Forecast

• The efficiencies created by peer-to-peer networks in an increasing number of industries will fuel continued growth of the sharing economy.
• Urbanization in developing countries, especially China and India, will drive more interest in the services offered by peer-to-peer platforms.
• Some countries could be forced to loosen their restrictions on the transfer of information as the economic need for cross-border data flow increases.

Analysis

One of the most profound — and potentially disruptive — developments in the world's economy over past five years has been the rapid growth of the so-called "sharing economy." The technologically driven networks underpinning the concept, also known as the peer-to-peer (P2P) economy, have grown so much that many countries are trying to add P2P to their official gross domestic product data to better monitor the sector's development. Recently, a P2P technology platform was at the center of one of the largest acquisitions in China's history, when Chinese network transportation company Didi Chuxing agreed to acquire Uber's China operations for $35 billion. Technological advancements, specifically in communications, have already brought substantial changes to a number of sectors, and with continued double-digit growth, the P2P economy will transform more industries in the future.

Changing technologies will affect how nation-states and countries evolve. China's rising importance in the global consumption economy and, by extension, all aspects of the sharing economy, will continue to influence the country's relations with tech companies, as Uber discovered. Moreover, the P2P economy itself will continue to contribute to substantial changes in the financial and banking sectors and have profound effects on the way that countries urbanize. However, the P2P economy is just one part of a much broader and more important long-term evolution that will shift influence and power away from the nation-state and toward other actors, or networks of actors, within the economic system. Even though P2P platforms are often public or open by nature, many P2P platforms in heavily regulated sectors will likely become closed, under the control of an organization, rather than open-sourced.

What Is the Sharing Economy?

Several different terms, including the collaborative economy, have been used to describe the P2P economy. Whatever the name, the concept behind it involves using technology to more efficiently and practically allocate goods, services and capital to potential users through peer-to-peer technologies such as smartphone apps. 

So far, P2P has shown the most growth in the transportation sector, though P2P applications have also enjoyed more modest success in areas including travel, skills and labor, fashion, and food delivery. Uber, Lyft, and other ride-hailing apps have drastically changed the markets in which they operate. In Los Angeles, for example, ridership in taxis has fallen by 28 percent since the arrival of Uber and Lyft in 2013. Though these companies' rapid and substantial global rise in value is noteworthy, their competitors have relatively low technological barriers to entry. Before selling its operations, Uber had been rapidly losing its market share in China to rival service Didi. Information giant Google also has plans to target the transportation networking sector with its own technologies.

The companies all face other potential headwinds. While innovation in the sector has brought down costs and allowed the P2P networks to challenge existing business models, the resulting disruption has generated opposition from taxi companies, regulators and labor groups. In some cases, Uber and other companies have lost to these opponents. New regulations in Massachusetts place a tax on ride-hailing companies to subsidize traditional taxi companies. In Austin, Texas, Uber and Lyft pulled out of the market after voters approved an ordinance mandating background checks on their drivers. (Other ride-hailing services have since begun to take their place). General Motors, BMW and Ford, meanwhile, are all racing to create automated cars for direct sale to ride-hailing companies or even to allow the automakers to act as ride-hailing organizations themselves. Ride-hailing could one day eliminate taxi driver as a profession, unless regulations intervene.

Beyond Transportation: A Financial Storm

Many of the initial applications of P2P systems have filled niches — such as renting out spare living or office space or hiring domestic labor — that will not have the same geopolitical impact as the disruption of the transportation sector. In the financial, banking and lending services sectors, however, P2P will bring a sea change in the way businesses operate. Already, technology known as the blockchain, which harnesses idle computer processing power to create a decentralized digital ledger of transactions, has caught the eye of the financial sector as a way to reduce transaction costs. The governor of South Africa's central bank recently expressed interest in using the technology in his institution. Elsewhere, Bank of Tokyo-Mitsubishi UFJ and Hitachi began testing the use of the blockchain to settle electronic checks and deposits.

Unlike the resistance shown by the taxi sector, financial companies have quickly recognized the potential of peer-to-peer technologies and are trying to leverage them for their own businesses. Since P2P lending platforms often have lower operational costs, they allow businesses to offer lower interest rates than conventional banks do. Furthermore, the banking technology can easily span national borders. In the long term, P2P platforms are certainly a threat to the existing order, but unlike in the transportation sector, the technologies are as complementary to financial services as they are disruptive. P2P lending platforms such as Kickstarter and Indiegogo provide efficient ways to front-load sales for developing products outside traditional financing methods. Still, P2P lending accounts for less than 1 percent of total global bank lending today, despite the fact that the technology has been around for a decade. By 2020, the market size could increase to as much as $500 billion and perhaps $1 trillion by 2025. 

The payment processing services industry, where the technology is already having a significant effect, could undergo a P2P-driven transformation more quickly. Mobile payment services such as Square Cash, Google Wallet and Apple Pay have all seen substantial growth. Beyond the giants, Kenya's M-Pesa, for example, has become an important platform for making payments via cellphone. The rise of these payment systems will not only allow banks to streamline the complicated IT infrastructure that some rely on, but also drive down the need for cash.

Many of these platforms are being proposed in closed and open fashions. While the blockchain itself is an open access system that anyone can use, bringing the system into regulation is crucial for the financial industry. This means that the blockchain's adoption will likely come about in a more standardized closed fashion. The technology has already gained traction through the Ethereum platform for "smart" contracts and could also be used to power P2P insurance networks. But the biggest change to existing business processes may come in an area that has not even been targeted yet. After all, in only six years, Uber went from just a concept to one of the most valuable startup companies in the world.

Challenges Ahead

But change does not always come easily. Perhaps one of the most infamous examples of the disruptive effect that P2P technology can have on an established industry came at the turn of the 21st century. File-sharing networks such as Napster wreaked havoc on the music and other entertainment media industries, halving revenue between 1999, when the file-sharers first appeared, and 2010. Though global law enforcement officials have cracked down on copyright-infringing file sharing, P2P networks are difficult to interrupt because they do not have a centralized infrastructure to target. File sharing contributed to a significant restructuring of the entertainment distribution industry, giving rise to internet platforms such as Pandora, Netflix and Steam that deliver media (music, video and gaming, respectively) directly to users. These new media delivery methods gave the beleaguered entertainment industry a chance to stanch the bleeding inflicted by illegal file sharing.

The experience of media companies presages the challenges ahead for industries facing competition from developing P2P technologies. Regulators, law enforcement and similar entities have often been slow to adapt when faced with the kinds of sudden disruptions these technologies can bring. For instance, regulators have struggled to harmonize existing regulations for the conventional financial sector with bitcoin and other cryptocurrencies, which blur the distinctions among commodity, property and money. The rise of ride-hailing companies (and the eventual rise of automated ones) raised the question whether drivers should be classified as employees or contractors. Other hurdles include the fact that many P2P companies do not even own physical assets. Despite being valued in the billions of dollars, Uber does not own cars or employ drivers. Like many P2P companies, it merely acts as go-between, connecting suppliers and consumers. This is also the case with true P2P lending platforms, which serve as a marketplace, matching lenders to borrowers.

Changing a Changing World

The effects of the rising P2P economy will not be spread evenly. Many of the most significant developments will fall into one of three areas: those that affect developing countries, those that affect cross-border flows of goods, capital and services, and those that affect the way a state interacts with its subjects.

P2P's effect on the developing world will perhaps be the most visible. Because these regions are (by definition) still developing and urbanizing, their economies are more sensitive to new inputs. Small changes in volume can cause great changes in aggregate, leading to a leapfrog effect with new technologies. At the same time, in places that lack a given established industry, these kinds of disruptive technologies can start with a blank canvas. Changing a pattern of use can be much more difficult than adopting a new technology. Mobile phone use, for instance, caught on quickly in regions where landline phone service had not yet been established.

Though P2P platforms claim only a 1 percent share of global lending right now, in the developing world — where most people already have a cellphone or will soon get one — they can quickly gain ground as an efficient way to invest. Moreover, delivery and mobile pay services — many of which already exist — can more efficiently be implemented through P2P platforms. Perhaps the most important development will be the increasing demand for these services as the developing world urbanizes. Urbanization continues apace in China, which will soon become the world's largest economy, and in India, which will likely become the second-largest over the next two decades. The demands of consumers and regulating entities in those countries, therefore, will shape the way many of these platforms evolve.

Already, China has been forced to react to the growth of P2P lending platforms. Since April, regulators there have been cracking down on P2P lending companies after a number of scandals and defaults struck the unregulated industry, which reached nearly 1 trillion yuan (about $150 billion) in 2015. The growth of P2P lending platforms has filled a niche for small- and medium-sized companies that China's heavily regulated state banking system has struggled to serve. Eventually, P2P lending could help focus China's economy on smaller, more nimble private corporations that help innovate. But even compared with other countries, China's P2P lending sector has been lightly regulated. More regulation could be a boon to the sector, by helping to consolidate it and increase its efficiency.

Peer-to-peer and distributed networks will continue to shape the movement of information — whether money, labor, or even patents or manufacturing designs. As cross-border information and data flows increasingly form the basis for integration into the modern economy, countries that have built data networks designed to keep information out will have a tougher time controlling the movement of information. The United Arab Emirates, for example, cracked down on virtual private networks in July, but stopped short of outlawing their use by banks because of the harm it would do to its banking sector. No country, short of North Korea, can easily isolate itself from communication with the outside world. Though some, such as China, have been fairly successful in sealing their information networks, even Beijing has trouble doing so effectively.

The idea of peer-to-peer networking for commerce is not new. Garage sales and bulletin boards advertising services are rudimentary examples of these networks. But the growth of communications infrastructure has increased their efficiency and scope of while creating new avenues for their use. Broadly speaking, open source infrastructure of any sort fits into the broader concept of a P2P economy, but digital P2P networks have been instrumental in accelerating the spread and adoption of the idea. The process could take decades and may stop short of total economic decentralization. But the development of new communications technologies that could trigger massive waves of disruptive technologies in various industries will not. For now, P2P platforms will continue disrupting traditional economic structures, and nation-states will continue adapting to them. 

Strategic Review has a content sharing agreement with Stratfor global intelligence.