Reciprocity as a Business Model

What motivates people to pay for services they receive?

It is a truism that in order to make money, you need to demand it in return for something else. Granted, sometimes valuable products are free. But, as the saying goes, if the product is free then you are the product. There are very few founders, operators, or investors who would consider offering a service where payment is an appreciated bonus instead of a necessary precondition. 

Yet in spite of this, there is a small subset of modern companies that do pursue such an optimistic model. Earnin and Public.com are two startups that fall into this rare category. 

Since 2012, Earnin has been offering a type of payday loan that allows workers to access part of their salary before they receive their paycheck. Rather than charging fees or interest, the company suggests users tip what they think is fair — or nothing at all.

Public.com is an investing social network that previously partially monetized stock trading via the practice of selling customer order flow to market makers and hedge funds (aka payment for order flow or ‘PFOF’). In February 2021, however, they pivoted to an optional tipping model in response to the controversy generated by their competitor, Robinhood, over this practice.  

These tipping models elicit all sorts of reactions. Enthusiasts argue that they are destined to succeed because people in general are good. There are a healthy number of what I would call interested observers, who praise the courage of such experiments while in all likelihood feeling secretly glad they’re not the ones conducting them. There are also skeptics, whose position stems from the belief that this kind of business model, while an admirable innovation, cannot be sustainable. Why would people pay if they don’t have to? Even if some do, eventually there will be those who don’t and the business will stop growing. 

One take on the skeptical position is that it says more about the skeptic than it does about the business. If payment is not motivated by necessity, then it rests on some sense of reciprocity or other such ethical concept. On that basis, you could think of a tipping business model as a call option on human nature. People who are bullish on business models like this are bullish on the underlying asset class—humanity. Skeptics, on the other hand, are humanity bears. 

But another, more revealing interpretation comes from considering the assumptions about human nature that skeptics invoke when judging a tipping model to be unsustainable. They include long-established classical economic concepts such as rational self-interest, marginal utility and even mankind’s general “propensity to truck, barter and exchange one thing for another.” People can debate the extent to which these assumptions align with how they view themselves or their place in society, but the theory is by now deeply ingrained.

Yet what if these assumptions about human nature are partially informed by a flawed interpretation of history, in particular, of the origin of money? How might that change our opinion of the optional tipping model?

Indeed, the conventional story of the origin of money relies on what appears to be a fictional account of how transactions were conducted in ancient communities. Taking a closer look at this fiction might allow us to gauge how it has come to shape our views on the functioning of society and the economy. It might also allow us to see whether the business models of Earnin, Public, or any others rest on something more than blind optimism. 

The myth of barter

A conventional account of the history of money, the sort you might find in an average economics textbook, tells us that money was invented to replace barter. The barter system, which involved exchanging goods and services directly for other goods and services, worked well at times in ancient societies but entailed a potential inconvenience. I might want to exchange my spare pair of shoes for a bushel of wheat, but you might not want shoes or you might want shoes but not have any extra wheat. A barter system requires what economists call a double coincidence of wants for a trade to take place. I need to find someone who has what I want, but that person must also want what I have. In order to get around this issue, a common unit of exchange was created—money. The below passage from Economics by Case, Fair, Gärtner, and Heather (1996) is a typical summary:

In a complex society with many goods, barter exchanges involve an intolerable amount of effort. Imagine trying to find people who offer for sale all the things you buy in a typical trip to the grocer’s, and who are willing to accept goods that you have to offer in exchange for their goods.

Some agreed-upon medium of exchange (or means of payment) neatly eliminates the double coincidence of wants problem. 

It certainly sounds like a neat resolution, but, as David Graeber argued at length in Debt: The First 5000 Years, it is likely a fictional one. Graeber, who was a professor of anthropology at the London School of Economics, called the idea of the invention of money as a replacement of barter the “founding myth of our system of economic relations.” A myth because, as much as the account makes sense, there is “no evidence that it ever happened, and an enormous amount of evidence suggesting that it did not.” Despite their best attempts, no anthropologist or economist has managed to locate an example of a society that conducts trade via the barter system described above. For example, Adam Smith set his story among the native tribes of North America, which he had never visited, but when anthropologists released an account of the lives of the Iroquois in the mid 19th Century, they outlined an economic system where most goods were stockpiled and then allocated by women’s councils. No barter. Nor did any members of Europe’s colonial expansion in the same century discover among the new cultures they interacted with an example of a barter economy. As Graeber put it:

They discovered an almost endless variety of economic systems. But to this day, no one has been able to locate a part of the world where the ordinary mode of economic transaction between neighbors takes the form of “I’ll give you twenty chickens for that cow.”

Caroline Humphrey, of Cambridge University, concludes in her definitive anthropological work on barter that “no example of a barter economy, pure and simple, has ever been described, let alone the emergence from it of money; all available ethnography suggests there has never been such a thing.”

Ok, but is this important? Some economists don’t think it is. They argue that no one ever really believed the barter economy was real. It was more a model to help simplify the context of modern economics than a genuine theory about past economic systems. As Michael Beggs, a lecturer in political economy at the University of Sydney, told The Atlantic several years ago: “I don’t think anybody believes that was ever a historical situation, even the economists writing the textbook...It’s more of a thought experiment.” But fiction can influence thought as much as fact. To the extent that this particular story about the genesis of economic relations influences the way we view our economy today, I believe the myth of barter is important to recognize. 

An important area where the myth’s influence manifests is in its treatment of the history of debt. It holds that money was invented to solve the problem of barter and that some time later debt emerged. In actual fact, the earliest economic systems were built on obligations, which preceded the invention of money or coinage. I use the word ‘obligation’, not ‘debt’, deliberately. Obligations take varying forms and have varying means of settlement. Debts, on the other hand, can be quantified and standardized, making them comparable. This is because they are denominated in a common unit of account - money. Reversing the order in which debt and money appear is therefore a significant flaw in the myth of barter, as it ignores the notion of the obligation as the precursor of modern debt and assumes that such an economic transaction could appear only when there already existed a means by which to quantify it and value it. In doing so, it suppresses the murky social and psychological motivations that could cause one party to create a transactional relationship with another. When the outcomes of different arrangements are comparable in standard terms, as they are with debt contracts, the choice of one over another becomes in theory a question of rationality. Gone is the complexity of human behavior and in its place flows a crystalline current of rational self-interest.

We can see from this how different versions of the same history give rise to different interpretations of human beings and how they transact with each other. The version of barter leads to one set of assumptions about rational, mechanistic and utility-seeking behavior, while the version of ancient obligations leads to another set of assumptions about complex, multifaceted and socially-driven behavior. Pointing out the myth of barter gives grounds to argue against the former set of assumptions invoked by skeptics of Earnin and Public’s tipping models, as they lack the basis in history that is commonly supposed. 

Furthermore, by smoothing out the potential motivations people might have to enter into a transaction with one another, the myth’s version of history implies a depersonalization of relationships. This doesn’t have to be intentional, but is rather a consequence of the kind of thinking that attempts to standardize and classify the multitude of interactions that constitute a society. 

Most people who participate in our economy today have encountered this idea of depersonalization in one way or another. Maybe your credit card application was denied despite a good credit score, maybe you received an absurd medical bill for rushing your sick child to an out-of-network hospital, or maybe you got a cell phone bill that just makes no sense. You ask yourself who you can call to remedy the injustice, but after getting bounced from call center to call center, from junior client support to senior client support and back down again, you start to get the feeling that maybe you’re not dealing with people after all, but rather with some enormous engulfing entity. Nobody is accountable, nobody can help, it just does what it does. John Steinbeck captures this sentiment in the great American novel The Grapes of Wrath. He describes the futile protests of the Oklahoma farmers being kicked off their land for defaulting on bank loans as a result of the dust storms that plagued the Southern Plains in the 1930s:

Sure, cried the tenant men, but it’s our land. We measured it and broke it up. We were born on it, and we got killed on it, died on it. Even if it’s no good, it’s still ours. That’s what makes it ours - being born on it, working it, dying on it. That makes ownership, not a paper with numbers on it. 

We’re sorry. It’s not us. It’s the monster. The bank isn’t like a man. 

Yes, but the bank is only made of men. 

No, you’re wrong there - quite wrong there. The bank is something else than men. It happens that every man in a bank hates what the bank does, and yet the bank does it. The bank is something more than men, I tell you. It’s the monster. Men made it, but they can’t control it. 

As the economy grows in size and complexity, layers of abstraction pile up between you and whoever is responsible for an outcome that affects you. They become all but impossible to penetrate and degrade not only your agency, but also that of the unseen person beyond the abstraction. 

Taking a step back, my goal here is not to excoriate the very idea of money or economic thinking in general. A common unit of exchange has allowed the construction of the modern world. Economic growth and technological progress have alleviated poverty and turned pointless daily drudgery into hope and optimism for countless millions. My observation relates to how the success of economic growth has shaped our broader philosophies, exemplified by the myth of barter. These philosophies have inculcated into the modern psyche a kind of faith in the depersonalizing forces that come from allowing an immaculate fiction to overwrite the true, complex history of exchange between human beings. This kind of thinking is ultimately what underlies the dismissal of businesses like Earnin and Public. How can you value a business that doesn’t require payment from its customers? What is one customer really worth? What are the value drivers for a single customer relationship? Whatever they are, they just don’t seem fundamental. 

The gift that keeps on giving

So if barter economies are a myth, what kind of historical economies did exist? Well, there were many, which I lack the space in this piece to discuss, but one type that has particular relevance here is the gift economy. 

Many indigenous communities operated on the principle of reciprocal gift giving. Say you were a baker who needed another pair of shoes; you wouldn’t go to the shoemaker and offer some flour for a pair of shoes. Rather, you might drop a hint to the shoemaker’s wife at some point that your current shoes were falling apart and hope she’d say “Oh you poor thing, take this pair!” At some point later, the shoemaker and his wife might want some help repairing their house or might need something they didn’t have and you would help them. 

The principle here is reciprocity, but notice that it is not simultaneous. Unlike the notion of barter, time is allowed to elapse before one deed is repaid by another. Trust is required to bridge that gap. Unlike barter, the exchange is not mechanistic in that it does not place a concrete value on one deed versus another. Rather it is inherently personal. As Graeber argued, if you’re trading with someone you care about, you’ll “inevitably also care about her enough to take her individual needs, desires, and situation into account. Even if you do swap one thing for another, you are likely to frame the matter as a gift.” This is important to note, as it suggests that the driving force of the trust underlying exchanges in gift economies was a sense of community and integration.

This brings us back to Earnin and Public. These optional payment models, what you might call business models of reciprocity, also operate like communities. They are implemented in software and so do not have the same sense of physical, local community, but community is still the underlying value system.

When a user decides to take out a cash advance on Earnin, they select an amount to borrow and then see a prompt with a range of amounts they might choose to tip. Each suggested tip amount is contextualized in terms of how many other users it would help by covering the transaction cost of their respective loans. This makes the motivation for tipping less about providing compensation for a service received and more about keeping that service accessible to others. Similarly, after a user has received their cash they get a message that another user’s tip has contributed to covering the cost of their transaction, along with the encouragement that they ‘pay it forward for someone else’. These not-so-subtle hints along the customer journey project the notion that the user is not in a transactional relationship with a business and its product, but rather is a member of a community whose continued existence depends on reciprocity and mutual solidarity. Reportedly, roughly 40% of users tip regularly.

Earnin’s value proposition, theoretically, is to save its clients financial stress by helping them better match the timing of significant cash outflows, like bills and rent, with significant cash inflows, mainly wages earned. This helps avoid issues such as difficulty paying rent, declining credit scores, overdraft fees, and the cost of engaging traditional payday lenders. For example, users report saving on average $58 a month on overdraft fees and $75 a month on payday lenders. To the extent that Earnin alleviates such burdens, clients might also partially be motivated to make a tip as a gesture of reciprocity toward the company itself. This reflects, first, the fact that savings like those mentioned above tend to carry emotional value far in excess of their monetary value and, second, the fact that the company does not even demand compensation for its service. Sure, it suggests it, but the lack of compulsion creates an interesting psychological dynamic where a reciprocal action might follow. 

In Public’s case, when they announced the move to replace payment for order flow with a tipping model early last year, they framed the pivot as a matter of strengthening their community. Any company could, in theory, employ similar rhetoric to describe a change of strategy and I suspect in most cases it would mean little. The reason I take it more seriously here is that Public is positioned not merely as a facilitation engine for stock trading, but rather as an investing social network, as a place where people may come together to discover, learn about, and discuss stocks and markets. 

On Public’s community forum, investors can comment and ask questions about specific stocks or general investing topics. Some users share their own stories and experiences to help others learn, while others seek out members with expertise in a certain area to ask questions. Similarly, a feature called Town Halls effectively creates a more accessible and user-friendly version of the kind of investor calls that listed companies normally hold with professional analysts and investors. Public users are able to connect via real-time chat in the app with Founders and CEOs of companies they are interested in and ask questions on as broad or narrow a subject as they like. 

Many users of new investing apps like Public previously felt shut out of financial markets by high transaction costs, opacity and the pain of the great financial crisis, all of which have created a dynamic where these new investors seek knowledge and advice not from traditional sources or ‘experts’, as those entities represent the system that had been excluding them, but rather from each other. According to a survey in 2021 of users of trading apps, 53% seek information for investments from the community or platform they invest with and 35% from friends and family. A Harris poll, also conducted in 2021 around the memestock phenomenon, found that advice on social media and forums drove people to buy stocks more than other motivating factors. This corroborates the broad idea that a sense of community is an important driver of user behavior on apps like Public. 

Another interesting, albeit not unique, feature on Public is the ability to search for stocks by theme. These include obvious ones like Tech Giants, but also included are themes that reflect social values. For example, The Future is Female consists of S&P 500 stocks that are run by female CEOs. Younger generations are increasingly selecting investments not only to maximize their gains, but also to reflect values that matter to them. Public has noted this, saying that some 41% of their users say their investments reveal something about their values. 

In their announcement of optional tipping, Public cited a desire to align the business values of their company with those of their user base. Ultimately, a genuine community, whether spread far apart across millions of smartphones or huddled close together in the wilderness, relies on alignment of values and incentives for its continued existence. 

Nothing new under the sun

As is often the case with tech companies, new business models, like tipping in this case, play on ancient ideas and practices, but make them many orders of magnitude more accessible and scalable through software. I have no view on whether Earnin and Public are good or bad companies, but I do think they have been brave in pursuing an innovative and unconventional business model. Does this mean they will succeed? Not necessarily. But it means we should take them seriously. 

We should recognize that there is a real history behind these business models. A history that some, like Graeber, have argued is more grounded in fact than the conventional story of the origin of money. In considering that history we can ask ourselves how easy it is to classify human interaction as rational or emotional, as direct or indirect, or as simple or complex. And we can reflect on whether cleaving user motivation into polar dichotomies might lead us to overlook potentially powerful forces and business drivers that extend beyond rational behavior.