Monday, December 21, 2009

ITEX, a barter exchange system

ITEX (itex.ob), is a leading marketplace for cashless business transactions across north America. The company services small businesses thru their independent licensed brokers and franchise network. It's services enable small businesses to trade goods and services without exchanging cash. These products and services are instead exchanged for ITEX dollars which is a closed loop system and can be redeemed only within the ITEX network. It has 24,000 small business members, more than $200 million of annual trade volume, and franchised operations across the United States and Canada. Small business members buy and sell using ITEX’s proprietary currency, the ITEX dollar. ITEX’s payment processing platform ensures that trades are settled properly and that members can easily review their account activity and balances. ITEX also issues an annual tax-reporting document to each member. Members pay ITEX a fixed monthly fee and a transaction-based fee. All fees are payable in U.S. dollars. The business generates revenue by charging members percentage based transaction fees and fixed monthly subscription fees. Generally the company charges its members 5-6% of the total transaction, both to buyers and sellers in the itex marketplace.

Why would someone barter in an ITEX marketplace?

The ITEX marketplace has approximately 24,000 members in the United States and Canada. The majority of members are businesses with fewer than 10 employees. Members may choose to participate in the marketplace for a no of reasons including to attract new customers, increase sales and market share, and to utilize unproductive assets, surplus inventory, or excess capacity. The Marketplace is especially useful to businesses where the variable costs of products or services are low, such as hospitality, media, medical care and other service related businesses. ITEX could benefit from recession as it helps small businesses save cash.
For example, a hotel that has not filled its rooms by the end of the day has lost potential revenue but still has nearly the same overhead associated with owning and maintaining its facility. Selling these unused rooms for ITEX dollars is beneficial for both the traveler (buyer) and the hotel (seller). The traveler receives a hotel room without spending USD and the hotel fills an empty room, with the ability to use the ITEX dollars earned to purchase other products or services in the Marketplace.
Bartering helps restaurants fill seats, reassuring prospective customers who might be turned off by the sight of a vacant eatery. It's hardly a permanent fix for ailing restaurants, which still need cash to cover such expenses as rent, mortgages,taxes and utilities. But bartering is an especially useful tool for small independent businesses that lack access to corporate credit lines or cash.
A movie theater could accept ITEX dollars for seats that otherwise would not be filled. This gives the movie theater free ITEX dollars while allowing the theater to avoid formally discounting the price of tickets.


The primary competitors of ITEX are other barter exchanges and internet distribution channels like ebay, craiglist, Travelocity and ITEX is is the largest barter exchange in North America, ahead of New Berlin, Wisconsin-based International Monetary Systems Ltd. The industry in which ITEX operates is highly fragmented. The services which ITEX provides serve only as a supplementary tool to small businesses in addition to cash,cheques and credit cards.
I believe the barter market is too small and not worth that much to well established credit card companies. It only serves as a marginal channel to carry out transactions which would have not been possible with cash, in fact it creates trade for small businesses which without the barter system would have not been possible.
Also the company benefits from some network effects and because new smaller competitors can launch their own barter exchanges at a relatively low-cost since technological and financial barriers to entry are low network effects is the only competitive advantage they have. However there is also a steep learning curve to manage a marketplace and might create some barriers to entry to new competitors.

A typical ITEX transaction
A dentist wants to remodel her office. Through the Marketplace, she hires a contractor who agrees to perform the remodeling work for $1,500 ITEX dollars. The dentist has ITEX dollars in her account to spend because she had previously provided dental work to the owner of a vacation resort, a restaurant owner and a lawyer, all members of the Marketplace, in exchange for ITEX dollars. These other members originally acquired ITEX dollars by providing products or services for other Marketplace members.