Cloud 310: Adding Value to Network Transactions Lesson 2: Evolution

by Tim Attinger

LESSON 2 DISCUSSION QUESTION: How is the performance of managers of processing networks measured today? On what basis? And is that the best performance measure for such a crucial growth role? Click here to respond.

In our last class, we reviewed the basics of how network businesses work to bring value to participants by exposing the core of the network to the users who transact on it in a way that they can see. We discussed how this process began with payments networks, building value into the core of the business by creating the foundation of an electronic payments network to underpin the network effect business created by linking buyers and sellers (originally consumers and merchants) together. These networks then set to automating authorizations by linking them to a call center, then creating systems that allowed computers to answer those calls, followed finally by linking more computers that received and calculated transaction settlement requests, ultimately clearing those into various interbank transfer systems.

From those rather rudimentary beginnings have risen network business models, built on processing network operations within them, which now span the globe and move billions of dollars a day flawlessly, down to the penny. The systems that sit underneath these businesses are truly impressive feats of technological engineering. Processing systems distribute transaction traffic across the world in multiple data centers resident in multiple geographies. Redundancies are built into applications, services, and centers that can cut over from one operating center to another in a nanosecond, rerouting global transaction traffic instantly, moving money flawlessly all the while. Network communications infrastructure spans the globe several times over, moving messages across countries, time zones, and currencies in the blink of an eye, all the way from a small retailer in Shibuya to a community bank’s processing center in Sheboygan and back again in under a second.

If the User Can’t See the Function, Is It There? Network managers of payments businesses often have what must seem the most impossible jobs in the industry. Managing operations and processing services that span the globe, where any little glitch or hiccup can mean millions, if not billions, of dollars hanging in the balance as systems update and cut over. Anything that can go wrong in the course of a day often does — at a construction site near a processing center, a backhoe severs one of the trunk lines carrying transaction traffic into a processing center, a major processor of authorization traffic goes down forcing the network operator instantly stand in to authorize tens of thousands of transactions, or a merchant processor system fails forcing the network operator to begin routing traffic from the retailer host systems to multiple rival networks instantaneously. Uptime expectations are nearly 100%, reliability expectations ride at the same stratospheric level, and as transaction volume and traffic grow, the complexities of managing systems and capacity grow with them. And this is exactly what success should look like.

If you do your job and manage your far-flung global network effectively — investing in capacity, scale, and reach to cover growth of the transactions through the network– then the result is… that no one who uses the network notices? The fundamental value proposition of the network — the great innovation that was the cornerstone of the network value when the processing capabilities that underpin the network model were first deployed — has now become the equivalent of dial tone. The first major innovation in network processing, the fundamental value from the core of the network that users could see, was that the network could move information and money electronically more swiftly and efficiently than had ever been done before. As network processing grew, the unique value became the global ubiquity of that capability. At one point in time, it was truly unique that a consumer from Michigan could use her Visa card in Mumbai. Unfortunately, today she absolutely expects it.

So What’s Your Next Act? So, exposing network value is an evolving process. What was a truly unique value proposition yesterday may just become a minimum requirement today, and may morph into, well, “yesterday’s news” tomorrow. If you’re a network manager, how do you build capabilities into the network that the business can use to strategic advantage as it works to increase value to the participants in the network? The systems you manage need to be reliable, high capacity, high efficiency, able to manage high growth, and set up to drive down an economies of scale curve to support the increasing pricing pressure on the business from competition, client consolidation, and the fundamental principal in any portfolio business that that biggest customers -those with the lowest prices-grow faster than all others, driving down the average unit revenue in the business with simple math. How do you also build flexibility into the processing services to support the business as the network drives into new markets, new applications, and new customer segments? And perhaps most daunting of all, you need to do this on a three to five year planning cycle that puts core network investment decisions out well ahead of the business needs they will ultimately fulfill. Ouch. That’s a tough one.

Play it Forward. How have effective processing network managers managed this challenging dynamic? By quite simply building the enhancements, improvements, and ancillary capabilities of the systems in such a way that they may be deployed against multiple applications beyond their primary intended use. Separated, but scalable. Fast, but flexible. Driving the core, but built with components. In subsequent courses, we will review the ways that networks drive more value for the information that they generate (Cloud 311) and from extending innovation at the edge of the network (Cloud 401). However, in our last class of this week, we will take a look at one of the most simple, and yet potentially transformative, re-applications of network processing capability that promises to take one of the core network propositions — managing risk for banks — and turn it on its head into a potential revenue generating service for merchants.

But more on that opportunity tomorrow. For today, let’s discuss the network manager’s role.

LESSON 2 DISCUSSION QUESTION: How is the performance of managers of processing networks measured today? On what basis? And is that the best performance measure for such a crucial growth role? Click here to respond.

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