Business Standard

Uber: Destructive innovators or system gamers?

Who can run a taxi and on what terms, is a matter of regulation with varying intensity in cities across the globe

Somasekhar Sundaresan 

Uber - a company that uses a mobile app to connect owners of vehicles with local passengers - is under acute regulatory spotlight worldwide.It presents a classic example of the conflict between disruptive innovation and regulatory systems.The impact of Uber and the regulatory response to it across the globe hold lessons in regulating any market for services, including financial services.

In India, a move by the Reserve Bank of India to remind and enforce its regulation on electronic payment security is being assailed as a targeted anti-Uber measure. That charge, attractive at first blush, seems a bit off since it affects not just Uber but any establishment that relies on Indian credit card usage - say, a Flipkart.

Yet, the theme of the conflict is evident here. One could argue that India has one of the most secure electronic payments systems for credit cards in the world, with customer authentication being required for every payment transaction using the card.

One could also argue that such security is excessive and imbalanced, dis-incentivising industry and forcing it to opt out of electronic payments, thereby not only hurting the consumer but also defeating the objective of encouraging banking and electronic channels for all payments.

Back to Uber. Provision of taxi services is a highly regulated market. The primary objective of regulating taxi services is consumer protection. Who can run a taxi and on what terms, is a matter of regulation with varying intensity in cities across the globe.

The aim of licensing regulations for taxis is to ensure a certain minimum standard of safety, security, cleanliness, politeness, and indeed, awareness of the city's road network when you hail a cab.

One may wonder if the knowledge of city roads is at all a relevant factor any more: why have a taxi driver pass exams on the road networks when GPS systems can guide even a dunce on how to go from Point A to Point B? Yet, that would not mean that the rest of the regulatory objectives have become redundant.

Therefore, it is for the regulator to embrace market realities and re-orient the content of regulations to keep them current and relevant.

For example, while GPS may make knowledge of the road network redundant for a taxi driver, but the taxi licensing authority may need to consider making the provision of credit card payment option mandatory in all taxis.

How well this re-orientation is done, defines the quality of regulation and the attractiveness of a market.

When a new market player who keeps out of the licensing and regulatory system provides pretty much the same service as the licensed players, commentators, depending on their own political stance, could either celebrate him as a "disruptive innovator" or assail him as one who has "gamed the system". Even that approach could change depending on whether a mishap takes place. For example, when a service like Uber provides clean and timely service, it could be celebrated as an innovation.

Yet, if a heinous robbery or rape were to occur in a Uber vehicle, the same commentators would be more prone to attack the regulators for not having been smart enough to bring such innovation that could go wrong, under their regulatory framework. Courts that are inclined to legislate - for example, by ruling that no vehicle should have sun control film to prevent crimes in moving cars - could bring the entire service crashing down.

Another factor that plays a role is the convenience for a regulator to play either a "light touch" approach (example: US securities regulators finding nothing wrong with brokers being paid by stock exchanges for routing orders to them) or an extremely prohibitory one (example: China not permitting any computer-driven algo trading). Both approaches are driven by the nature of the market players who are regulated. Just as a regulator must spend his waking hours thinking about how to protect those mandated to be protected, he sub-consciously gets used to thinking of the players in his market as "family" that needs protection. Reasons can always be found to justify such regulatory capture - the most popular example would be that of a financial sector regulator going soft on regulated entities citing the need not to cause panic and runs on banks.

Regulators also come up with "solutions" that seek to establish a "via media" between an outright ban of a disruptive newcomer (example: Berlin's ban on Uber last year) and an outright overhaul of a broken regulatory framework (example: imposing licensing conditions on a service like Uber and enabling the same terms for incumbent taxis). The via-media option can be a race to the bottom.

For example, some cities have imposed on Uber, a forced and deliberate delay of a minimum period of time between the cab booking and the cab arrival at the pick-up location. Subject to such condition, they would register Uber as a cab service. Such measures can not only protect the existing licensees from efficient competition, but also can prevent the very benefit of competition from reaching the customers.

With financial services, the Financial Sector Legislative Reform Commission faced this dilemma. One member has dissented on the approach to registration of a provider of financial services.

The Commission has recommended that no financial service should be provided unless registered with the regulator.The definition of "financial service" is quite wide and all-encompassing and to ensure that disruptive innovators do not game the system.

The solution was to mandate that if the regulator were to not approve of a service within a certain timeframe, the sevice would be deemed to be approved.

Such an approach could end up incentivising the regulator to say "no" when it does not think it can understand the proposed project well enough to give an expedited final rejection within deadline.

The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.

First Published: Sun, September 14 2014. 21:34 IST