but also play a vital role in finding new solutions. In their work, lawmakers and regulators have an important role and responsibility to play, but that they must also innovate new solutions, not just close their eyes.

This article was first published on Disruptive.Asia.