The Cold Start Problem: How to Start and Scale Network Effects

by Andrew Chen

Credit cards have network effects for the same reasons that marketplaces do: they aggregate consumers, merchants, and other financial institutions as a multi-sided network. Everyone in the network benefits, particularly the consumer, who can go shopping without carrying physical cash. Merchants and banks are happy, too. And the bigger the network gets—meaning more consumers, more places where credit cards are accepted, etc.—the more useful the network. This in turn drives new merchants and consumers to adopt it. Bank of America invented the credit card, and picked Fresno, California, as its first test site. It would just focus on this single city—why? Fresno was chosen as the first test site partly because of its size—with a population around 250,000, it offered the critical mass the bank thought necessary to make a credit card work—and partly because a staggering 45 percent of Fresno’s families did some business with the Bank of America.15