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01/17/07
Bartering gives cash a run for its money:
The house that Barter built

Bartering gives cash a run for its money

By ROB STOCK - Sunday Star Times | Sunday, 14 January 2007

On Te Atatu Rd in Auckland is the house that bartering helped build.
When John and Carole Crockett bought the building for their business, the Auckland Ring Company, it was a "doer-upper".

Normally, a business doing so would have to get a sizeable bank loan to pay the architects, builders, plasterers, drain-layers, plumbers, landscapers and shop-fitters.

That would have attracted hefty interest from the bank, but as members since 1993 of the Bartercard trade exchange, the couple knew they had an interest-free source for most of those services.

Carole recalls: "We paid cash for the property, but stripped it back almost to just two walls and the floor. Then we rebuilt it completely - 75% of what we did, we paid for with barter dollars."

Trade exchanges, of which Bartercard is the nation's biggest with 5300 members, are like mini economies. Their small and medium-sized business members trade goods and services between themselves, pricing them in "trade dollars".

Each business has an account, which can be in credit or debit. A plumber may do $5000 of work for an accountant within the network and accept payment in trade dollars, removing the need for the buyer to fork out real cash.

The $5000 trade dollars are credited to the plumber's account to be spent on any good or service from any other Bartercard member. The accountant's account is debited $5000 of trade dollars, which need to be recouped by selling an equivalent value of services to other members.

In the Auckland Ring Company's case, it sells jewellery to Bartercard members.

The example of John and Carole Crockett raises the question of what a trade dollar is really worth.

When a dollar is accepted across the counter, its value to the business is clear. Take off GST (12.5 cents) and the costs of supplying the goods or services provided, and there is the value.

So, Carole says, the value of the trade dollar, on which GST is also payable, would appear to be the same, minus the handling costs. Bartercard takes a payment of 5% in cash from both the buyer and seller. It also has a $30 monthly account fee ($10 to be paid in trade dollars).

But that calculation doesn't quite ring true to Carole.

Renovating their business premises has turned out to be a canny investment given the boom in property prices, so the interest-free trade dollars it accessed have been used to add a much greater value to their business than the sum spent.

Up to 20% of the firm's business is done in trade dollars. "Cash is still king, but with that said, we've got 20% more business which we wouldn't have otherwise," Carole says.

Rotorua businessman Steve Hockly is the owner of Freefall Extreme, a tourist attraction he designed and built using a 1000 horsepower (745KW), V12 twin-turbo Detroit diesel motor hooked up to a DC3 propeller to produce updrafts of 190km/h which can suspend people in mid-air, giving them the sense of flying.

For him, as well as being a source of interest-free funding (the building of the attraction went over budget), trade exchange membership is a sensible move for any firm with over-capacity. His freefall machine is occupied between 20% and 30% of the time, so the $200-$300 of trade dollars that goes through the till each week is attractive. Hockly also runs an engineering business in the Hutt valley, near Wellington, and spends the trade dollars earned on expenses shuttling between his businesses, and to pay for nights at hotels and dining out.

There are also limits to a trade dollar's spending power. Big enterprises such as the power companies, telcos, supermarkets, local authorities, government and the petrol firms will not accept trade dollars.

Big purchases like property are also hard, though Bartercard trade dollars are used to part-finance property deals, and because there are Bartercard operations overseas, most notably in Australia, trade dollars can be spent abroad.

There has been a spike in academic interest in the benefits trade exchanges bring to an economy.

On a company level, they provide small businesses with access to interest-free funding, which promotes economic growth. But recent studies suggest their impact may be still more profound because they operate counter-cyclically to the cash economy.

In general, when the economy is booming cash is king for businesses. Borrowing is easy, and there is no shortage of cash business, so they have reduced need to trade through barter networks.

But when the economy is slowing or in recession and cash is scarce, trade exchanges boom and exert a stabilising effect not just on individual businesses, but if they are large enough, on the economy as a whole.

In a 2000 landmark study centred on the huge Swiss WIR trade exchange system, US academic James Stodder argued there was proof that the exchange's very existence limited job losses when the conventional Swiss franc economy slows.

The WIR system provides strong support for that thesis. It was launched in 1934 in response to currency shortages that lingered long after the great stock market crash of 1929. It allowed businesses to trade between themselves using internally generated currency, which reduced their dependency on Swiss francs and made them more robust.

Today WIR has over 40,000 members, and annual trade across the network passed the $2 billion mark in 2004.

Those kinds of figures are on a different plane to Bartercard, which facilitated $200 million inter-business trade last year, and point to one significant difference between the WIR system and Bartercard's. WIR allows any sound business to join. In contrast, Bartercard manages growth, for example limiting the number of jewellers that can join in Auckland to a number it believes provides choice, but not oversupply.

That has left an open market, and last week a firm moved aggressively into it.

Ozone Card has bought a series of credit card numbers from Visa and has been mailing tens of thousands of businesses around the country seeking members to build an exchange it believes will have 1500-2500 members by the years' end.

In three years it plans to be bigger than Bartercard, sales manager Alex Wong said, with a strategy of under-cutting Bartercard's pricing, not limiting network membership, franchising (up for grabs around the regions for five to six-figure sums), freelance trade facilitators and a truly automated online and credit card payments system.

Instead of charging the 5% on each side of a trade dollar transaction, Ozone Card, which has also just launched in the UK and Australia, will be charging 3%. However, the monthly fees will be the same as Bartercard.

Though it has online capabilities, 20% of Bartercard's trading is done through paper vouchers, with the rest run across the eftpos system, which makes costs high, Wong claims.

Wong also believes the open system will make members "viral marketers" for Ozone Card. When they want services from another firm, there will be only credit-worthiness criteria standing between them and membership, which Wong says will result in exponential growth.

Certainly, the multi-country launch of Ozone Card shows a level of ambition, though there are a couple of big hurdles.

Firstly, trade exchanges are the guardians of their currencies, just like reserve bank governors and governments. They need to be able to provide confidence that in a system where there are debtors, credit is managed properly. A large, centrally-run operation like Bartercard had provided that confidence over many years, said Paul Hebbink, general manager of sales & trading at Bartercard.

Second is reaching a critical mass which demonstrates value to members. Carole is a member of both Bartercard and the old Ozone trade network, which Ozone Card is replacing, and she says the size of Bartercard makes it worthwhile, but the benefits of the smaller exchange have been limited.

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