Network effects are a fascinating and profitable phenomenon, whereby the value derived from a product or service grows exponentially the more users of that product or service there are. One of the first historical examples of these, and one of the best understood, is the telephone network. At the turn of the previous century, the more telephones people had installed, the more connected they became, and the greater the utility derived from their usage. Communication, and thus commerce and economic activity, picked up.
When enough users have adopted a product or service, the network effects that are generated by such widespread adoption become so valuable to the user that their likelihood of switching to a different or competing product significantly decreases. Therefore, in a world that is increasingly reliant on digital infrastructure that keeps us constantly connected, realizing the lifetime value of a customer starts with ensuring that your product or service is able to provide or tap into network effects.
It’s clear that network effects are incredibly beneficial for the firms that first establish them. Does that mean that they’re the only ones who stand to profit from them? We don’t think so. One of the most wonderful things about network effects is that, in many cases, they promote instances of interoperability (the characteristic of a product or system to work with other products or systems). When a firm puts forth a product that is interoperable with another product that has established valuable network effects, that firm stands to benefit from those effects as well.
We realize that for some firms (such as banks), massive amounts of capital have been invested into technological infrastructure over the past 30 years. The scale of such investment has been far outpaced by the development of more dynamic, interconnected technologies in the subsequent years. It has also been outpaced by consumer expectations that have constantly evolved as technology has. How then, can banks with legacy infrastructure position themselves to reap the benefits of network effects of, say, payments networks?
Reaching interoperability for legacy systems seems daunting, but it doesn’t have to be. Platforms exist to help legacy systems better integrate with more advanced tech products. Leveraging these systems to breathe new life into the day to day operations of legacy firms will allow those firms to capitalize on their interoperability with advanced technologies. This will allow them to deliver better customer experiences, and fully realize the lifetime value of their clients.
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