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This article appears in the September 6, 2017 issue of Forbes.
People who know me know I’m a car guy who loves nothing more than driving a great automobile on the open road. Lately, however, the thing that’s added greatly to that pleasure is an app on my smartphone that helps me avoid getting snarled in traffic — Waze.
The genius of Waze is that it uses the power of crowdsourced information to update traffic conditions in real time. The app relies on the people using it to constantly feed information back into the app. That’s called the network effect — where the value of a product or service improves as more people use it — and it is what makes Waze great. The network effect can also benefit the financial services industry.
Waze disrupted the established navigation business, where major players such as Magellan, Garmin and TomTom had been selling billions of dollars’ worth of devices to drivers everywhere. Their navigation products, however, had a vulnerability — like the paper maps of the previous generation, their information was static.
The financial services industry today is at a similar juncture. It’s a well-established, profitable global business. However, customers want improvements. Capital markets firms want trades to be settled faster. Consumers want electronic communications compelling enough to make them dump paper. And new technologies — from blockchain to machine learning — could further revolutionize the industry.
Financial services companies that want to thrive in this challenging environment should harness the network effect. A century ago, successful companies revolutionized manufacturing with assembly-line processes for everything from cars to washing machines and turbines. Today, the most successful firms — Facebook, Google, Amazon and Apple — leverage networks. These companies create networks of users and curate great experiences to improve the lives of their customers. For example, Apple once made desktop computers loved almost exclusively by educators and designers. But Apple became the world’s most valuable company after its iPhone created an ecosystem of loyal users buying everything from music to apps.
The network effect turns costs into profits: Amazon built its cloud servers for its own business but later opened them up to its network of customers, creating a significant new Amazon Web Services business that has attracted an ecosystem of vendors that now offer add-on services.
Bloomberg is a great Wall Street example of the network effect. As a scrappy startup, Bloomberg faced established players like global information giants Reuters and Dow Jones but beat them both with the network effect. Bloomberg’s original Terminal in 1982 gave traders live market data, just like its competitors, but it also turned those customers into a network by giving them instant-messaging capabilities that allowed traders to execute and record trades.
At Broadridge, we’ve seen the benefits of the network effect too. Our proxy platform connects institutional investors, representing 86% of the shares in North America. That network effect makes it easier for public companies to communicate directly with shareholders and roll out such innovations as electronic proxy voting and digital annual meetings. Likewise, our Broadridge Customer Communications sends over 5 billion annual communications from thousands of companies, reaching over 75% of North American mailboxes. Our cloud communications will enable those companies to connect with their customers where they are, on 10 digital channels including Amazon, Dropbox and Evernote.
Another huge benefit of the network effect — at companies as varied as Waze, Amazon, Bloomberg and Broadridge — is that when a company works at the center of a huge network of customers, it can invest in transformative technology and then share the benefits of that investment back with clients in the form of better products and improved experiences.
Some on Wall Street complain that building new technology is difficult because new platforms must initially run alongside legacy technology and can be hard to scale across the industry. That makes investing in innovative technologies difficult to budget for. However, a network mutualizes the costs of those investments and the value of the resulting product or service increases as more firms use it. Consider the example of a shared platform for trade settlement. Trade settlement is already moving from three days to two, but many institutional firms on Wall Street would prefer one-day settlement. By joining a network, firms that want one-day settlement could have it today. So firms interested in faster settlement could identify and join like-minded companies to set up a members-only club to trade faster. The network effect would go beyond just faster settlement — it would free up valuable capital too.
Similarly, emerging blockchain technologies are creating new networks that could disrupt Wall Street. For example, Delaware now allows companies registered there to legally issue and trade shares on a blockchain platform. With this new law coming into effect in July, the trade publication CoinDesk provocatively raised the question “Will traditional equity markets still exist 10 years from now?” Although I strongly believe they will exist, the fact that technological developments raise this question shows how strong technology combined with the network effect can potentially be.
Whatever happens with all this coming technological disruption, firms that want to thrive should connect with the power of the network by partnering with those firms that have a strong network and are already investing in the technology advances that could overhaul their market. Anything else would be to risk being overtaken by upstart companies that may capitalize on the opportunity, just as Waze did in personal automotive navigation. Progressive firms will tap into network power to leverage the transformation that will inevitably take place.
From Forbes.com, September 6, 2017 © 2017 Forbes. All rights reserved.