A business that helps me rent my own stuff has almost no overhead and is great for the environment? Sign me up! I love the basic concept of peer-to-peer sharing and the idea of “collaborative consumption.” So do investors, lawmakers and the media to the tune of millions of dollars of seed money, favorable insurance legislation and tons of free press — all on relatively small revenues.
But the recent closing due to car theft of HiGear, a peer-to-peer luxury car-sharing company in San Francisco, exposes some issues with the peer-to-peer model that may just be scratching the surface.
Curiously, HiGear itself already seemed to have thrown the concept under the bus in its press statement regarding the shutdown: “This incident exposed us to the worst-case risks inherent in our service. Even by improving security and processes, we are not completely sure we can prevent an incident of this sort from happening again given the peer-to-peer nature of our service.”
First and foremost, this case is a security issue. With any traditional car rental company, the renter must meet a live person and produce an actual driver’s license and a credit card that is physically swiped. “That’s a deal breaker with peer to peer, because there is just no way that you can possibly verify your customers in person,” says Noah Lehmann-Haupt, founder of luxury and exotic rental company Gotham Dream Cars.
The thieves were able to use stolen identification, which would have been much harder in a traditional rental transaction. “It’s a very different type of identity thief who does it over the Internet compared to in person,” he says.
The ability of peer-to-peer companies to insure car owners is central to the model. But HiGear’s insurer may simply not have stood for such losses in the company’s first year — and will likely look very carefully at insuring new companies moving forward. “It’s not sustainable — no insurance company will cover you every time you have to eat a loss,” Lehmann-Haupt says, adding that his company has only filed one insurance claim in the past two years, and that was an unusual case.
It’s one thing for a car rental company to have their cars stolen or wrecked and eat those losses. But Lehmann-Haupt wonders how the individual owners of these luxury cars are being compensated. Apparently some of the vehicles in the HiGear case have been recovered.
But for those that haven’t been found or sustained damage, are those owners being made completely whole? Will they pay a deductible? Do they get an exact replacement of their exotic steel pet? How long will they wait for reimbursement? At some point, these questions will be tested in the general peer-to-peer car-sharing market.
Compare the potential insurance headaches with the benefits of peer-to-peer for car owners. First adopters are putting a positive spin on the extra $100 a month in their pockets. But there are plenty of dings, chips, cigarette burn holes, clutch degradation and out-of-whack wheel alignments that go unreported or unresolved but ultimately add up. How long will car owners put up with that?[PAGEBREAK]
Fleet operators consistently perform cost-per-mile analyses of their vehicles, something consumers don’t do. When you pencil out the extra miles, wear and tear and extra maintenance, the net income may not be worth it to many owners.
“It's not clear that the vehicle owners are even being compensated enough to offset the loss from normal wear and tear, yet they are also expected to bear 100% of the burden of inspection and maintenance,” says Sharky Laguana, owner of Bandago Van Rentals. “That strikes me as onerous (to the car owner).”
Though you can often set your own rental rates, owners of newer and higher end vehicles can’t be making out in the deal. The older the car, the better the return for the owner — but then the renter has a greater chance of mechanical issues.
In the peer-to-peer world, your peers often act as the quality control because of their ability to rate you. But crowdsourcing quality control is an inexact science, not something you want to mess with when you’re maintaining high-priced, constantly moving steel machines. In this case, maintenance is perhaps better served with a responsible, professional organization. Sometimes it’s not so smart to cut out the middleman.
What will certainly be tested — it’s just a question of when — is how peer-to-peer companies will be able to distance themselves from major liability issues. When the judgment does come down for millions of dollars on a case involving significant injury or death, how will the insurance company react? How will a company with no apparent assets — such as a fleet it can liquidate — pay the judgment? "The public will only stand for a certain number of fly-by-night companies that get sued and go away,” Laguana says.
There should be space for peer-to-peer companies in the auto rental world, and you can bet that peer-to-peer companies are continuing to search for the right vector between owners, renters and profits. Right now, though, the model has some troubling potential consequences.
For the news article about HiGear’s shutdown, click here.