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Death Comes for the Regulated

How long can dinosaur industries stave off the inevitable?

Apr 21, 2014, Vol. 19, No. 30 • By IRWIN M. STELZER
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Enter Uber and similar services that replace inefficient and emissions-maximizing cruising with pick-up-by-appointment. And begin what Bloomberg’s Brad Stone calls “The Invasion of the Taxi Snatchers.” Tap the right app, and a clean vehicle piloted by a polite driver with at least a minimal acquaintance with the English language, and possessed of gadgets that enable him to get you to where you want to go in a more or less direct fashion, and you have a moderately more expensive alternative to the often difficult task of finding an available cab, especially on a rainy evening in the rush hour, when Uber et al. keep their drivers on the road by charging a premium based on the level of demand. Uber too pricey? Try a ride-sharing app such as Lyft or Sidecar. Geoffrey Fowler of the Wall Street Journal organized tests in several cities and found that “over more than 30 rides, we had [ride-sharing] drivers offer us candy, fist bumps, and even mediation coaching. They all got us where we needed to go safely, and almost as quick as a taxi, but not always as cheap.” 

All of these services provide a real incentive to courteous service: Riders report their ratings of each driver, and other users can see those ratings when asking for service. The services themselves must vet drivers if they are to stay in business, and report to future customers the less-than-stellar safety habits of any NASCAR wannabes they allow to remain with the company. Ask yourself: Would you rather ride with a driver who has been rated by other passengers, with that rating posted on your cell phone and monitored continuously by a company with a stake in maintaining consumer confidence, or one who has been cleared by some local political appointee who might, just might, see approval of a driver as a source of income?

All this new competition is anathema to regulators, who see their jobs disappearing if enough customers prefer the new, technologically based services to stand-and-hail-and-hope. From the District of Columbia to Seattle, and in cities and states in-between, regulators are rallying to the side of their pet dinosaurs. They want to require Uber to use a payment system that is incompatible with its technology, report all rides to them for analysis, and comply with a host of new regulations designed to drive them (pun intended) from the streets. If apps-based companies send taxis the way of the horse and buggy, regulators, too, will become redundant as the market replaces them as the determinant of just how many vehicles will be on the streets, and who will be driving them.

That is not the only example of consumers seeking alternatives to outmoded business methods that regulators seek to preserve. As banks become less and less willing to lend to small businesses, alternative lenders are emerging—“shadow banks” incumbents and regulators like to call them, implying that these “indistinct financial entities .  .  . lurk in the dark corners of the financial system,” writes Tracy Alloway in the Financial Times. In fact, she continues, these nontraditional lenders often do what traditional banks do, but “in a cheaper and more efficient way.” There is peer-to-peer lending, provision of capital by cash-rich companies such as Google, a variety of ways to do without the banks that impose such systemic risk on the economy, and new alternatives for the 28.3 percent of households, predominantly low-income, who choose not to rely on the mainstream banking system because it is either too expensive or too inaccessible.

The incumbent banks, their profit margins declining in the face of new competition and more stringent regulation, now see profit in serving the under-banked. Unfortunately, that is not their great strength; witness their overreach when they raised fees on debit cards. So they are counting on their regulator to stop or at least rein in these “dicey” competitors, presumably including rock-solid Walmart, which survived the recent downturn without a government bailout and is expanding financial-service offerings to its mostly low-income customers. The Federal Deposit Insurance Corporation says that the providers of Alternative Financial Services (AFS) “may lack consumer protections.”

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