Credit bureaus: How about a Market Memory for Franchising?

September 23, 2008

This is a good book for several reasons.

One of them is the history it provides of the company that we see today as Dun & Bradstreet. It’s motto is Decide with Confidence and they one of the first companies to be in the information game.

Lewis Tappan (1788 – 1873) started the Mercantile Agency in 1841 and was the first modern credit bureau. In effect, Tappan established a national bureau of standards for judging individual winners and losers.

By 1857, Tappan was able to find and appraise the creditworthiness of a single businessperson within a population of 29 million 7 days of a request. The system managed identity on a case by case basis, while doing a volume business which is a unbelievable task.

The marketplace was disciplined through surveillance and it now had a memory. New business relationships could be started without as much fear of default.

Tappan was able to do this by a network of independent agents, often local lawyers, insiders and/or postmasters. By 1846, Tappan had 679 local informants; by 1851, his network had reached 2,000.

The marketplace now had a memory, an archive for permanent records of entire careers. Each page looked more like a series of stories than a column of statistics. Individual cases spanned decades, while accumulating updates chronicled a subject’s beginning, middle, and end. When did he start, and where? What has he achieved? What happens next?

Tappan meant to create an intelligence agency that would reward men of integrity and punish rash lenders and crooked borrowers.

This is the type of service that is very much needed by those looking to invest in a franchise.

  • Unfortunately, potential franchisees in the class of people that are least likely to be willing to voluntarily support such a network. They do not know what they do not know (they are both unskilled and unaware of their lack of skills).

Governments have a legitimate role in regulating the quality of market transactions as the unfolding worldwide depression will prove (again). Without the supporting information framework to reward good and punish bad franchise behavior, the industry will continue to die.

They could do this by:

  • create a franchisee and franchisor national registry system (just tombstone information run by  an independent company),
  • limiting and registering confidentiality agreements (only for very rare “trade secrets”),
  • broadly defining what a franchise is,
  • making every franchise agreement contingent on both sides having independent legal advice (including spouses),
  • establishing a reverse onus on good faith (ie. when challenged, the franchisor is obliged to prove that they had not acted in bad faith; a much more realistic approach than defining what is “bad” faith), and
  • requiring lenders to support a private service that rates franchisor’ reputations.

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