A few taps on a smartphone and you’ve borrowed space in a car with Uber, booked a low-cost bed for a night with Airbnb and even found someone to post a package with Postmates.
Unprecedented numbers of new business models are entering the marketplace. However, cities are often unprepared for the arrival of digital start-ups. And tech innovators can easily trip up on outdated regulation.
Cities are left balancing the demands of incumbent companies that fit into existing regulatory frameworks with those of innovators operating on the fringes and who lack regulatory classification.
This is a new territory for cities, and there is no single way of doing it right. Instead, cities need to experiment, learn and take a flexible approach. Markets move too fast for cities to wait for the perfect solution. Our research highlights five positive steps forward that cities can take to enable entrepreneurship in a way that safeguards citizens, allows for fair competition and generates tax revenues; they are:
- Reframe regulation for new business models
San Francisco was one of the first major US cities to regulate and therefore legalise short-term letting company Airbnb. Taking into account the specific challenges facing its city, the San Francisco Board of Supervisors carried out research, listened to stakeholders, drafted various amendments and engaged in discussions before casting a final vote.
It is contentious, however, whether this new regulation is a complete solution. Whilst San Francisco has taken positive steps, challenges still exist in the process of reframing regulation. There are concerns that the city does not have the infrastructure to enforce compliance and that the legislation does not prevent guests from damaging properties or ensure that guests’ complaints have been answered. Additionally the City Planning Department has recently placed considerable administrative requirements on hosts.
As Airbnb is estimated to contribute $56 million to the local economy and support 430 jobs in San Francisco, city governments must attend to ensuring they foster the correct environment for new business growth.
- To get it right, make sure you speak to all your stakeholders
Incumbents who are threatened by change will often have the loudest voice. But cities need to engage with start-ups in an open, responsive and adaptable way. Recognising this, Amsterdam proactively engaged with Airbnb to address concerns and find solutions, such that from February 2015 Airbnb will collect local tourist taxes from their hosts and pay this directly to the city of Amsterdam. Airbnb will also ensure that hosts are aware of their legal responsibilities.
- Level the playing field in a way that encourages innovation
If regulation that applies to old models is outdated, then applying it to new models is the wrong approach. Cities can look to enforce existing regulations proportionately, to ensure that old regulations do not block new entry over technicalities. New entrants should then prompt a rethink of how a market is regulated to best enable innovation for consumers.
- Distinguish between protecting consumers and protecting producers
It is important how regulation structures the market for both the consumer and producer.
In Singapore, for example, regulations were introduced to safeguard consumers when using popular taxi-booking apps such as Uber. Ride-sharing apps are now required to disclose information on fares and fees payable as well as providing ‘basic customer support’, such as complaints procedures. Rulings also encourage fair competition by requiring apps to apply for a three-year certificate of registration with Singapore’s Land Transport Authority (LTA); only dispatch licensed taxis and drivers and not exceed booking fees charged by regular taxi firms.
New regulation also encourages fair competition for businesses by requiring apps to apply for a three-year certificate of registration with Singapore’s Land Transport Authority and by capping fees to the regular booking fees charged by other taxi firms. This is wise consumer protection and does not hinder new entrants.
- Next practice: take measures to stay ahead of emerging trends
‘Next practice’ is when regulation becomes proactive and not reactive to change. Through horizon-scanning, cities can be best placed to shape for market entry, and there ensure the best for the consumer, rather than waiting until new business models fall foul of old regulations.
For example, at the national level, the UK has invested in researching the peer-to-peer economy and has taken a number of steps to engage entrepreneurs in regulatory decisions. The UK has launched Sharing Economy UK (SEUK), a trade body for businesses to set standards and responsible best practice for platforms and consumers. It has also created platforms to crowdsource ideas for regulatory improvements from entrepreneurs.
Next practice for high performing city governments will be to use similar platforms to engage with the start-up community on regulation. They could consider building the capability to horizon scan for future disruptions to quickly engage with the community and adapt regulations.
While no city has found a perfect balance, city governments must keep engaging and experimenting. For regulators to keep pace in a fast changing digital world where companies are re-defining industry classifications overnight, how regulations are viewed and managed needs a fundamentally different approach.
Disruptive business model regulation is a work in progress with high performing cities being those that are open to experimenting. Whilst no city has perfected their approach our analysis from looking across how 40 cities are responding has highlighted a number of key learnings.