Retail Banking

Understanding Modern Networks: Business Models & Examples

MEDICIGlobal Head of Content

Modern networks are more complicated affairs than they may seem. They represent a strategy, an approach, and a vision of the future for each network participant. Networks vary in their models, aims of formation, and, logically, their structure. They have one thing in common though: networks are a deliberate evolution of the corporate world across industries from alluring islands of proprietary solutions to an overwhelmingly invisible cloud of highly detailed solutions, encompassing every conscious and unconscious action, decision, and preference of any given individual, whether those solutions are proprietary or acquired.

But let’s get down to particular examples and details to illustrate the formation of modern networks. The case study of a cooperation network, named House of the Future, carried out in the framework of a project with a significant participation of the University of Aveiro in Portugal, described a visionary framework of networks based on combinations of the following hallmarks:

By duration:

  1. Project teams and virtual corporations – gathering for a short-term goal

  2. Strategic alliances, joint ventures, and business association – implying longer run collaboration

By actors involved:

  1. Vertical – connecting actors along a supply chain;

  2. Horizontal – connecting actors from similar functional areas or sectors

  3. Diagonal – connecting actors from complementary functional areas or sectors

Geo-scope:

  1. Local

  2. Regional or national

  3. International or global

If we were to build a three-dimensional map, zooming in on various combinations of hallmarks constituting every type of a network, there would be a handful of real-world embodiments across industries representing one or another combination. However, this time, I’d like to pay special attention to two types defining the future of financial services and the retail industry around the world.

International + Diagonal + Strategic Alliances

This particular combination is very interesting and somewhat symptomatic for 2018 because it’s sweeping startup niches out of the picture (like IBM does with RegTech). International alliances of businesses in complimentary functional areas create companies like Alphabet, IBM, Amazon, Tencent, Alibaba – the number of examples is limited and the vast majority would know exactly who they are.

The financial services industry has been affected the most with this particular network model because every player mentioned above has acquired a key to the financial world by figuring out all other industries while banks did not have the luxury of diversification beyond financial services. Today, deep diversification and outstanding success in such areas as contextual AI development, AML/KYC solutions, cloud technology, and other niches open the door to the financial world with a fair ease. More interestingly, hybrid corporations are not even following the steps of banks in entering consumer finance market. Instead of focusing on prime customers, they seek to expand the universe of bankable individuals, plugging billions into the financial world through the power of data and advanced technologies.

There are more examples: ID2020 alliance, or Facebook, or JPMorgan + Amazon Alexa, IKEA + Task Rabbit, IBM + Promontory, TD Bank + Facebook, and many more.

Facebook, for example, has been accumulating capabilities to power its own vision of a comprehensive network. The social media platform has a history of interesting acquisitions, including a loyalty and rewards startup TagTile, the personalized shopping engine TheFind, speech translation app Jibbigo, speech recognition startup Wit.ai, data analytics company Onavo, and a surprisingly diverse list of other businesses.

Tencent is another vivid example here. The e-commerce giant is on a quest to define the future of retail and does it through WeChat Pay and a chain of partnerships to squeeze its payments solutions into the future of retail and commerce.

“WeChat payment, whether in retail, catering or other formats, is gradually promoting and cooperating with the entire retail industry in China, including department stores, supermarkets, and convenience stores. There is no one format that does not support WeChat payment,” Bai Zhenjie, Operations Director of WeChat Pay said in a press conference at Tencent’s smart unmanned retail industry conference held on March 30. Tencent showcased its unmanned convenience stores, or vending machines, including EasyGo, Miss Fresh, and CityBox.

Regional + Vertical + Strategic Alliances

While the previous model creates comprehensive, often monopolistic or sometimes duopolistic ecosystems (the key here is that there cannot be over a couple power networks in any given nation), the next one I’d like to illustrate is focused on vertical scaling. The financial services industry, gig economy services, logistics, insurance – all good examples of industries where this particular network model is a good approach for scaling a business.

Discover – the network of networks – is one of the most vivid examples from the financial services industry of why this model is so interesting and is tailored for scale in a respective industry. Discover Network is a comprehensive, payments network accepted at millions of merchant locations in the US, Canada, Mexico, Central America, and the Caribbean. Discover’s power is magnified by the two core networks it is built on:

  • Diners Club International introduced the first multipurpose charge card to the world in 1950. Currently, Diners Club International has over 26 million merchant acceptance locations and 1.9 million ATM and cash access locations across 185 countries and territories.

  • PULSE is one of the nation’s leading debit/ATM networks. PULSE provides cardholders with access to 1.8 million ATMs worldwide.

Discover is also accepted by three major mobile wallets – Apple Pay, Samsung Pay (>5 million monthly customers), and Android Pay (>5 million monthly users).

Discover covers a network of 80+ acquirers covering the needs of businesses around the world. Being a network and an issuer, Discover is able to offer unique benefits to Discover cardholders that are rooted in operational efficiency and network reach.

An important hallmark of the Discover Network is its approach to acceptance expansion. The Discover Network itself is strategically picking global partner networks to ensure the backing of the leading institutions across pan-regional markets – the ones that have the most scale and reach. More importantly, the potential of this growth is fueled by the partnerships that Discover acceptance members create themselves.

In industries other than financial services, there are examples like Uber + Grab, Amazon + Whole Foods (although this one can also be somewhat attributed to the previous model too).

The Enterprise Ethereum Alliance is also an interesting case although it’s different from Discover’s. The alliance brings together a diverse and powerful bunch, but that bunch has only one niche interest with this alliance – the application of blockchain technology and exploration of opportunities in the crypto space. BNY Mellon, BBVA, JPMorgan, ING, Santander, Credit Suisse, and many more came together to form their own network of interested parties. Where will this alliance lead? Hard to say. But one is evident: it falls into one of the combinations – international + vertical (if we look at it from the connective tissue perspective) + strategic alliance.

Alternative lending as a vertical and a concept will likely perish in the years ahead because there is no alternative financing behind alternative lending in the vast majority of cases. Hence, technically, there is nothing alternative about alternative lending. Banks are using the national + vertical + strategic alliance model to remain a dominating financial force in the lending space. A multitude of strategic partnerships play a transformative role in the lending space, especially for underserved groups of the population. Partnerships such as Avant and Regions Bank, OnDeck and JPMorgan Chase, Kabbage and Santander, Kabbage and ING, Prosper and Radius Bank, LendingClub and Union Bank, and other industry examples represent a mindset transformation and strategic work in place to learn and find avenues for expansion of business in the lending space.

Critical Consideration

One thing that may have been omitted from consideration in the framework above is the accelerated rate of homogenization in markets followed by aggressive acquisitions and mergers. When we say ‘alliances,’ in reality, it does not always represent a partnership of the equal. Alliances more often come in forms of M&As today rather than partnerships. Or, to be more precise, in the financial services industry, relationships have evolved from the stage of partnerships towards buyouts with an aim to absorb talent, knowledge, technology, or just pushing a ready solution to customers.

Elena Mesropyan

MEDICIGlobal Head of Content

Global Head of Content, MEDICI

Elena is a research professional with a background in social sciences and extensive experience in consumer behavior studies and marketing analytics. She is passionate about technologies enabling financial inclusion for underprivileged and vulnerable groups of the population around the world.