Adding Value to Network Transactions: Landscape

by Tim Attinger

LESSON 1 DISCUSSION QUESTION: How unique and revolutionary was reliable and consistent automated net settlement by payments networks in the past? How unique (especially to users) is that capability still today? Click here to respond

In this course we will explore the various ways that successful networked businesses drive more participants and ensure that existing participants continue to send transactions over the platform. In almost all cases, this is driven by services that make the core experience richer and more valuable for the network participant, ensuring that participant returns.  As with any network business, the key to growing a successful payments network business is to first attract participants, then give them valuable ways to interact, and finally underpin that value exchange with a physical processing network that continually delivers value to participants as they transact over it. If that value that the network drives to participants is something that they can actually see, then the likelihood that they will continue to send their transactions across the network grows.

As we discussed in our first section on payments networks, Cloud Payments 210, understanding the network effect is a basic requirement to driving value from a payments network. Networks are powerful engines for growth.  Like all platform businesses, networks require two different parties to adopt the network at the same rate and at the same rate to be viable. Successful payments networks are born from a strong proposition that brings buyers and sellers to the platform at a great rate, driving valuable interactions between them that cross the network, igniting a catalytic reaction at the core that begins to fuel an almost self-driving cycle of growth. (Related: Ignition Series)  

The Beating Heart of a Network: At its core, a successful network business grows and supports the network effect by delivering a valuable interaction, and increasing that value, to participants as they engage with the network and interact with each other across it.  Exposing value from the heart of the network is particular importance as network managers work to increase participation on the network platform.  As we define the landscape for network value creation, let’s take a look at how this dynamic functions out in the payments business. In simple terms these play out as follows (see Cloud 201 for more detail):

  • Attract Participants to the Network: For payments networks, this has traditionally meant connecting financial institutions to the network, who in turn bring the buyers and sellers -that is, consumers and merchants—to the network to conduct commerce

  • Give Them Meaningful Ways to Interact: For payments networks, this usually means delivering payments products to consumers and acceptance solutions to merchants, through the financial institutions who serve both groups directly.

  • Enhance the Value of Each Interaction:  As we have discussed earlier in the semester, this is the most important function in managing a network business. Making interactions of customers more valuable as they traverse the network helps to ensure that they send their next transaction across the network, driving revenue and value to the business in the process.

The challenge in building value from within the network that will drive uniqueness to participants and their interactions, and ensure their return, is that this value is mutable – it can and should (perhaps even “must”) change over time if the network will continue to be relevant to the core participants, ensuring their return. Perhaps even more importantly, this value must be visible, unique, and highly differentiated if the network is trying to grow incremental participants outside of its core customer group.  

Adding Value with Ancillary Systems:  When payments networks first appeared in the marketplace, the primary value proposition they provided from the core of the network was quite simple: “we will move money accurately and efficiently between participants to ensure that everyone who owes and is owed sends or receives their funds without error.”  That core value proposition sounds pretty basic in today’s context, but back in the day it was almost revolutionary.  Moving money between a host of network participants who didn’t know each other reliably was no mean feat when networks first began, especially when you consider that the method of settlement was a putting a staff of temps and managers into a gymnasium full of paper card receipts and sorting them by hand.

As those network business models grew –and as mainframe processing technology became more compact, efficient, and affordable—managers of networks began to see the promise of linking telecommunications and processing capability to improve the processing of paper receipts.  Investments in adding systems to manual processes were gradual, beginning with the process of stopping potentially fraudulent or un-payable transactions from happening in the first place.  The original way of doing this, essentially publishing and shipping thick books of invalid numbers for reference with clerks at the point of sale, was slowly replaced with the process of placing a call to a central call center, where….someone else looked in the book for you. Slowly that book became an automated table, and then the calls from the point of sale were automated, creating the first automated authorization systems. These were followed by calls from programmable terminals at the end of the day to update central computers on all the transactions that had happened that day, with a total of what that retailer was owed for the day’s activity.

Gradually, the network business model that was general purpose payments established a core value proposition that was built on a physical network – a combination of terminals at the point of sale, telecommunications lines linking those terminals to a central processing center, and computers at the processing center tied to bank settlement systems that translated hundreds of thousands of consumer purchases into totals that each bank in the system owed, or was owed, for that day’s activity. So, the first network value that participants could see was automated authorization, clearing, and settlement – delivered reliably and consistently every single day.

And for a long time, the industry rested on those laurels. But in the past 10-15 years, a massive investment in enhancing network value has driven a significant change in the network value proposition and in the value participants receive from it.  In the next class we’ll review how that value has grown from the core of the network to the participants in a way that they can see. In our last class we’ll take a look at how the flexibility to see and manage transactions individually, built into the network often for other purposes, can create unique and sustainable value from the core as the business evolves.


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