I had an idea to research and publish a post dedicated to network effects in fintech.
Network effects are well defined in this HBS article:
- Any situation in which the value of a product, service, or platform depends on the number of buyers, sellers, or users who leverage it. Typically, the greater the number of buyers, sellers, or users, the greater the network effect—and the greater the value created by the offering.
- Direct network effects occur when the value of a product, service, or platform increases simply because the number of users increases, causing the network itself to grow. Social media platforms primarily benefit from direct network effects because the service's value grows as a direct result of attracting more users. Apple also benefits from direct network effects. The preferential treatment of messages sent from an iPhone to another Apple device (through iMessage) has helped the company expand its moat in the market.
- Indirect network effects occur when a platform or service depends on two or more user groups, such as producers and consumers, buyers and sellers, or users and developers. As more people from one group join the platform, the other group receives a greater value amount. This is best illustrated by the e-commerce and ridesharing examples noted above.
This fintech ruminations post does an excellent job covering them when it comes to fintech.
I wanted to go a level deeper to:
- quantify the number of fintech company exits where the business was highly dependent on network effects to exist.
- quantitatively catalog the fintech categories which require network effects (and are therefore generally winner-take-all).
- identify how each relevant company got past their chicken and egg problem to reach a tipping point.
A half day of working on this workbook was all it took to realize I couldn't take this on by myself. So now I'm sharing what I have so far and offering it up to the fintech community as a starting point. I welcome any and all who want to contribute. Every tiny bit helps. Just DM me and/or comment on the sheet and I'll give you edit access and credit.
What I have now is a bunch of worthless fintech company exit and funding data. It's worthless because it's extremely incomplete and I haven't even scratched the surface on getting to anything regarding network effects. Let's work together to make it a lot less worthless!
Not yet exited:
As I said, I welcome any and all who want to contribute to this research. Every tiny bit helps. Just DM me and/or comment on the sheet and I'll give you edit access and credit.