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How digital changes oversight

Should governments welcome innovative, low-cost digital startups that challenge established industry players? Or rein them in as dangerous insurgents that put jobs at risk, compromise quality and safety, and reduce tax revenues?

Overview

Their fast growth and disruptive strategies make the likes of Uber, Airbnb and Lending Club a vanguard of young, fundamentally digital companies that are changing the way people travel, save, learn, eat, pay, lend—and more. Typically positioned as alternatives, they offer, among other things, financial services without being banks, car services without being taxi companies, and somewhere to stay without being hotels.

In other words, they don’t play by established industry rules. And that’s the reason regulators and courts in a number of countries struggle to make sense of the changed industry ecosystems they oversee as they try to determine whether to permit or prohibit these digital disruptors. We believe the choice doesn’t have to be a black-or-white one: Regulators will want to enable the potential of these digitally contestable markets to deliver efficiency and innovation, while minimizing risks for consumers and the burden of adjustment for incumbents. The question is, how should they approach this difficult task?

The entrepreneurs who create digitally disruptive companies are routinely guided by a number of interrelated strategic questions. We believe oversight bodies can use similar questions to arrive at appropriate regulatory responses. Here we suggest five.

  1. How can we better serve customers’ needs and wants?

    Many of the new digital business models work by putting underemployed talents or assets—like spare rooms or underutilized cars—to productive use. These business models usually won’t fit into traditional industry categories, such as “hotels” or “taxis.” Consequently, to make sense of them, regulators should fully consider the perspective of the consumer, setting aside purely industry sector approaches and taking a market view—the market for overnight stays or for travelling within a city, for instance. This way, they can support the successful operation of the market as a whole, namely balancing the many different outcomes demanded by consumers, including price, quality, availability, choice and safety.

    Doing so will enable regulators to make a sober and impartial assessment of a new player’s potential to improve or upset this balance. Ruling out new players from the start simply because they don’t fit an existing industry definition could deny consumers better or cheaper ways of fulfilling their needs and wants. Worse, a start-up whose activities fall outside the realm of regulation could decide to enter an unregulated “shadow” sector that could ultimately create even greater trouble for incumbents and consumers. The recent rise of the so-called shadow banking sector should give consumers and regulators alike pause for thought.

    In practice, regulators may be constrained by existing laws; they can, however, start the conversation about how regulation will need to adapt.

  2. Are we considering all the competition?

    Within a digitally contestable market (for example, the market for payments) new entrants very often straddle multiple industries. A good example is Apple Pay, a new way of paying for things with an Apple device. It has the potential to reinvent in-store and mobile transactions, simultaneously disrupting the telecom, financial services and retail industries. The market for wearable biometric technology is another example, bringing together high-tech, mobile and healthcare services within accessories and apparel that needs to be demonstrably safe for personal use. As digital markets run beyond industry boundaries, regulators in different industries will need to collaborate with one another in order to catch up. Collaboration between regulatory bodies, where appropriate, may be both necessary and desirable—not only to execute current responsibilities but also to create common frameworks that encourage businesses to invest in digitally contestable markets. This approach can drive growth and productivity for the economy as a whole.

  1. Are we thinking globally?

    Just as digital disruptors don’t conform to traditional industry definitions, neither do they confine their ambitions within national borders. Mobile apps can work in the same way the world over as long as there is unfettered internet access, and providers want to back them with consistent services. Moreover, customer expectations exhibit a ratchet effect. If it’s possible to use a mobile app to arrange a ride in London, why not in any other city? Why should a consumer’s experience of VoIP services from the same provider vary from country to country?

    The work of regulators will increasingly depend on international collaboration. National bodies should actively align their work programs in order to increase the evidence base, accelerate the uptake of “next practice,” and coordinate regulatory responses where it makes sense to do so in the interests of consumers.

  2. Where can we experiment?

    Digital disruptors don’t just compete in existing markets—they explore, create, define and shape new markets. Take Postmates, a San Francisco startup launched in 2011 that has built its business model on the entire process involved in “getting things,” including queuing, purchasing and delivering.

    Consumers and businesses can use the company’s app to arrange for a “Postmate”—an individual with spare time and wheels—to buy and hand-deliver any item within a city in less than an hour for a distance-based fee starting at $5. Using technology to combine elements of the retail, courier, concierge and postal sectors, the company is opening up a market for integrated convenience services previously available only to the affluent. Postmates can now be found in thirteen metropolitan areas in the United States and has inspired similar services in Europe. It is also developing a merchant program to enable local businesses to initiate deliveries to customers and establish virtual stores within the Postmates app.

    Disruptive businesses don’t wait for market potential to be proved before they act—and neither should regulators. While regulators will always base their oversight activities on deliberative, comprehensive assessments, today they also need to become as agile as the new players in order to react quickly to events, or even anticipate them. Digital tools and techniques can help.

    One example: A/B testing, frequently used by digital disruptors to run multiple fast experiments on small samples of their customer base. This enables them to refine and improve proposed changes to the online user experience—design, offerings, prices—before rolling them out in full. While taking care to secure the consent of participants, regulators could harness techniques like these to test regulatory adaptations. If a market’s participants innovate and succeed through speedy knowledge of what works and what doesn’t, why shouldn’t that market’s enabling framework benefit in the same way?

  3. Do we know what’s around the corner?

    Digitally contestable markets often catch regulators by surprise. The head of the United Kingdom’s Competition and Markets Authority called digital disruptors “a Schumpeterian gale” sweeping across the economy. To harness the power of this storm of creative destruction, regulators will have to do more than simply react to change. They also need to be prepared before markets are upended.

    To prepare effectively, they should make renewed use of horizon-scanning activities to spot systemic risks and emerging trends. When postal agencies (and their regulators) were debating the competitive merits of “last-mile” delivery companies, did they really envisage the breadth of service integration that players like Postmates would provide? Regulatory agencies will also need to develop techniques that encompass new technologies, encourage innovative business models, and explore new and more effective policy tools.

Getting Started

The level of uncertainty generated by digitally contestable markets is unprecedented. New market dynamics are rapidly altering the boundaries and methods of oversight. Regulators will need to build new capabilities if they are to ask and meaningfully answer the five critical questions. They can start in three areas:

  1. Talent: They should recruit people with experience in startups, in order to acquire the range of skills and mindsets needed to cope with fast-changing markets. Agencies should also ensure they have employees who are well acquainted with disruptive technologies, whether through their work or simply in daily life.

  2. Technology: To inform and enhance decision making, regulators should become comfortable with employing digital technology, including the “SMAC” of social, mobile, analytics and cloud. In particular, they should make full use of the intelligent data collection tools available today, including consumer apps such as Field Agent, as well as the burgeoning Industrial Internet of Things. Their goal should be to improve decision making using an evidence-based and data-driven approach. Beyond that, big data analytics can help them more accurately predict changes in customer and regulatory demand.

  3. Tactics: To better anticipate and meet regulatory challenges, there are some no-regret steps regulators can take. For example, they can undertake “social listening” of Twitter, LinkedIn and other conversation spaces; this will help them identify future market players and spot market trends. Regulators should also participate in industry “hackathon” events to learn about the challenges entrepreneurs and innovators are currently facing, and even employ their own open, problem-solving events—physical or digital—in order to understand current concerns and explore potential solutions.

    Digital innovation hasn’t changed the objective of regulation: promoting consumer welfare. But how to do it—developing and applying rules that deliver efficient and equitable outcomes—has become more complex and difficult. In economies increasingly populated by digital disruptors, the first step for regulators is to begin to question, think and act like the companies they oversee.

Authors

London-based Matthew Robinson is the managing director of policy research at the Accenture Institute for High Performance.

Kuangyi Wei is a thought leadership research specialist. She is based in London.

Outlook: Accenture's journal of high-performance business

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