Many of us consider trust a fragile expression that must be earned over time. Trust is the assured reliance on the character, ability, strength, or truth of someone or something. Reading the definition of trust, we can understand why we place considerable weight on our decision to extend it to others.

Once trust is extended to someone we enjoy acting freely knowing it is present, which makes broken trust such a painful experience. Broken trust comes in many forms, but all lead back to the betrayal of vulnerability. It’s difficult to learn how to trust because we know all too well the risk that comes along with it. A family member takes advantage of you. A friend talks about you behind your back. A contractor walks off with your money leaving behind a shoddy or incomplete renovation. These examples drive home the personal cost of broken trust.

Over time we have adapted to the risks of trust by establishing institutions that endow trust. Companies and organizations that can guarantee or enforce good faith in transactions with individuals which are otherwise susceptible to a breach of trust. As these institutions have grown and society’s reliance on their service has increased, they have become centralized powers with the ability to shape the boundary lines for economic participation.

The Evolution Of The Trusted Third Party

Do you remember the first thing you bought online? What was that experience like? This may depend on the reader’s age, but for me the whole process felt risky. I was worried that my credit card data would be stolen, and that I’d spend eternity trying to prove that I didn’t, in fact, buy some random goods. I also feared that the seller would run off with my money and never actually send the sports memorabilia I coveted in that moment.

Over the eighteen years since I made my first online purchase, the ecommerce industry has evolved to address these trust issues. In order to grow adoption, the industry needed to introduce trusted third parties, intermediaries that make the process feel safe. For example, PayPal adds financial security and Amazon provides property exchange security.

The Risk of Trusted Third Parties

Intermediaries have made many aspects of life easier as they provide the service of endowed trust. Their service, however, has not come without its own risk.  

The first, and most glaring, is the risk posed by fraudulent activity. Despite rules and regulations, trusted third parties are still run by people and are thus susceptible to fraud and abuse. The financial crisis of 2009 is a prime example of trusted third parties profiting from fraudulent activities, as mortgage companies made loans to borrowers seemingly destined for default and then sold those loans to unsuspecting investors. These organizations shirked their responsibility to be the agent of trust in a transaction, and the consequences of their negligence are still felt to this day.

It’s difficult to learn how to trust because we know all too well the risk that comes along with it.

Another risk posed by relying on trusted third parties is centralization which results in a single point of failure. An example of this risk and its impact on individuals would be the data breach of Target in 2013. All transaction data at Target stores was held within their central point-of-sale system, which was heavily secured by leading-edge technology. Despite the precautions taken by Target, hackers gained access to their system and stole personal information from 70 million shoppers along with 40 million credit card numbers.

Finally, there is risk associated with the terms of agreement we have with a given institution. For example, we entrust intimate details of our personal lives to Facebook and we are shocked to learn they sell this data to the highest bidder. This was the agreement we made with Facebook in order to access their free service. As users we give them information rights that will in turn be used to generate revenue. Of course ethical usage of data is another story, but also an inherent risk taken when trusting a third party with our information.

The Exclusionary Behavior of Trusted Third Parties

The more prominent a third party is within a given industry, the greater the risk they become a gatekeeper to that industry’s activity. One consequence of centralized trust is exclusion.

The role of financial intermediaries has been essential for innovation and overall economic growth, but there has been an unintended consequence as well: exclusion. Over time more and more economic activity relies upon banks, thus entrenching them as a central figures of commerce. Unfortunately this means a bank’s decision to work with someone is akin to access to the economy. Banks are drawing new boundary lines of trust which exclude unprofitable customers such as small merchants, small balance holders, and microtransactions.

Beyond the banks, other financial intermediaries such as credit bureaus have a similar impact on economic access. Credit bureaus, for example, exist to pull together information regarding your creditworthiness, which is then used by lenders to determine if they will lend you money and at what terms.

People do not typically have a balanced set of books for their household, therefore a credit bureau steps in to help banks understand your personal economic situation. The role of credit bureaus has unlocked institutional capital to lend to individuals, which has in turn afforded them the ability to buy a home, a car, an education, etc.

The unfortunate downside to credit bureaus as trusted third parties is the simple fact that they are historically inaccurate. The federal trade commission has found that 20% of all credit reports have a “potentially material error,” which impacts an individual’s ability to access capital.

What is worse, credit bureaus have a narrow view of creditworthiness, leaving many more data points out of the equation and many individuals without their endorsement. Your credit score is a combined look at payment history, current balances, length of credit history, and type and frequency of credit used. A common and significant objection to this formula is that you must have credit to get credit, which excludes many would-be borrowers from access to institutional capital. If the goal of credit reporting is to determine someone’s likelihood of repayment, there are numerous other behaviors that may provide a more accurate context. Behaviors such as work absenteeism, donation history, volunteerism, etc. Given technology today, all of these behaviors can be reported timely and accurately.

What Now?

If you feel like the problem posed by centralized trust is too big to solve, then you are not alone. Many of us have grown callous to the risks and costs of centralized institutions. We either ignore them or shrug our shoulders and look away as we feel powerless to change the status quo.

At Access Ventures, we strive to step into challenging situations and find solutions that lead to a more inclusive and creative economy. Although centralized trust is systemic, we believe it must be disrupted as the cost to society is devastating.

As we pursue solutions we will provide updates to this journal. If you are interested in joining us, engage with us on social media and send us your ideas! And for more updates and information about Access Ventures consider subscribing to our newsletter.

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TJ Abood

Partner, Investments