Paper discussed: Zervas, G., Proserpio, D., & Byers, J. W. (2017). The rise of the sharing economy: Estimating the impact of Airbnb on the hotel industry. Journal of marketing research, 54(5), 687-705

1. Introduction

Peer-to-peer markets, also known as the sharing economy, has enabled people to collaboratively make use of underutilized inventory through fee-based sharing. The rapid growth of peer-to-peer platforms has arguably been enabled by two key factors: technology innovations and supply-side flexibility. This study analyzes Airbnb’s entry into the state of Texas and quantifies the impact on the Texas hotel industry between 2008 and 2014. The paper contributes to the growing literature on multi-sided platform competition, as Airbnb is an example of a two-sided platform. Besides, the work contributes to the existing literature by focusing on the impact of external shocks on the tourism and the hospitality industry. The researchers expect that some stays on the Airbnb platform will substitute certain hotel accommodations. This can significantly affect the hotel revenue. Though, the authors note that the impact differs per geographic region, hotel market segment and season.

2. Method

In order to quantify the extent to which Airbnb’s entry has negatively affected the hotel room revenue, the researchers gathered data from various sources. The Airbnb platform was the main source of data for this study. Additionally, the monthly room revenue from 3,000 hotels in Texas together with several other datasets were included in this study to account for the information on control variables and in order to conduct robustness checks.

After collecting the necessary data, a difference in differences (DD) empirical strategy is conducted to identify the causal impact of Airbnb on hotel revenue. This strategy identifies the Airbnb treatment effect by comparing differences in revenue for hotels affected by Airbnb before and after Airbnb’s entry with a baseline of differences in revenue for hotels that were not affected by Airbnb in the same period. To perform the analysis, they regress against two measures of Airbnb supply, namely a cumulative measure of all Airbnb listings and an instantaneous measure that defines supply as those Airbnb listings active within a short period. In all their specifications, they included a set of control variables that vary over time. For example, control variables such as population, wages, unemployment, total hotel room supply, airport passengers counts and TripAdvisor ratings were taken into account for each hotel as a proxy for quality. Also, they included city-specific trends and city-month dummies to account for seasonal differences in demand across the different markets. Finally, they have conducted several robustness check in order to support the causal interpretation of the estimates.

3. Findings

The authors found that, in Texas, each additional 10% increase in the size of the Airbnb market resulted in a .39% decrease in hotel room revenue. These effects are primarily driven by Austin, where Airbnb inventory has grown extremely rapidly over the last years, resulting in an estimated revenue impact of 8%-10% for the most vulnerable hotels in Austin. Accordingly, the researchers found that the impact of Airbnb is bigger on cheaper hotels in comparison with expensive hotels. The impact of Airbnb also falls disproportionately on hotels lacking conference facilities. Another finding is related to type of hotel; chain hotels tend to be less affected by Airbnb than independent hotels. This can be explained by the fact that chain hotels have a larger marketing budget and can thus benefit from their stronger brand identity. To conclude, the research showed that Airbnb is flexible in terms of their ability to flexibly scale instantaneous supply in response to seasonal demand, whereas hotels lack the flexibility. This has significantly limited hotels’ pricing power during periods of peak demand.

4. Strengths & Weaknesses

The main limitation of this study is related to the representativeness of this study since the AirBnb effect on the hotel industry is only studied in Texas. The generalizability of the findings should be taken into account considering the volatility of the housing market and the sensitivity of the hotel industry towards economic differences and other dynamics influencing supply and demand for accommodation. Though, the research uses a diverse set of data sources and controls for various exogenous variables (e.g. population, wages, unemployment and total hotel room supply). The authors point a similar limitation In addition, the study investigates multiple cities in a large state and the data is collected in a time period of 6 years (2008-2014). On the one hand, the long time period adds to the level of reliability and consistency of the research. On the other hand, the timing of the data period (2008-2014) yields a point of discussion since it investigated the vacation rental platform before the explosion of peer-2-peer networks happened.

Another limitation of this paper is related to the analyzed properties, the authors only consider AirBnb as the main peer-to-peer platform, whereas other vacation rental platforms such as HomeAway and VRBO do gain traction as well and might influence the negative on the hotel industry as studied. Also, the authors of the research add that only short run implications are considered by including only two metrics; price and occupancy rate. A longer time scale is not included, this reasons that the authors did not include the longer time scale is arguable. Further research can take the findings of this research as a starting point to study possible ways to respond to peer-to-peer platforms such as AirBnb. For example, alterations of investment schedules can be analyzed or effect of government regulations can be taken into account.

Overall the paper considers the short-term effect of the peer-to-peer platform AirBnb on the revenue stream of the hotel industry in Texas. Strengths of this paper are mainly related to the comprehensive investigation of the AirBnb platform, economy and housing market in Texas including controlling for exogenous factors such as airport passengers counts and TripAdvisor ratings. Not to mention the wide time span of six years (2008-2014). All strengths of this research considered, generalizability is a main concern of the findings. Though, the research takes a first step in quantifying the effect on society by analyzing AirBnb which contributes to the recent development of peer-to-peer networks in the raising sharing economy. By quantifying the effect through including several reliable data sources (e.g. platform itself and the monthly room revenue from 3,000 hotels in Texas), control variables and other exogenous factors, the study does provide practical relevance in terms of showing the exact effect in percentages and how the researched variables account for differences in the effect. The study is therefore relevant for society and other countries as well as governmental bodies, consumers and the hotel industry itself.

References

Zervas, G., Proserpio, D., & Byers, J. W. (2017). The rise of the sharing economy: Estimating the impact of Airbnb on the hotel industry. Journal of marketing research, 54(5), 687-705

After the development of Internet Banking, and Mobile Banking, the European Union has now paved the way for Open Banking. ‘Open Banking’ is the relatively new umbrella term for opening the bank to other parties to access customer data (Courbe, 2018). The Payment Service Directive (PSD), enforced in 2007, is revised recently with the aim to stir innovation and emphasize consumers’ protection by increasing security and transparency through enhanced know-your-customer capabilities, identity validation, and fraud detection (Brodsky & Oakes, 2017). The new European legislation: ‘The Payment Service Directive 2 (PSD2)’, which became applicable in January 2018, sets the banking industry into motion by shifting the authority to share data from financial institutions to bank customers by the rule of: access to account (European Commission, sd). Under PSD2 large financial institutions may move towards the background, maintaining the back-end systems, where digital “giants” are able to extend their close customer relationships by fulfilling the specific customer needs by adding digital value-added services on top of the bank, leading to more competition, digital payment methods and lower transaction costs for consumers (McKinsey, 2016). These digital ‘giants’ like Amazon and Google, are now able to directly access bank customers and collect the final piece of data that was not accessible before. This could lead to end-to-end solutions that complete the circle of services offered by these parties (PWC, sd).

The Payment Service Directive 2 (PSD2)

Two new categories of licences are created: the Payment Initiation Service Providers (PISPs), which enables third parties, if permission is granted, to directly initiate payments at the bank on behalf of the customer; and the AISP (third party account information service providers), multiple accounts of various banks can be combined into one interface (Deloitte, 2016). By establishing a single legal framework for payments within the EU, cross-border payment transactions can be made as easy, efficient and secure as the domestic payments in Europe (European commission, sd). In this way, the directive lowers entry boundaries of the payment market and thus competition increases. Efficiency is reached by standardization of rules, which results in lower transaction costs and improved financial services. Though, new entrants must meet strict technical requirement set by the European Banking Authority. The customer-centric legislation aims for increased security and transparency of Third-Party Service Providers (TPSPs) as well as banks towards customers. Newly non-banking solutions can be offered as well; payments via digital channels such as social media (Noctor, 2018).

By giving Third-Parties their consent, customers have to trust the Third-Party first, but consumers may not be able to assess the same value and sensitivity to certain data elements as banks and regulators do (Brodsky & Oakes, 2017) as they can be blinded by the benefits that a certain payment service of a TPSPs provides. Thus, the customer-centric regulation results in a cost-benefit trade-off concerning the ability to utilize more efficient and improved bank services, while putting one’s own privacy at risk. New consumer-payments relationships in the financial industry raises the need for a better understanding of how to build consumer trust over the internet. Are bank customers willing to share their personal financial information with TPSPs in return for improved financial services or personalized financial applications? In other words, do the benefits outweigh the risks of sharing your financial data? The following paragraphs explain the advantages and disadvantages of the PSD2 along with related developments in banking.

Personalization of the financial industry

In today’s world, personalization in e-commerce is rather a must than a nice to have. The future of the financial industry will follow the e-commerce sector by responding to the financial needs of consumers through new types of payment services delivered by Third-Parties’ interfaces on top of banks’ existing data and infrastructure. The PSD2 enables, for example, PayPal to provide additional services on top of the banks infrastructure in which the bank customer barely interacts with their own banking institution. This can threaten banks since PayPal can access multiple bank accounts of bank customers, if consent is given, and can thus collect more information on customers. The information can then be used to fulfill the customers’ needs. In this way, banking services can be offered in a more personal way. In contrast to banks, Third-Parties have the benefit that they can specialize on specific needs of consumers since they do not have the burden of meeting all of the needs of the consumers (Deloitte, 2016). Though, Third-Parties still need to be granted access to the banks’ interface through API’s (Application Programming Interface) provided by financial institutions to interact with bank accounts to third-parties. Although the customer centric, mobile and swift nature of TPSP services is in conflict with how banks traditionally operate, banks have the opportunity to differ between basic and advanced API’s in order to generate a new stream of revenue. Banks expect to face the most significant challenge, not from new digital banks or fintechs, but from the consumer tech giants such as Google, Facebook and Apple. Apart from the end-users’ financial information, these firms were able to access almost every other part of personal information that is available on the internet.

Another important element of banks is their reputation and institutional trust that they have gained over the years. Though, the image of some banks have been harmed in the past years (Volkskrant, 2018), banks do invest heavily in security because their reputation is at stake. TPSPs on the other hand, do not possess a similar security foundation because it was not possible to access bank customers’ accounts or initiate payments on behalf of the customer. However, in the online context, uncertainty increases as users are not aware of the consequences associated with sharing of personal financial information, including account information, obtained financial services and transaction data. Consumers are not likely to share highly sensitive data because of perceived privacy concerns that are due to the invisible nature of the online environment (Culnan & Armstrong, 1999). Thus, e-commerce and consumers are confronted with more payment options, but this does not necessarily benefit to the level of confidence in the payment system, because too much fragmentation of providers can also increase uncertainty and therefore uncertainty among consumers. Then again the conversion at online retailers can have a negative effect in addition to potential market saturation and regulatory burdens which can become another challenge for TPSPs. (Deloitte, 2016). The customer-centric legislation may in the end not be so customer-centric concerning the potential market saturation and the corresponding privacy concerns in the uncertain online environment.

The rise of ‘Digital Giants’ in banking

Currently Google has its primary payment method Google Pay which is a digital wallet that offers a limited number of financial services. As of january 2019, Google has been granted the new payment license in Ireland and Lithuania (Finextra, 2019), which enables them to access bank customers’ account and initiate payments on behalf of the bank customers Although Google did not publish any new service ideas yet, efficiency gains can be made by providing convenient interfaces and features that banks do not offer. These potential services can be combined or linked with existing products, resulting in end-to-end solutions. In this way digital giants are empowered to complete the circle of services offered by these parties. In sum, banks have their brand image and the in-house security foundations as strategic assets, whereas Third-Party Service Providers (TPSPs) have the flexible nature to adapt quickly to customers’ needs. Instead of entering the red ocean, banks can leverage their assets and strengthen their position by collaborating with fintechs and digital giants. Especially, in the uncertain online environment where risk is inherent, trust becomes an important factor. Collaboration is thé solution in the customer-centric world of today. Google has already announced that they prefer to work with banks instead of continuing by themselves. Under the PSD2, Europe puts the customer first and customer protection is number one priority. It is a starting point for change in the traditional financial industry.

References

Brodsky, L. & Oakes, L., 2017. Data sharing and open banking. [Online] Available at: https://www.mckinsey.com/industries/financial-services/our-insights/data-sharing-and-open-banking [Accessed 18 february 2018].

Courbe, J., 2018. Building ‘Open Banking’ on a Platform of Trust. ABA BANKING JOURNAL , pp. 38-39.

Culnan, M. J. & Armstrong, P. K., 1999. Information Privacy Concerns, Procedural Fairness, and Impersonal Trust: An Empirical Investigation. Organization Science, 10(1), pp. 104-115.

Deloitte, 2016. Anticipating the challenges and opportunities of the PSD2. Inside, June, pp. 60-65.

European Commission, n.d. Payment services. [Online] Available at: https://ec.europa.eu/info/business-economy-euro/banking-and-finance/consumer-finance-and-payments/payment-services/payment-services_en [Accessed 18 february 2018].

Finextra, (2019). Google gets payments licence in Ireland. [Online] Available at:https://www.finextra.com/newsarticle/33167/google-gets-payments-licence-in-ireland [Accessed 22 february 2019].

McKinsey, 2016. Technology innovations driving change in transaction banking. [Online] Available at: https://www.mckinsey.com/industries/financial-services/our-insights/technology-innovations-driving-change-in-transaction-banking [Accessed 18 february 2019].

PWC, n.d. PSD2 stimuleert slimme authenticatiemethoden banken. [Online] Available at: https://www.pwc.nl/nl/themas/blogs/psd2-stimuleert-slimme-authenticatiemethoden-banken.html[Accessed 17 february 2018].

Volkskrant, (2018). Ministers wil schandalen zoals bij ING voorkomen en scherpt beloning van bankiers verder aan. [Online] Available at: https://www.volkskrant.nl/nieuws-achtergrond/minister-wil-schandalen-zoals-bij-ing-voorkomen-en-scherpt-beloning-bankiers-verder-aan~b37cfd78/?referer=https%3A%2F%2Fwww.google.com%2F[Accessed at 22 february 2019]