What’s a Network, Anyway?

In the payments industry, we tend to use the word “network” casually and often aspirationally. A vertical SaaS company with a thousand midmarket customers starts calling itself a network even though its customers, and their customers, don’t actually interact with one another. Platforms that have built extensive integrations with ERPs, banks, and processors offer real efficiency, but they aren’t enabling net-new commercial relationships. Some firms use network to imply openness, ubiquity, or neutrality when their business model is actually highly controlled. And the most common abuse: providers claiming network effects that are in fact highly elusive.

The word has become squishy. That’s a real problem at this moment in the payments industry. We’re navigating our way through the uncertainty of a significant inflection, and the questions we’re grappling with are network questions. Can a supplier on one platform transact with a buyer on another? Can a stablecoin on one chain be exchanged for a stablecoin on another? Can an enterprise move funds through traditional rails alongside tokenized infrastructure?

What would it take to orchestrate cooperation across the ecosystem? Networks! Real ones.

So let’s unpack what networks really are.

What networks are, and why they exist

A network is a many-to-many arrangement governed by some combination of common rules, common standards, identity signals, and shared technical connectivity. Card networks have all four. Email has standards, identity (DNS), and connectivity, but thin rules — which is why spam is harder to govern than chargeback fraud. Each new participant makes the network more valuable to everyone already in it. You join once and use it many times.

Networks emerge when bilateral coordination becomes too expensive: when it costs more for individual participants to negotiate with each of their counterparties directly than it does for all to agree to use shared infrastructure. Bilateral arrangements just don’t scale. Examples of networks across industries include telephone systems, electrical grids, the internet, freight rail, and of course payment networks.

Economists call this phenomenon cross-side network effects.¹ Each side of the network makes the other side more valuable, and the price structure (which side pays, which side gets subsidized) is what makes the whole thing work or not. The card networks figured this out decades ago. Merchants pay; cardholders get rewards. But scaling a network is genuinely hard. When I was at Glenbrook Partners, we called this the chicken-and-egg problem: which comes first, the merchants or the consumers? You need enough consumers for merchants to retool their checkout for your form of payment. You need enough merchants for consumers to actually buy things with your payment method. This tension forces networks to be responsive to participants on both sides.

What networks actually do

Real networks combine several functions. They set rules. Who can participate? What can they do? What liability will they bear? How will disputes be resolved? They establish identity and trust: who is who, who can be trusted with what. They maintain standards for message formats and data. Their brand signals to participants that a transaction operates under well-understood rules. Finally, they govern settlement: how obligations get fulfilled and how exceptions are resolved. They also set the pricing to govern how value is exchanged amongst the participants.²

My former colleagues at Glenbrook have very precise definitions for payment networks versus payment systems. A payments network sets rules, processing, and brand, sometimes through one organization (card networks) and sometimes distributed across many (the ACH system, for example, where Nacha writes the rules, FedACH and EPN operate the rails, and there is no consumer-facing brand).³

A network is not a rail. Networks define the rules that govern participation, allocation of risk, resolution of disputes, and operations. Rails carry the traffic. Mastercard’s acquisition of Vocalink in 2017 illustrates how easy this distinction is to miss. Mastercard paid $920 million for Vocalink, the UK-based technology company whose software runs Faster Payments in the UK, FAST in Singapore, and (under contract to The Clearing House) RTP in the United States. The press at the time (and probably many people within Mastercard) believed that Mastercard could expand its network franchise to new A2A payment rails. But Vocalink is just the software that real-time payment networks run on. It doesn’t define products, write the rules that govern allocation of risk and reward, or enjoy the healthy margins of the legacy card network.

The same logic applies outside of payments. TCP/IP and the bodies that govern it (ICANN, the IETF) make the internet work across operators and jurisdictions. The GSM Association sets the standards that let a phone provisioned by one carrier roam onto another carrier’s infrastructure anywhere in the world, and governs the settlement of roaming fees between them. Underwriters Laboratories sets safety standards, certifies participants, and licenses a brand that signals compliance.⁴

What makes a network actually hold together

Most things that claim to be networks ultimately fail. Some never reach a level of participation that makes the network truly valuable. Many collapse due to indifference. What distinguishes networks that last from networks that don’t?

Elinor Ostrom won a Nobel Prize for answering this very question.⁵ She studied how groups govern shared resources (fisheries, irrigation systems, common grazing land, forests) and identified design principles that distinguish mutualized arrangements that hold together for decades from arrangements that collapse. Although she was considering agricultural and ecological systems, her principles translate to networks of any kind, including payment and commerce networks. I’ve applied those principles to familiar payments and communications network examples as follows:

1. Clear boundaries. Ostrom: Participation and the network’s scope are clearly defined; outsiders can be excluded. Contemporary reference: Visa and Mastercard member banks are clearly defined, and non-banks need a bank sponsor to join. Nacha specifies that only eligible depository institutions can participate in ACH. For the internet, ICANN-accredited domain registrars are clearly defined.

2. Rules congruent with conditions. Ostrom: The rules of the arrangement fit the actual circumstances of its participants — what they need, what they can do, and what they can afford. Contemporary reference: Card interchange varies by merchant category. ACH operating rules differ from wire rules because they serve very different use cases.

3. Collective choice arrangements. Ostrom: Most participants affected by the rules can participate in modifying them. Contemporary reference: Nacha’s rulemaking process runs through member working groups. ICANN has formal multi-stakeholder governance. The IETF operates on rough consensus. (At one point, when the card networks were bank-owned associations, the member banks each had a voice. Today, not so much.)

4. Monitoring. Ostrom: Monitors are accountable to participants, and participants can observe each other’s conduct. Contemporary reference: Card networks publish chargeback rates to issuers and acquirers. The internet’s routing tables are public. SWIFT gpi gives banks and corporates visibility into their correspondents’ performance.

5. Graduated sanctions. Ostrom: Penalties for rule violations are proportional and escalate with severity and repetition. Contemporary reference: Card networks fine acquirers before terminating them. Nacha’s rules specify warning thresholds before enforcement actions.

6. Conflict resolution mechanisms. Ostrom: Low-cost, accessible processes exist for participants to resolve disputes with each other and with the network. Contemporary reference: Card networks have chargeback processes. ACH has return codes and arbitration procedures. Without these, disputes default to courts, which are too slow and expensive to offer practical recourse.

7. Recognition of rights to organize. Ostrom: External authorities (governments, regulators) recognize the participants’ right to make their own rules within their domain. Contemporary reference: Visa and Mastercard operate under U.S. and EU regulatory frameworks but write their own operating rules. Financial market infrastructures are recognized by central banks.

8. Nested enterprises. Ostrom: For arrangements that span multiple jurisdictions operating at the largest scale, governance is layered. There are local rules, regional rules, and network-wide rules, each governing what it can govern. Contemporary reference: The internet operates this way. So does telecom. So does cross-border payment activity across SWIFT, CLS, regional ACH systems, and national rails.

I believe that this eighth principle is going to matter enormously as commerce infrastructure tries to span traditional financial rails and new tokenized infrastructure across jurisdictions. The coordination problem is hard enough at one level; spanning levels without nested governance is essentially impossible.

Although Ostrom articulated these criteria based on centuries of successful self-governing arrangements, from medieval Spanish irrigation cooperatives to modern fisheries, I think they translate to payment networks. All networks face the same fundamental issues: how to incent and sustain cooperation among participants who may be competitors, engender trust, and eliminate the temptation to free-ride on the contributions of others.

A network is when participants gain durable, portable value from a shared arrangement that multiple operators run under common rules. Visa cardholders can pay any Visa-accepting merchant anywhere in the world, regardless of which of thousands of banks issued the card or which acquired the merchant. An email user on Gmail can send to an email user on Outlook. A mobile subscriber roaming in Tokyo can make calls because GSMA rules govern handoffs between hundreds of carriers. The network’s value compounds across counterparties and across operators. This compounding value is what makes it a network.

Why governance matters

The networks that have lasted (telecom interconnection, the internet, the card networks, ACH, the postal system) share governance structures that give participants sufficient voice and the experience of fairness that makes them remain. As payment infrastructure proliferates, as we begin to contemplate the need to exchange data as well as value, as we wrap our arms around blockchain settlement and AI agent coordination, we tend to focus on technology and standards. We need to focus on governance, too. Today’s Open Standard announcement only underscores this fact.

Calling something a network does not make it one.

I think there is actually a spectrum of network-like arrangements from bilateral integration to public protocol. I’m still noodling on this, so I will return to it in a future article. In the meantime, if you want to discuss a continuum of network concepts, please reach out. - EMc

1. The formal economics of two-sided markets traces to Jean-Charles Rochet and Jean Tirole, “Platform Competition in Two-Sided Markets,” Journal of the European Economic Association (2003), and “Two-Sided Markets: A Progress Report,” RAND Journal of Economics (2006). Tirole received the Nobel in 2014 partly for this work. For a more accessible treatment, see David Evans and Richard Schmalensee, Matchmakers: The New Economics of Multisided Platforms (Harvard Business Review Press, 2016). Carl Shapiro and Hal Varian, Information Rules (Harvard Business School Press, 1999), remains the leading source for standards and lock-in dynamics.

2. In a recent post David Hirsch and I argue that the card networks have transitioned from global infrastructure for value creation to machinery for value allocation: shifting economics from small banks to large ones, small merchants to large ones, appeasing stakeholders in complex, behind-the-scenes negotiations. The implications of that shift are profound.

3. Glenbrook literally wrote the book on payments: Carol Coye Benson, Scott Loftesness, and Russ Jones, Payments Systems in the U.S., Third Edition, Glenbrook Partners. The terminology distinction between a payments system and a payments network is theirs. The fourth edition is coming out later this year. In the meantime, check out their payments education program.

4. The postal system also belongs on this list. The Universal Postal Union (UPU), founded in 1874 and now a UN agency, sets the rules under which national postal authorities exchange mail across borders. A letter mailed in Japan reaches an address in Brazil because the UPU governs the handoffs, terminal dues, and standards. (I still write letters. The fact that they arrive is a small miracle of federated governance. And a source of genuine delight: just yesterday I received a chatty travelogue from Madrid and a local postcard featuring an exhibit I had recommended to a friend. She wrote to thank me for the suggestion. Joy!)

5. Elinor Ostrom, Governing the Commons: The Evolution of Institutions for Collective Action (Cambridge University Press, 1990). Ostrom received the Nobel in 2009. PDF version here.