| By Gavin Chait,
on 05 April 2007
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 Is your reputation at risk?
One of the central themes of the capitalist age for the last few hundred years is this: how, given the complexity of financial interactions, is it possible to trade with someone else who you do not know and trust that they will deliver on their promises?
In small trading groups it’s easy; you know each other personally and can vouch for each other. When you get a passport photo shot even today embassies often ask you to get the back signed by a priest or public representative you have known for a decade or more.
As society has grown larger and – more importantly – as our interactions have become entirely disintermediated across the distant-proximity of the Internet we have found it harder than ever to know who to trust.
eBay and other trading platforms allow each party to a transaction to rate the other. Transaction participants can evaluate the opinions of others prior to committing to dealing with someone they don’t know.
The problem on the Internet, though, is that your good name at eBay won’t follow you to Amazon or any other site that you may wish to use as a trading platform. In each spot you have to start all over again and gain the trust of that new community. Even worse, though, is that those who sabotage their reputations entirely in one spot simply create a new persona for themselves at the same site or elsewhere and start all over again.
The formal sector doesn’t work that way. Every financial transaction you make where you borrow money in advance allows you to develop a credit history. No doubt you have experienced the frustration of going to a bank and being told, “You have no credit history. We cannot lend anything to you.”
Just like jobs, how do you gain experience if no-one will hire you?
Banks make use of credit ratings to evaluate your ability to repay them. The credit history is maintained by various third-party rating companies who the banks subscribe to. You may feel excluded if you’re not part of it, but you’d be even more frustrated if you moved town and had to start all over again with a new bank.
Credit ratings allow you to use your good name as a bargaining chip. Your rating follows you from bank to bank and you can demand a better level of service than you would otherwise get if you were an unknown.
Ratings act to improve competitiveness since companies usually price in a typical default rate for their industries into the products they sell. If it is clear that you won’t default then they can reduce the price accordingly.
In a modern economy, filled with third-party rating services, you are able to build up a good name as an asset simply by behaving honourably. Good behaviour is automatically rewarded while bad behaviour is punished. There is a natural feedback loop – call karma if you like.
The Internet, clearly, has a long way to go before companies develop common reporting standards that allows for ratings to take place. But, once it does, then your value as a customer should be reflected in ever better payment terms and prices.
In the future you may certainly maintain your privacy, but at the cost of being told, "You have no good name, I can't sell you anything."
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By: beninmwangi on 09 April 2007
But you make a good point. I guess the lack of real time credit accessing on the web is makes it almost compulsory for most web sales to require credit cards. But, if there was a stronger system in place buyers wouldn't need to produce a credit card and worry about the possibility of someone phishing out their credit card information and fraudulently running up purchases.
Thanks for the insightful post!
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