Wednesday, March 18, 2009

Barter corporation

Souped-up swap shops

Mar 17th 2009
From Economist.com
The downturn may be good news for barter exchanges

THE current economic climate has left many companies stuck with unsold stock. They are also struggling to get credit to finance their purchases of supplies. As a result, some are turning to barter exchanges. These are a modern incarnation of a very old practice in which one trader swaps his surplus for someone else’s, sparing both the need to use their scarce cash. The International Reciprocal Trade Association (IRTA), which represents about 100 barter networks around the world, says its adherents expect their trading volumes to rise by around 15% this year.

America is by far the biggest market for such “corporate barter”. But it is apparently growing elsewhere. In 2007 BizXchange, a barter network on America’s west coast, opened a branch in Dubai. At first, business there was scarce because Middle Eastern economies were booming and there was little excess capacity. But as the slowdown goes global, more deals are emerging. BizXchange recently handled a transaction in which $10m-worth of steel from Dubai was ultimately traded for, among other things, some property in America—a business in which there is still plenty of overcapacity.
Mary Evans How they did it in olden days

Of course, the reason that developed economies generally use money to do business is that it is so hard to find suitable partners to barter with. In the case of, say, a clothing distributor with a warehouse full of unsold shirts which needs to buy computers, what are the chances of it finding a computer seller which needs a batch of shirts? For this reason, most barter exchanges operate some sort of shadow currency. A firm that sells its surplus goods or services through the exchange receives credits which it can then spend on the goods or services of any other exchange member. “We make a currency of excess capacity,” explains David Wallach, the IRTA’s president.

It is hard to tell quite how much of this quasi-currency is floating around. Many of the hundreds of exchanges that exist are privately owned and do not report any numbers. The IRTA estimates that transactions worth $10 billion were completed in America last year, with 250,000 companies taking part. The head of one large American trading network reckons that the actual number was nearer $4 billion, after eliminating double-counting.

Unlike real cash, the barter exchanges’ quasi-currencies do not have governments standing behind them. This, combined with the lack of reliable and independent information about some exchanges’ finances, can make bartering a bit of a gamble. In the past, some exchanges have collapsed, leaving participants holding worthless bits of paper. As a self-regulatory body, the IRTA sets minimum financial-reporting standards and other rules that its members must meet. A few of the bigger exchanges—such as International Monetary Systems (IMS), the biggest, which claims 18,000 members—are publicly quoted and thus subject to strict auditing and reporting standards. In general, though, the risks of using barter exchanges are greater for firms that sell physical goods, which cost money to produce, than they are for service providers, whose surplus “stock” has a low marginal cost.

A British barter exchange, Miroma, does without a quasi-currency and instead seeks to line up all sides of each deal before it goes ahead. Miroma mainly serves companies which want to run an advertising campaign but cannot afford to pay for it all in cash and happen to have some surplus stock. Miroma matches these clients with sellers of advertising space (eg, broadcasters and outdoor-poster firms) which are struggling to sell all of their slots. It also finds a third party to buy the client’s surplus stock. Since it receives the advertising slots at a heavy discount, Miroma rewards itself for the risk that some part of the deal will come unstitched and leave it with liabilities.
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Barter boosters argue that there has been much consolidation in the industry and that the biggest exchanges are very robust. But as the recession bites, more member firms may renege on their debts or fail to deliver goods. While acknowledging that some barter traders may indeed go under in these tough times, the IRTA’s Mr Wallach claims that the failure rate of firms which use barter exchanges is lower than the average for the economy as a whole. This may in part be because belonging to an exchange can be a good way for a company to network with potential new customers with whom it will go on to do deals in real currency.

If so, some firms that go in for bartering out of necessity during the current downturn may find that it continues to be worthwhile when the recovery eventually comes. However, it must be said that bartering enjoyed a similar revival of interest in previous recessions only to fizzle out once the recovery came along. Barter may have its uses at the margins but it will be hard to beat the attractions of getting paid in hard cash.

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