Cloud 310: Adding Value to Network Transactions Lesson 3: Implications

by Tim Attinger

LESSON 3 DISCUSSION QUESTION: What do you believe is the most likely source of sustainable new core value for a payments network? Processing new forms of payment, creating new ways for participants to interact, or driving new value to existing participants? Click here to respond.

In our last class on exposing value from a network business, we’ll take a look at how network managers may repurpose capabilities from the center of the network to drive new value to, and new revenue from, participants in the network as they drive transactions across the network. We’ll begin by summarizing the evolution of payments network processing facilities as they created and distributed value to participants in an increasing cycle of enhancing capability in the face of rising user expectations. (Lydian Journal:(Out-side-In)novation: The Changing Paradigm for Driving Payment Platform Growth)

Electronify. In the early days of network processing, it was enough for a network business to deploy a network with a very simple value proposition — electronify payment. Automating authorizations, speeding transactions at the point of sale while driving out the costs and delay of clerks looking up numbers, or calling someone else to do so was a truly revolutionary innovation in its time. Developing systems that make it possible for a number encoded on the back of a card to automate a call from the merchant to the bank who issued the call, driving a decision from a machine to say whether the transaction would be covered, and then delivering an automated reply back to the merchant with that answer — this was an industry-making development. On top of that, network managers brought the additional value of automating the request for final payment along the same rails, including a capability for net settlement among thousands of direct participants for the millions of participants they sponsor and the billions of transactions they generate. Across the globe in nearly 200 countries and scores of currencies, money is moving reliably and efficiently, creating in today’s international payments networks what is arguably the electronic heart of the global economy. With over $7 trillion moving among countries every year, nearly $20 billion every single day, these networks have become essential the foundation of a flattening world. (Related Briefing Room: Payments Around the World)

Modify. But the one-time unique and new value proposition of anytime, anywhere access to financial resources across the globe has become a basic expectation of the participants in these global networks. From Shibuya to Sheboygan, Missoula to Mumbai, consumers expect their cards to work everywhere. And the merchants in those places expect any consumer showing up in their stores with a card on one of these networks to be able to walk in with the card and walk out with whatever they want.  And as long as the message back across the network says the sale is good, the retailer can expect to be paid. Period. No questions. So the networks built and propagated by those unsung heroes, the network managers, are doing their job superbly. However, on top of this global access and reliability, network managers have built sophisticated risk management systems to ensure that those transactions guaranteed by the networks are absolutely securely good for payment. These systems include scoring, flagging, and modeling capabilities in ancillary systems that profile transaction traffic as it moves through the network core. In their most sophisticated form, these risk management systems drop a score into the transaction message that is passed along to the financial institution participant to indicate how risky the transaction looks in the context of all the other traffic in the network at that moment, on that day, from that place, on that kind of card, and so on. Systems for basic money movement, have now become processing networks that manage and score risk for transactions on the fly as they move through the network, exposing the value of that processing sophistication to network participants.

Amplify. So, you’re a network manger trying to stay one step ahead of the business, creating value for the next wave of transaction innovation with the building blocks from the systems you built to manage the last one. You have systems that move money around the world quickly, reliably, efficiently. Your network has global reach to thousands of financial institutions touching hundreds of millions of consumers, all of whom are making purchases at tens of millions of merchants every single minute of every single day. Say your business is looking for ways to drive new revenue and new value to participants from the products and services you deliver today, and you need to drive that new value from a position of relatively low investment and in a way that continues to make the processing network you manage central to the new source of value. And, just for fun, let’s assume that you’re under quite a lot of pressure to create new value fast because… the core economics of the product you deliver to your most important constituents has just undergone a massive restructuring that puts enormous emphasis on finding new revenue streams, and fast. Well, perhaps an enlightened network manager would look at the systems that interrogate transactions in flight, reference a rules engine and neural model database, then score the transactions for risk, and finally deliver that incremental information in the transaction to network participants and think — how else might I use that? (Related Briefing Room: Security and Fraud)

Quantify. Perhaps those same capabilities that score a transaction in flight for risk could perform the same process for another purpose? Maybe those systems could be repurposed to interrogate and score the transaction for a loyalty or promotion benefit, automating within the network the kind of consumer-to-benefit matching that no amount of coupon code inputs and bar code scanning at the point of sale can do at anywhere near the scale and reliability of a global payments network? Is it possible that the same rules engines and processing systems that drive risk management in the core of the network for financial institutions could be in essence flipped on their heads to provide positive scores for marketing and promotion campaign qualification to merchants? Would that be something that these participants could see, and value? 

Somewhere surely deep in the operations centers of a payments processing network, someone is having that epiphany right now. All we have to do as participants is wait until it’s something we can see, and then, value.

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