Twin Cities entrepreneurs James Kruse, Jon Schoen and Shawn Towle claim to have come up with a kinder, gentler car-hailing service — an online exchange that offers drivers more autonomy and control over their pay than Uber or Lyft.

Their efforts to get Corbata off the ground in St. Paul and California, however, have hit a few proverbial speed bumps.

Corbata, which means necktie in Spanish, is set up almost like an online dating app, where customers choose drivers based on their profile. If you like someone’s bio and their car seems equally appealing, you connect with them.

Not interested? Swipe left, reshuffle the deck and consider the next eligible chauffeur instead.

The bios aren’t just window dressing. Drivers come up with their own pricing and give the owners of some 10 to 15 percent of the revenue they make from trips. Much like other exchanges — think of Ebay.com or Craigslist.com — everything else is a private transaction between the driver and the passenger, from trip lengths to extras such as help with luggage or groceries.

“They set their own rates,” said Kruse, who has run the Pathways to Community social services agency in St. Paul for some 20 years. “We’re not involved in surge pricing. (Drivers) pay a small percentage to the platform in order to use that. They function as an actual business, rather than an employee. We encourage all of them to incorporate as LLCs.”

Kruse pointed out that drivers have been protesting Uber and Lyft in California, in part for using algorithms that take large and varying amounts out of their trip revenue. Corbata would take a flat percentage.

“The economics for drivers for driving for Lyft or Uber really aren’t there,” said Kruse, who believes Corbata improves upon their design. “The percentage they’re taking is probably 30 percent at the low end, and I’ve heard as high as 60 percent in some cases. The road is already paved. They just happened to create a fundamentally-flawed business model when they did it.”

Industry analysts say Uber and Lyft have kept ride prices artificially low in order to corner their markets, a practice that may gradually come to an end now that both companies are publicly traded and beholden to Wall Street shareholders.

“When you control the price, you’re an employer, not a contractor, and they’ve been saying they’re contractors since they started,” Schoen said. “To me, it’s a venture capital Ponzi scheme. They’ve subsidized rides to buy up the market and get competitors to go away. Ours is complete free market. If people want to pick you, they’re going to pick you. The way Uber and Lyft say things are, we actually are.”

Neither representatives of Uber or Lyft responded this week to requests for comment.

INSURANCE, SAFETY REQUIREMENTS A HURDLE

Over the years, St. Paul has had up-and-down experiences with car-hailing and car-sharing. Green and White/Suburban Taxi recently closed in St. Paul. After shrinking its service area within the city, Car2Go left both St. Paul and Minneapolis entirely at the end of 2016, citing high rental car taxes, bulk parking meter fees and other hurdles.

Another car-sharing option, Zipcar, retains limited visibility in St. Paul and mostly markets itself as a Minneapolis service. On the flip side, HourCar, the official nonprofit car-sharing partner of the University of Minnesota, plans to go all-electric and expand in St. Paul with help from a $4 million federal grant and $4 million from Xcel Energy.

Corbata represents an entirely different approach than any of the above. For the St. Paul Department of Safety and Inspections, which licenses transportation network companies such as Uber and Lyft, the business model has raised a number of questions around insurance, background checks, car safety requirements and the potential for price gouging.

Towle, the company’s government relations officer, said with the exception of background checks, the company would not provide oversight over any of those things because it owns no cars and has no employees. To satisfy local regulations, Uber and Lyft buy large bulk insurance policies for their drivers, and Minneapolis and St. Paul charge additional fees. The annual licensing fee in St. Paul is $36,700.

“The city is going to be looking into how the company is proposing to do business, how they’re going to be running and managing their business,” said Suzanne Donovan, a spokesperson for DSI. “The way it’s configured now, it may or may not fit under the current city ordinance governing transportation network company licensing requirements. … (Those) companies do need to maintain liability insurance. The vehicles need to pass annual mechanical inspections.

“With a new company that is looking to create a new kind of business model … then you go to the question of whether or not a policy change would need to occur, and that would of course goes to our elected officials,” Donovan said. “They’re at the very beginning stages of that, as I understand it. It’s clear they would have to go through some steps to start operating.”

Corbata owners say those rules should not apply to them as they’re simply a platform, like Priceline.com or Airbnb, and they don’t provide direct services.

In short, said Towle, they’re not a transportation network company — they’re a “transactional integrated exchange,” which speaks to the name Corbata.

“We’re having a big problem with the city because they don’t get it,” said Towle, a part owner of the company. “Do we provide rides? No. We provide an exchange.”

City officials are seeking a taxable model, he said.

“They want a fee structure so they can charge us money,” Towle added. “They’re saying, who is going to provide insurance? Who is going to make sure the car isn’t defective? We’re not a company hiring a driver. We’re a company giving a driver the opportunity to find clients.”

Discussions with the city of Minneapolis have yet to get underway, but some transportation experts say consumer protections exist for a reason.

“There is no reason they should be exempt from these requirements,” said David Levinson, the former managing director of the Accessibility Observatory, a transportation evaluation system at the University of Minnesota. “They are no different from Uber or Lyft except in how a customer and driver are matched.”

Susan Shaheen, a professor of transportation engineering at the University of California-Berkeley, said both cities would do well to proceed with caution.

“Generally, many of the requirements for for-hire services (taxis and TNCs), such as drug and alcohol testing, insurance, and background checks/fingerprinting, are in place to protect consumers,” said Shaheen, in an email. “Both potential users and public agencies should carefully weigh whether the information provided on the profile provides sufficient consumer protections.”

Insurance is a particularly thorny issue, she said. “For example, if an accident were to occur, an insurance company may deny coverage, arguing that if the city does not regulate it as a TNC, the insurance company should not be required to pay for medical care or property losses.”

She acknowledged, however, that companies like Uber and Lyft can’t go on forever as they have.

“Generally, it is widely believed that TNCs will have to replace drivers with automated vehicles to reduce costs or raise prices to become profitable,” Shaheen said. “At present, it is unclear how long investors will permit these services to carry an operating loss.”

CALIFORNIA LEGISLATION

Corbata has run into additional issues in California, where proposed legislation would make it harder for companies like Lyft and Uber to classify their workers as independent contractors and avoid worker compensation and minimum wage laws.

Towle said he believes Corbata and its drivers would be exempt from those rules in any event, but he wants to see the exemption written into the bill, known as AB 5.

Schoen, a musician and former personal trainer to Hollywood celebrities, added that “the way tech works with regulation, when they first come out, they never meet at the right place.”

Talking points released by the company state that “we encourage drivers who use the Corbata Exchange to become their own business to take advantage of tax options. … As an exchange, Corbata provides the environment for commerce to occur while not dictating the activity, a place for people to meet and experience a breadth of options. Pick your driver and enjoy the ride.”

Kruse said Corbata ran a pilot program during the Super Bowl in Minneapolis last year, working off a web-based platform.

“It was really pretty successful,” he said. “But a web platform is not as dynamic enough as what we want to do.”

Working with a programming company called Foutane, they’ve since created a smartphone app for the iOS/iPhone and Android operating systems. Once licensing and legislative issues are settled, Kruse said he’d seek venture funding to expand from St. Paul into major California markets.

This content was originally published here.