As discussed in our earlier post about B2B Credit Middlemen, a powerful aspect of doing business on the Internet is the elimination of sales and distribution layers between the producer and consumer. In a typical non-Internet value chain there are many “value-added” steps in the process between the producer and consumer. Each step increases costs and reduces profit.
Internet distribution models eliminate many of these steps by scaling distribution and eliminating sales complexity (e.g. Amazon, iTunes and Zappos). In this post, we will attempt to illustrate the value chain for the B2B credit industry and point out the false value provided by the credit industry middlemen: the credit bureaus.
Credit bureaus estimate a company’s viability by aggregating data from other businesses for them to use in making new credit application decisions. Unlike banks and financial institutions, they DON’T ISSUE CREDIT. Businesses issue credit to each other and should be the real arbiters of worthiness.
Furthermore, this data is created by businesses, provided to the credit bureaus (for a fee of course), and then resold to other businesses. The never-ending fees keep people from using the service and in turn make the data less accurate, less timely and pretty useless. Who is a better judge of a company’s viability: a random call center operator or the people at companies who interact with each other?
Free the Data
The prevalent business model among these bureaus is to charge companies to ”establish” their profile, charge to view other companies’ profiles and charge to submit data regarding the quality of interactions they have with other companies. Charging to submit data is a disincentive to accuracy and keeps the largest population of companies (small businesses) from participating. If companies could freely exchange THEIR data, then there would be a more timely and probably more accurate way to determine creditworthiness.
The value of the data increases as the number of active users in the network increases. A sort of Metcalfe’s Law for social networks in practice. The data should be free!
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