Are Blockchain Solutions Really Expelling Brokers?

Guest Author | May 5, 2018 | 1:00 pm
fr8, logistics, trucking
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Are Blockchain Solutions Really Expelling Brokers?

Guest Author | May 5, 2018 | 1:00 pm

Blockchain businesses, like many other startups in the digital world, choose to boast of expelling middlemen and intermediaries. But sometimes intermediaries add real value to their industries. And sometimes they outlive their usefulness and create unnecessary economic distortion and inefficiency. More often than not, intermediaries in disrupted industries occupy an ambiguous zone between these two poles.

Uber, for example, has disrupted the taxi industry in London by connecting ride-hailers and drivers directly, cutting out taxi companies and certification requirements. But taxi drivers have pushed back, pointing to the legendary “The Knowledge” test that aspiring taxi drivers must pass to gain accreditation. This rigorous exam requires London taxi drivers to memorize thousands of street names, points of interest, and routes by heart, rending them efficient navigators even without GPS. Without taxi companies and accreditation providers serving as an intermediary, they argue, London’s ride-hailing industry would be overrun with inefficient navigators. Similar ambiguity over go-betweens’ new place (or lack thereof) exists in multiple fields experiencing technological disruption.

Fr8 Network is a new logistics startup that’s disrupting the freight trucking industry. This massive sector serves as the U.S.’s economic backbone, transporting 80% of all overland cargo. But it’s currently experiencing a “capacity crunch” as demand expands while talent supplies run short, and it needs to become more efficient to handle increased capacity. Fr8 Network’s blockchain-based platform will improve efficiency and working conditions in the trucking industry in a way that does impact freight brokers. But it’s an oversimplification to say brokers are going to go extinct.

Brokers in the Freight Industry

The freight industry is highly fragmented. 97% of truck companies operate 20 or fewer trucks, while 90% operate less than six. Many are owner-operators using only one vehicle. These carriers have traditionally used brokers to connect with shippers trying to move merchandise from one point to another. Brokers essentially match-make between suppliers and carriers and take a cut of carriers’ revenues in return. Broker fees currently comprise about 30% of typical shipping costs.

Brokers used to be an absolute necessity of the freight world–without them, there were no ways for carriers and shipper to find each other. But despite their fees, brokers’ abilities to efficiently make connections are limited. One broker might know of a shipper who needs goods moved from point A to point B, while another broker might know of a shipper who needs goods moved from point B to point A. One carrier could easily handle both of these shipments, but they only get access to knowledge about one of them through their chosen broker.

The result is a carrier who carries goods one way but has an empty load the other way. These “empty miles” are the scourge of the trucking industry. Owner/operators and carriers working for small businesses often get paid little or nothing for driving empty miles, even if they’re essential to completing a delivery. Empty miles drive up the environmental footprint of the entire trucking industry. They’re dangerous: empty trucks are more than twice as likely to crash as loaded ones. And they do nothing to help the trucking industry’s capacity crisis. The American Trucking Associations estimate that the trucking industry could be short 174,000 jobs by 2026 if hiring and demand trends continue. Empty miles exacerbate this shortage by decreasing the average capacity each trucker can handle.

Fr8 Network

Fr8 Network proposes a blockchain solution to empty miles. Their central platform is the Fr8 Board. On this job board, carriers, shippers, and brokers can post their shipping needs or available truck capacity. A bi-directional matching engine helps carriers find freight to carry on each leg of their journey. Blockchain-based Fr8 Tokens memorialize shipping agreements made on the Fr8 board in an immutable blockchain ledger, while smart contracts in the tokens automatically move funds into escrow when an agreement commences and can even automize settlement once a shipment concludes. The platform protects itself from spam accounts by requiring a small buy-in of Fr8 tokens to participate, and users leave reviews for their shipping partners so all participants can gauge future potential partners’ trustworthiness.

Broker Elimination?

Will this system eliminate trucking brokers? Fr8 Network argues no–in an industry that needs to fill a talent shortage and ramp up capacity, there’s still a place for the industry expertise and skill sets of brokers. What Fr8 Network will do is eliminate the stranglehold brokers–and particularly large and expensive brokers–have over data on shipping/carrier arrangements. When shippers and carriers can directly find and reach out to each other, there’s no longer a premium on services providing that connection.

Instead, brokers of any size can operate the Fr8 Board on behalf of clients, leaving shippers and carriers more time to carry out their tasks efficiently. Brokers can also offer value-added services such as providing credit and risk management for their clients. Fr8 Network anticipates that broker fees’ share of the average shipping cost should shrink immensely, from 30% to less than five.

Blockchain disruption doesn’t always kick intermediaries out of their industry. Instead, it can make them more valuable and efficient members of that industry, providing enhanced and cost-effective services once digital platforms take over and improve basic tasks. Fr8 Network illustrates how blockchain can revolutionize a sector and still keep valuable intermediaries in-the-loop.

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