The Role of Trust in the New Economy

When the enormous infrastructure of the cable industry was being created, the greatest hurdle to overcome was to physically connect the cable to millions of consumers. This undertaking came to be known in the cable and telecommunications industry as the "last mile problem." Companies had to build the entire infrastructure before they could capitalize on the benefits of delivering the first products to the market.

The last mile of the new economy is not a matter of bandwidth, computer desktops or even networking and communications standards. Instead, it is the factor of trust.

When you look at the recent shakeout of the e-business market, you have to wonder what role trust--or lack of it--is playing in stunting the growth of online exchanges and the willingness of both buyers and sellers to support them.

Trust has always been a limiting factor for new business models. Few people trusted the first Sears catalogs, but they did trust the local railroad agents who assured customers that they would get the products they ordered.

Perhaps those were simpler times. If relationships formed in the new economy--where business partners are often anonymous--are by definition transient, then trust becomes harder to come by. Exchanges become the only place of permanence for trust and are the binding factor in forming a fast and fluid economy--at least that's the way it's supposed to work.

According to Metcalf's Law, the value of a network should rise exponentially with the addition of each new node. Napster, an infamous case in point, is the fastest growing Web site in history, with over 25 million hits in its first year. Its peer-to-peer (P2P) communications model, the most viral approach to date for creating online connections, brings the evolving issue of trust to center stage. Even Metcalf's Law is not immune to the impact of this issue.

Varieties of Confidence

In the case of sharing music for free, the issue of trust is not significant. If the song you get isn't what you had hoped for, you have lost only a few minutes of time. But in consumer applications, trust becomes more of an issue. Consumers need at least a minimal level of confidence in the online brand's reputation. For business-to-business (B2B) exchanges, trust becomes a major factor as considerable value, services and products are being exchanged, with an effect that trickles down through the entire value chain.

It is difficult today to conceive of this sort of networked, peer-based economy as having such integrity. Many private exchanges openly acknowledge that their real value is not in building trust but in facilitating current transactions between existing partners--which may be why so many of them are failing.

In any complex system, trust is mostly structural. It is built into old-economy commerce in tangible ways. In buying a house or a car, when you require the involvement of a third-party lending institution, chances are that you have no personal relationship with the banker, the real estate broker, the appraisers or even the seller. Yet you all establish a common sense of trust by adhering to certain basic tenets of performance, rules that already exist in concrete form in the documents, laws, contracts, procedures and regulations governing the transaction.

Without these structural aspects of trust in place, far fewer homes would be bought and sold. Structural trust ultimately allows an economy to grow and flourish--and it is missing from most online exchanges.

The solution to this problem involves much more than moving purchasing and catalogs to exchanges. We need new trust service providers to appear and integrate with online exchanges and marketplaces. One category of trust service provider that has already made this effort is companies such as escrow.com and iescrow.com that handle escrow for online business transactions.

As with the cable industry, the cost of connecting the infrastructure to every home dwarfs the cost of the backbone structure. The same holds true for exchanges, which represent only the first steps in the last mile of rewiring the economy.