Whither Middlemen?

A recent piece in the Harvard Business Review entitled The Promise of Blockchain Is a World Without Middlemen lays out the case for decentralized networks in evangelical language. As the author writes, “Decentralization offers the promise of nearly friction-free cooperation between members of complex networks that can add value to each other by enabling collaboration without central authorities and middle men.”

But is it a given that such a world is what customers really want?

Middlemen make for an easy target for disgruntled customers and observers of the economy. At times it can be unclear how they are adding value to a transaction. Sometimes it looks like middlemen are simply inserting themselves into a transaction to increase costs and take a cut.

I previously wrote about middlemen and the ways in which they are continuing to provide value in the new digital economy. In my upcoming book, The New Invisible Hand, I will continue to explore how different types of middlemen and the process of reintermediation are continuing to create real value for customers—and consequently earn strong profits.

Many of the largest success stories of the digital economy are middlemen to some extent. Google grew by connecting users to others’ websites through its search engine. Amazon helps customers find products and hosts third-party reviews. Uber and Airbnb, of course, are built on the premise that they own neither taxis nor hotels yet provide similar services to the masses.

An important attribute of the middleman is bringing trust and compliance to a marketplace. Proponents of completely decentralized networks talk about how their systems can provide both as well, but there are downsides of not having a relatively strong central authority as enforcement. And if there are downsides, that means that there is an opportunity to provide a different service.

Take Craigslist, which provides little more than a method for potential buyers and sellers to find each other. It works well, but mostly operates under buyer-beware (and seller-beware). If a transaction goes south, Craigslist has little to no role in mediating.

That works for some users, but also opened an opportunity for services like Reverb to offer more. Reverb is a marketplace for the buying and selling of musical equipment. Such goods tend to be expensive, hard to ship, and subjective in value. To encourage commerce through its platform, Reverb takes responsibility for mediation:

In the case of a dispute, Reverb will contact the seller directly to help broker a return or refund for the fastest possible resolution. If resolution cannot be reached, we will help the buyer obtain a refund through one of several avenues.

If payment was made through PayPal, we will walk you through their claim process and, if needed, provide materials necessary to ensure this process reaches the correct end.

If payment was made via Reverb Payments, we will issue a refund directly to the buyer’s credit card if we are unable to find a reasonable solution with the seller.

If you are unhappy with your purchase in any way, please fill out this form and our Resolutions Team will get back to you within 48 hours.

That’s a lot of work! But it’s very valuable in assuaging the concerns of buyers and sellers who want a little more assistance than what Craigslist offers.

Coinbase, an online platform for trading cryptocurrencies, was recently written up by The Economist in a piece that talks about the promises and perils of its model. One concern is theft; such stories of individuals and exchanges being targeted make the news regularly. And this highlights one issue of such decentralized systems. In the words of Coinbase’s CTO, “As a bank chief executive you can authorise a big wire transfer in a robbery, and then undo it the next day. Digital currencies are like handing over a suitcase of cash. You can’t get it back.”

Traditional banking and credit providers aren’t perfect for everyone, but they do have mechanisms to protect their users in the case of theft and fraud. It is almost unbelievably easy to dispute a credit card charge. The fact that such services have proliferated is evidence that at least some customers find them very useful, and are implicitly willing to pay for them.

Cryptocurrencies, built on blockchain, have this issue. The decentralized nature of the technology doesn’t stop theft from occurring and offers no recourse when it does. Like Craigslist, the flexibility and anonymity is worth the risk for many people. But certainly not everyone. Many people want the value that intermediaries can provide.

Decentralized networks such as those enabled by blockchain will surely change many industries, but so long as middlemen provide value there will be customers willing to pay for it. Middlemen won’t be disappearing anytime soon, and that’s a good thing.