Cloud 210 Lesson 2: The Network Effect Evolution

by Tim Attinger

Cloud Payments 210 (required): Building Value in the Network

Lesson 2 Discussion Board: Which of the three strategies for network growth is the most critical? Is it the same as the one which gets the most attention from management? Click here to respond. 

Payments are a network business. Any enterprise that requires the participation of two parties at the same time is a networked one. This is particularly true of electronic payments, in which a physical electronic network underpins the commercial enterprise of value exchange between buyers and sellers. Just as electronic payments have become fundamental to the core of the global economy, understanding the core tenets and benefits of the network effect — and how they apply to electronic payments — have become critical to managing and growing payments businesses.

In yesterday’s class, we discussed the core tenets of the network effect, and how those apply to the payments business. As more consumers and merchants join a payments network, the value of the network to the consumers and merchants who already use it grows dramatically. As the network grows, more participants are attracted, creating more value for the participants already there. This effect cycles back into the new participants, attracting more. The value of the feedback loop is high and, at least at the outset, seems almost self-perpetuating. However, for a payments business to grow effectively, managers look to follow three key strategies to ensure that the business remains healthy and that the positive cycle continues to feed value to everyone on the network.

Growing a Network Business: Managers of a payments network, or of a business that is a part of an electronic payments networked business, may look to three simple strategies to grow transactions and revenues. These strategies provide a simple approach to sustaining the network effect.

 
• Attract Participants: This first rule sounds like an obvious one. If the key to driving all the benefits of the network effect come from the number of players involved, as discussed in the last class, then bringing more participants to the party is the most critical step. Traditional network businesses have grown over the years through managing the addition of, well, traditional participants. They are sometimes slow to respond to new players or to new sources of consumers and merchants.

 

 
• Drive Interactions: Even though the value of a network is absolutely driven by the size and scale of the participant base, it is important to remember that just having the most or being the biggest doesn’t always create the momentum necessary to grow a network. One of the most critical ways to attract participants to the network is to deliver them the broadest array of ways to interact with each other. Richness and variety of ways to transact are key to making a network not only a valuable place but also a growing one. By providing buyers any way to pay they desire and allowing sellers any way to be paid, a payment network ensures that the broadest and largest population possible comes to the network and stays to do as much business there as possible.

 

 
• Add Value: This is the most critical component of the network effect when it comes to the business of managing a payments network or electronic payments business. While customers are attracted to the network by the number of participants who are already there and by the richness and variety of the ways in which they may engage in interactions, it is the experience of finding those interactions more valuable than they might elsewhere that ensures they will continue to bring their transactions to the network. It is increasingly important that a payments platform brings value from the core of the operation out to participants in way they can see (examples of this include transaction risk scoring and loyalty flags). This enriches the payments experience for the participant, and if it can bring incremental revenue, it may enrich the payments platform operator.

 

As a payments network business grows from the core network effect value proposition we discussed in yesterday’s class, managers of the business can ensure that the core network effect continues by following these three fundamental strategies. However, as we will ask tomorrow, does every business manager of a payments platform understand how to apply those strategies to their own business? What happens if the key to growing a network requires constantly rethinking and redefining the application of these strategies to the business? How have networks and payments platforms been looking at how these growth strategies work in their own companies? How should they be thinking about them?

We’ll look at those questions tomorrow. In the meantime, let’s open up debate on PYMNTS.com with the following question:

Which of the three strategies for network growth is the most critical? Is it the same as the one which gets the most attention from management?

Give us your answer. We’ll see you tomorrow.

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