A new report urges firms to get rid of excess capacity through barter houses.
It’s one of the oldest systems known to man and now, according to new research by The City of London Corporation, bartering could come to the rescue of London’s credit squeezed companies.
The report suggests that the development of a global capacity exchange hub in London could improve productivity by reducing surplus stocks and providing an alternative to conventional credit.
Capacity Trade and Credit: Emerging Architectures for Commerce and Money,commissioned by the City of London Corporation, Recipco and the Economic and Social Research Council was released yesterday.
It highlights how businesses with spare capacity in their own goods, services or infrastructure, often the case in economic downturns, could utilise their surplus via an exchange to ‘finance’ the purchase of other goods and services that they need.
SMEs and larger businesses can find an alternative credit stream through capacity exchanges, in the face of a challenging environment for conventional credit as banks rebuild bank balance sheets.
“The UK has a long history of responding quickly to the competitive challenges of new technologies and forms of commerce,” said Stuart Fraser, Policy Chairman at the City of London Corporation. “In a fast-changing world, now more than ever our future depends on meeting these challenges.”
The idea that businesses could swap goods and services in today’s markets is not a new one. Established twenty years ago in Australia, Bartercard is one of the world’s leading bartering companies and has 75,000 trading members in six different countries.
One of London’s Top 20 Fastest Growing Companies is Miroma, which works exclusively with advertising companies to allow businesses to barter goods for advertising.
With Bartercard currently trading over $1.3 billion in cashless transactions per annum globally and Miroma being named as one of the fastest growing companies in the country it seems awareness of capacity training is spreading among the business community.
“Innovative capacity exchanges with common tender have particular relevance now as we face a weak economic recovery and widespread constraints on the flow of credit to SMEs, in that they have the potential to ease counter-cyclically the liquidity problems facing businesses coming out of recession,” said Fraser.
“But while the advantages may be highlighted in a downturn, reducing the need for traditional financing saves money and makes sense at any time for businesses, large or small.”
Capacity trading across the world has traditionally taken the form of simple bartering, which involves two parties – commonly SMEs in local or national trading networks – settling a transaction through a flow of goods or services rather than sovereign currencies - or cash.
Monetary trade has traditionally been seen as more efficient than an exchange of goods as the latter requires finding a suitable counterpart at one point in time and is often contractually more complex.
In contrast, the internet based multilateral exchange proposed in the report could potentially lower transaction costs through market clearing. The report finds that London is uniquely placed to facilitate the expansion in scale needed for larger government and multinational organisations to utilise capacity trading more effectively.
“The report exposes the scope of what could be possible, if a new economic architecture for the exchange of value were created to facilitate trade and overcome some of the limitations of traditional credit,” said James Fierro, chief executive of Recipco.
“Such a system of exchange could have a material impact on stimulating economic growth and social development in the UK and around the world.”
The study, authored by Z/Yen, also finds that such market infrastructure would need to provide confidence that deals agreed and contracts made will be honoured and delivery made in a secure exchange using an acceptable trade unit. It finds that if capacity exchanges were formally recognised, a more solid regulatory framework might encourage more rapid development.
Mankind began trading with barter. Looks there’s life in the old system yet.