It was just after the financial crisis, and Jared Krause was looking for his next venture. “I was really pissed at the banks”, he said. “I was just really, really angry at the big banks and I was thinking ‘what can I do about this problem?’ ‘What can I do about this intense overrun of power of the big banks?’”
His answer was TradeYa, an online platform where people arrange trades. Krause is CEO and co-founder. The example given on the website is a digital camera being swapped for a designer handbag, but this could also include services such as personal training. Essentially, it’s a modern platform for bartering.
Historically ever-present, barter never really went away, but has drifted in and out of obscurity. It most recently lurked at the back of newspapers in the classifieds section, but has now found a new home on the internet on websites like Craigslist and ‘buy, swap and sell’ Facebook groups. TradeYa is far more organised, and Krause found its appeal stretched further than individual person-to-person trades.
Business between businesses
“Interestingly, what we found are predominately the largest benefits are for small businesses, independent contractors and sole proprietors.” Considering this, ‘Pay with Sushi’ was created specifically for small businesses. Krause described it as a mobile wallet and payment platform, which functions like an exchange of gift cards. $400 of flowers from a florist might be exchanged for $400 of plumbing work at their offices. The claims don’t need to be made immediately, but there does need to be a direct trade between two businesses.
While bartering seems to be most effective at a small scale, there is no reason deals couldn’t be bigger. According to Bloomberg News, more than 60 percent of the sponsorship deals made for the upcoming Rio Olympics are ‘value-in-kind’ exchanges
“Small business owners own small businesses for the express purpose of providing their livelihood”, said Krause. “It’s not a hobby, it’s the way that they earn their money, and so being able to cut down on cash expenditures is really a big benefit.”
But bartering isn’t a flawless system, with its original problems dating back to the dawn of money. The platform’s biggest issue is the need for a ‘double coincidence of wants’. In order to barter with someone, three things need to happen: you have to have something the other party wants, they have to have something you want, and you both have to find each another. It’s a problem currency doesn’t have, since everyone always wants money.
If the internet existed in 600BC, Alyattes of Lydia probably wouldn’t have bothered minting the first coins. An international communication network ensures that if there is anyone out there who wants what you have, you can find them. In fact, in Krause’s research he found that virtually all small businesses already barter, but there are four things standing in the way of them doing it more.
The first is simply finding people to barter with, i.e. the coincidence of wants. The second is the act of negotiation. Actually discussing the details of a trade is a time-consuming, exhausting and pretty unpleasant task. Third is accountability, since there is a lack of assurance trades won’t go wrong. Finally, the fourth issue is the lack of review for transactions, something basically every online purchase now gives people the power to do.
“After listening to all of those [problems], what we realised is people don’t want to barter per se”, said Krause. “What they want is to pay with their goods and services. They want the experience to be as frictionless as cash.” This became the basis of Pay with Sushi; it finds people to trade with, arranges the transaction and lets customers review the trade.
Doing it differently
TradeYa and Pay with Sushi are by no means the only bartering services available online. A quick skim will turn up dozens of results, from Yerdle and Listia, which provide person-to-person trading, to Bartercard, which focuses on business-to-business trades. These platforms solve bartering’s problems in a different way, employing an internal currency. There doesn’t need to be a coincidence of wants since everyone inside the system should want the internal ‘credits’ in the same way as people want cash. Users don’t have to touch their cash and also don’t have to wait for a direct, like-value trade to come up. However, Krause believes that, in practice, this solution doesn’t quite work.
“What ends up happening almost 100 percent of the time is that virtual currency ends up getting devalued because people won’t take it. If you go on to the forums you’ll see people saying ‘yeah you can pay me but you’ll have to pay me three-to-one. My cash rate is $200 per hour, but you have to pay me $600 an hour in barter bucks’. That really unravels the whole financial system inside of your little economy. And then people who have highly desirable things get bombarded with requests, and people who don’t have highly desirable things can’t really get any money. And so it doesn’t solve the problems that currency has. It just has exactly the same problems and then it adds more problems on top because it’s a more limited ecosystem.”
While bartering seems to be most effective at a small scale, there is no reason deals couldn’t be bigger. According to Bloomberg News, more than 60 percent of the sponsorship deals made for the upcoming Rio Olympics are ‘value-in-kind’ exchanges. For example, rental car company Localizia is supplying 150 cars in exchange for marketing that will likely attract some of the scores of tourists the event brings in. It seems like a smart move, given the fact that most of the limited cash organisers have at their disposal is probably reserved for employees. It’s not completely without precedent either; London made similar deals in 2012.
Bigger still, bartering also allowed trade with the former Soviet Union when the ruble could not be converted. In 1974, Pepsi became the first US consumer product to be manufactured there, thanks to an agreement in which the syrup was traded for Stolichnaya vodka. A similar example came from Debis, the financial services wing of Daimler-Benz, which traded bananas from Ecuador in exchange for Mercedes busses in 1994. The swap circumvented EU laws that, at the time, made importing from Latin America difficult.
Symptomatic of a greater ill
However, bartering can also be the sign of a very sick economy. When Russia’s economy was being hammered in 1999, bartering became a necessary reality for businesses and citizens. With no cash coming in, what was once the Soviet Union’s biggest bicycle company, Velta Co, gave employees a bicycle each month in lieu of a pay cheque. 4,000 employees were left simultaneously trying to rid themselves of the bikes, selling them far below their actual value. A similar rise in bartering has also been recently reported in rural Greece, as the cash flow has dried up.
Nonetheless, in a healthy economy, bartering can be a positive force. It is never going to be a complete replacement for money, but can provide an alternative form of trade when the cash isn’t there. The only challenge is finding a service widespread enough to eliminate the reliance on a chance coincidence of wants. While it’s all well and good for the Olympics, not every business can offer as compelling opportunities. Similarly, the value an online bartering service can bring in is only as varied as its user base. However, with new platforms constantly appearing, it only feels like a matter of time before one reaches a scale that makes it a must-have tool.