Visa

the middle and easy. And then, of course, as we get into the research, as always, it's

like, Oh, no, big story here. There's always a story. Who got the truth? Is it you? Is

it you? Is it you? Who got the truth now? Is it you? Is it you? Is it you? Sit me down.

Say it straight. Another story on the way. Who got the truth? Welcome to Season 13, Episode

4 of Acquired, the podcast about great technology companies and the stories and playbooks behind

them. I'm Ben Gilbert. I'm David Rosenthal. And we are your hosts. Today, we tell the

story of an absolutely incredible system. You can show up anywhere in the entire world

with a piece of plastic and transact for anything you want in any currency. The merchant doesn't

need to know you or trust you, and you do not need to know or trust the merchant. And

Visa, along with just one other competitor, MasterCard, has tirelessly spent decades stitching

together all the banks, merchants, and the relationships with consumers to make this

possible. Now, this is just the rosy side of the story, and merchants may harbor far

less rosy feelings about Visa, given how much of their profits go to interchange fees. But

the duality of the story is what makes it so interesting to understand. Today, we will

explore how the whole thing came to be, and try to understand the value that the credit

and debit card system creates, compared with how much it captures, and by whom, in what

situations. So here are some astonishing stats on Visa. It is the 11th most valuable company

in the world. It is worth more than any bank in the world, including every bank involved

in creating it. Visa's brand is among the very most trusted in the world, associated

with reliability and security. But that said, if you asked most people what Visa does, they

could not actually articulate it. Visa does not extend credit. They do not issue cards.

They do not work directly with merchants. They do not work directly with consumers.

They are not a bank or a financial institution. They don't ever bear any risk. They are merely

a network, connecting banks to other banks. David, it is insane.

This is such an insane story. I can't believe we're all the way in Season 13, and we haven't

talked about this company yet. But as we will get into, it's always been overlooked and

underrated.

Well, perhaps not underrated the last decade or so. If you listeners want to know every

time an episode drops, you can sign up for email updates at acquired.fm slash email.

Two new fun things. One, emails now include little hints and some teasers about what next

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Come talk about this episode with us after listening at acquired.fm slash slack. And

if you want more from David and I outside of these big, long, main Acquired episodes,

check out ACQ2, our interviews on a second podcast feed. Now, without further ado, this

show is not investment advice. David and I may have investments in the companies we discuss,

and this show is for informational and entertainment purposes only. David Rosenthal, where are

we starting today?

Well, we are starting actually with a big thank you to Dave Stearns, author of what

is undeniably the very best book on Visa and its history, Electronic Value Exchange. And

we owe a thank you to Dave both for writing the book and for talking to us as we researched

and helping us sift through everything as we're preparing here.

Fellow Seattleite and the book, which is so wonderfully esoterically named Electronic

Value Exchange, was his, I think, PhD thesis that they sort of turned into a book.

Correct.

All right. Take us back in time.

So D. Hawk, the founder of Visa, who we will talk a lot about as we go along here, he told

this great story of how after his time at Visa in his kind of older age, he would start

his speaking engagements with a little thought exercise for the audience. He would get up

on stage, he'd hold up his Visa card, and he would ask, how many of you recognize this?

And of course, every single hand in the room would go up, as I assume all of yours listening

are going up now, too. Then he would say, okay, now how many of you can tell me who

owns this company? And every single hand in the room would always go down. And then he

would say, how did this company start? No hands. Who runs it and who governs it? No

hands. Where is it headquartered? No hands. It's just wild, as we were saying in the intro,

how important this company is. And yet still to this day, I think, you know, maybe a few

more people than in D's time know the answer to these questions, but not many.

Yeah, it's one of these things, too. It's like one of the only essential pieces of financial

infrastructure in the United States that has not run out of New York.

So our task today is to tackle these questions. And we start where some of you I suspect know,

but the vast majority of you I also suspect don't. We start in 1958 in Fresno, California,

with The Drop.

The Drop. This is the name of the title in this fantastic book, A Piece of the Action,

How the Middle Class Joined the Money Class. And it's chapter one, The Drop, 1958. The

Drop has become like, if you say The Drop to someone in the fintech industry, they're

like, oh, September 1958, Fresno.

Yep. And the rest of the world has no idea.

Yep.

All right. So what happened? Well, the then largest bank in America, the San Francisco-based

Bank of America, which formerly was called the Bank of Italy, both of which were total

misnomers because it was actually more accurately the Bank of California. It was illegal to

operate banks across multiple states back then, as we will discuss.

And the reason it was named Bank of Italy was it was started by an Italian immigrant

who wanted to create something for the underbanked Italians in his California community.

Yeah, mostly farmers and merchants in San Francisco. It really started as like the Bank

of the Little Guy. So Bank of America decides that they are going to mail out little rectangular

pieces of plastic to every single one of their 65,000 customers in the city of Fresno, completely

unsolicited.

Now, a couple of things about this. One, it's wild. I think the Fresno population at this

point in time was like maybe 200,000, 250,000 people. So like a huge portion of the city

of Fresno banked with Bank of America. And that was true for all of California at the

time. Two, they just send these things out. Obviously, these are credit cards. People

don't know what they are. They have no idea what to use them. Mass chaos ensues.

Well, and certainly nobody asked for them. There's this great quote, again, from a piece

of the action that describes it and says, there had been no outward yearning among the

residents of Fresno for such a device, nor even the dimmest awareness that such a thing

was in the works. It simply arrived one day with no advance warning as if it had dropped

out of the sky.

All right. So to explain how we got here, we need to spend a few more minutes on Bank

of America's history and the history of banking and payment industries in the U.S. more broadly.

So like we said, B of A was the biggest bank in America in the 1950s, but it was not like

all the other big banks at the time. It was a consumer bank. The other large and influential

banks in America back then were like the J.P. Morgans. They were white shoe corporate banks

based in New York. We talked about this a lot in the Nike episode. It was illegal for

banks to operate across state lines until much, much later in history.

So for banks back then, the only way that you could actually get big for just about

everybody else in the industry was to go the corporate route and to go the investment

banking route, because you could service very large corporations that obviously were large

themselves, would generate lots of deposits, lots of lending activity. The investment banking

activities around that were obviously very lucrative. That's how the J.P. Morgans, the

Morgan Stanleys, et cetera, the world came to be.

For the most part, consumer banks were kind of backwater, small. There was no way to aggregate

enough customers that you could get big enough.

Well, and in most states, they would have restrictions on the number of branches that

banks could actually have. In some states, I think Texas was one of them, you literally

could only have one branch. Other states would limit them as something like three. Other

states would limit them and say none outside the city. So you were sort of a bank of a

city. You could almost think about these more as credit unions than these sort of big banks

that we think about today.

California happened to be unique in that you could actually have branches all over the

state, and California happened to have quite a large population. So it was kind of the

only place you could pull off a large consumer bank.

Yes, exactly. California was already the second biggest state in the nation at that time behind

New York, but the New York banking industry was super fragmented because Bank of America,

starting as Bank of Italy with all these immigrants, had built up a consumer base.

They really were unique. So the business of banking is, well, banking. You take deposits,

you make loans, you make your money on the loans. B of A was doing tons and tons and

tons of small, little, and disparate consumer loans and lending. So obviously, mortgages

and car loans, like those still exist today, but they were doing like washing machine loans.

They were doing like buy now, pay later, but instead of on the website, you would go to

your local bank branch, you would schedule time, you would sit down with the bank manager,

and he would authorize you to go spend $150 at some merchant and make you a loan that you would

come pay back over the next few months in installments. And every single time that you

wanted to buy something now and pay for it later, you would repeat this very physical,

one-off manual process.

Yeah. And for specific items, to like go buy a refrigerator.

Wild.

It was just wild to imagine today. So you can see why for a bank like Bank of America that

is doing this at such large scale, the idea of a consumer credit card, well, it's pretty

awesome because you can take all of these disparate lending programs, consolidate it

into just one card, cut out a ton of overhead fees and make it way more efficient. So this

is what they are launching first in Fresno as the pilot market, and they call it the

Bank AmeriCard.

Beautiful name.

Beautiful name. And it would survive for quite a long time.

Now, this wasn't exactly a new idea on the part of Bank of America. Charge cards and

credit cards have been around for decades. What was new was this was the first time that

a bank had entered this market at scale. So let's talk about the history. Historically

in the US, transferring money was actually not that easy. You had two options. You could

use cash or you could use checks. And checks worked, but they also had a bunch of problems.

One, until the creation of the Federal Reserve in the 1910s, the parties cashing the check,

receiving the check, didn't actually receive the full face value of the check because there

was a bunch of work and like mailing stuff around, traveling around the country that

had to be done. And that was taken as a discount out of the check.

And this is super important. This thing that we have today, interchange rates on credit

cards, that was happening with checks too. There was really a lot of expense and risk

in processing checks when they first got started. And like, of course you would take a discount

out of the fact that you're taking risk and you're spending money to go and make sure

that this check that someone handed you eventually turned into dollars that you could have in

your possession. Totally. So problem number one, you didn't

get all the money. Right.

Problem number two, also a big problem. It took a really long time. Imagine, you know,

we're talking like the 1800s, early 1900s. This stuff was on the Pony Express, you know,

pieces of paper going around a really, really big country. Not ideal.

Yeah. And until ACH, where the banks would sort of all meet once a day and decide, okay,

how much do I owe you? How much do you owe me? In aggregate, okay, let's just settle

one transaction and then we'll figure out all of our internal accounting ourselves.

They were literally like check by check and saying, okay, I have this check. So you owe

me $6.08. Okay, next check. Oh, I owe you $4.20. And it was this crazy system of individual

couriers bringing checks from the person who gave it to the merchant for the merchant to

go and track down the money and bring the money back.

Totally. And spoiler alert, ACH doesn't get developed in the U.S. until the 1970s.

Wow. Humans, though, are quite ingenious creatures at solving their problems, particularly when

motivated by money. So there is sort of an obvious solution to this for merchants and

their sort of usual regular customers. And that is credit accounts, charge accounts.

Rather than giving me money or a check, let me just keep tabs on a ledger of what you bought,

what the value is, I'll tab it all up. And then at the end of the month, you'll come give me a

check or cash for it. I remember even me growing up in the 1980s, we had this at our local gas

station near our house. Really? We had a credit account. And it was just like, whenever any of

our family would go to this gas station, we would get the gas. And then we'd go inside and be like,

oh, we have an account here. And they just write down what it was. And then at the end of the

month, I assume my dad would go give them some money, which saves on operations for everyone.

It's oh, great. Now we only need to move money once we move it at the end of the month. And I

trust you because I've seen you lots. So from charge accounts at individual gas stations or

individual branches of a grocery store chain or something like that, it's not a leap to think

the next stage of evolution would be, oh, a card or account that would work at all the branches

of a given brand. So like the gas stations get into this in a big way. Standard Oil gets into

this in a big way. Lots of standard stations across the country. You can have an account

that works at all standard stations. Yep. In 1939, Standard Oil of Indiana

sent 250,000 unsolicited cards directly to all of their customers.

Yeah. Making the Fresno drop look like a drop in the bucket, shall we say?

Well, and interestingly, this is 20 years before. But again, this is not a bank. This is a single

merchant mailing it out to all of their customers exclusively for use at their facility.

Yep. So there was that phase. Then pretty quickly in a given local area,

some of the retailers would get together and be like, you know, we compete with each other,

but it sucks running these charge account programs on our own. We could collaborate and have a

standardized charge account system that we could share.

And just literally to simplify the back office as the first value proposition here.

Yep. And for consumers, that's also pretty awesome because do you really want to carry

around 57 different charge cards in your wallet or would you rather have one that would be like,

you know, your visa to everywhere you want to be? Yes. And not to mention on top of this,

there is the huge benefit of a shared credit history. Now, all these merchants who were

losing money on people coming and getting a loan from them in the form of, I'm going to buy some

goods, I'll pay you back later. But it turns out they had run up a tab all over town and

weren't paying their bills anywhere. Now with this idea of a shared card, you actually can

have a shared notion of who a consumer is across locations and across different retailers.

Yep. So this comes to be kind of post depression in the 1930s, 1940s in the U.S.

And this really is starting to sound a lot like visa, except as you point out, Ben,

there is a problem here. As the size of any given network of retailers that are

collaborating on this grows, so does the intensity of competition within that network.

So once you get to a certain scale, nobody's really incentivized to keep making this work.

A, because now you're enabling people to shop all your competitors. But also B, once you get past,

I don't know, a couple hundred, a thousand participants here, like our individual merchants

equipped to manage a network like this. No, they don't have the resources to do this.

Right. So you have to spin up some kind of like shared organization that all the merchants are

pulling their capital into in order to run the network on behalf of all of the merchants. It

gets messy. Or there could be an independent third party for profit network that does this.

And this is when Diners Club and American Express arrive on the scene. So Diners Club was first,

and people might know and have heard of Diners Club. It still exists today. It's like a sub-brand

of Discover. Totally. There's a very famous legendary origin story behind Diners Club,

and it goes like this. In 1949, you know, post-World War II, economic prosperity,

beginning of the Mad Men years in New York and Manhattan, a New York businessman named

Frank McNamara is hosting a lavish business dinner in downtown. Halfway through the dinner,

he realizes that he forgot his wallet at home. He does not have cash to pay for the dinner.

So he excuses himself. He goes to the payphone. He calls his wife at home on Long Island.

She speeds into the city with enough cash in time to pay the bill for the dinner. And,

you know, face is saved. His reputation as an erudite businessman is preserved.

And then afterwards, he's talking to his wife. He's like, oh, there's got to be a better way

to do this. There really should be a business person focused charge card network that would

work at all the restaurants in Manhattan where business people host dinners. So nobody ever

needs to bring their cash. And, you know, you could just imagine that, like, we're all in this

club of diners where anywhere we dine, we can stand up. We can authorize the bill. We can leave.

We can pay no dollars out of our pocket that moment. And we get one nice statement at the

end of the month that, importantly, we do need to pay in full. We cannot roll it over into a loan.

We must pay it. But that's nice because all of my business transactions are on one single

statement. It's easy for my expense reports. It's easy for me to not have to carry a wallet around.

And, of course, I get to look super awesome in front of all of my colleagues.

I think there are two really important points here. One, you said I pay it. I don't pay it.

My company pays it. You know, I don't care. Two, the most important point, I get to look super

awesome in front of all my colleagues and customers and people that I'm trying to impress.

I don't need to bring cash. They know me here. I'm good for it.

And just to start tracking a certain number here, when we were talking about

checks earlier that were getting a discount, and even in this era of early Diner's Club,

early American Express, we're talking about a five to seven percent discount of what actually

got remitted ultimately to the restaurant or the retailer versus what the bill was

originally that the consumer authorized. So all that's a very nice story,

except it's completely fabricated. None of that actually happened, although stories like that

did play out, I'm sure, on a nightly basis in Manhattan. The reality is Frank just thought

this would be a good business idea, and he was right. You know, you see this all the time with

networks, network effect businesses. This was the right little node of the network to start with.

This was like Harvard and Facebook because restaurants in Manhattan, they're competitive

with one another, but it's not exclusive competition. This isn't JC Penney's versus

Macy's. No restauranteur in Manhattan, no matter how good they are, really honestly believes that

a majority of their customers are only going to dine at their restaurant. Great point. So there's

some incentivized sharing. It's almost like the reason to enter into a bundle for your most

extreme fans, which are only going to be like the top five percent of your customers. Sure,

you want some kind of exclusive relationship and you want to maximize the dollar value you can get

out of them, but for your casual fans who like your business but aren't necessarily exclusively

going to use your business, you should figure out some kind of bundling system that makes you work

with complements of yours so that people can shop you and everything like you with the easiest way

possible, and you can still make some money on everybody. You're enabling people to spend money

in your restaurant easier and more frequently, and you don't really care that they also go to

restaurants because they're going to do that anyway. It's crazy. Like you said, Diner's Club

is able to charge restaurants and other merchants. They expand to hotels, airlines, anything that a

business person traveler would need. Seven percent of the gross bill. Merchants complain about three

percent today. Seven percent. And these are restaurants. That's crazy. Eventually, they have

so much power in what they're doing. This product is so good. They also add a fee for the card

holders, and it's companies. It's not individual people paying this fee. It's the companies paying

this fee. Of course, they're happy to pay it. It enables business. Amazing. Brilliant idea back in

the day. And we should say this is pricing power in action to have those very high fees. It's also

a necessity. The cost of running these networks in a previous technology generation was super high,

and it was not at full scale yet. So it's just operating with a bunch of restaurants and

retailers in New York City. So you actually need a lot of people, both because there's not a lot of

technology, but you need a lot of people even though there aren't actually a lot of merchants.

And so it turns out there's just a lot of cost in the system to run it. And Diner's Club would

ultimately fade, although it grows to over a million members. It goes national. It gets acquired

by Citibank, then sold to Discover in 2008. As we said, it's still a brand today. But it's basically

impossible to create an independent from the ground up network of this at the time because

you were just talking about the operational costs of running this thing. Think about the merchant

and customer acquisition costs. Nobody knew what Diner's Club was. They have to now go canvas the

entire island of Manhattan and ultimately the whole country and world and sign up all of these

merchants and go sign up all of these companies to get their employees to use it. That is a very

expensive sales proposition. Whereas from this point on, basically everybody else that comes

into the industry already has established relationship sales channels into one or both

sides of the market, which of course brings us to the brand you're all probably thinking about here,

American Express. Which is the Diner's Club of today. It's the favored card by businesses.

It is the card that is most used for travel and entertainment and meals.

Yep. And so as you might remember from our Berkshire Hathaway series a couple years ago,

Amex at this point in time was primarily a traveler's checks business.

That's how they started, right?

Well, actually, no. They started in 1850. This is amazing. Do you know who started

American Express? This is a version of D-Hawk holding up the visa card.

Ooh, no, I don't.

I did not either until doing research for this episode. It was started by a group of people,

two of the most prominent among whom were...

Wells and Fargo.

Henry Wells and William Fargo.

Amazing.

Totally amazing. Man, 1850, the Wild West, different time.

It was something like they started American Express, but then had a conflict. And so they

left and they started Wells Fargo after that.

Yeah, something like that. The infrastructure of America was getting built out. So American

Express, it's called American Express, it was an express mail company. It was like the

Pony Express. That was how they moved stuff around. And I think Wells and Fargo were doing

banking. And so obviously banks, as we're talking about, you need to move stuff around

the country. It was like a related business.

It's amazing. I think it's fascinating that Wells Fargo came after Amex. You think Wells

Fargo as this old-timey foundation of America, American Express is even older than that.

So Amex, by this point in time, had become a traveler's checks, primarily. That was their

primary business. As we talked about on the Berkshire episode, that was a freaking awesome

business. Partially because traveler's checks, they made good money. You would buy a $100

traveler's check and pay Amex a little fee or whatever. But the float and the breakage,

there's traveler's checks out there today that are 50, 100 years old that have never

been cashed. And Amex has just been sitting on that cash for decades, investing it. What

an amazing business.

Okay. So Amex observes Diners Club and says, Hey, we need to get into this. And we actually

have an ability to get into this fast.

And they actually try to buy Diners Club, but they can't get their own price. And so

they're like, Well, we don't need to pay you a lot of money because we can just do

this too. And like I was just saying, not only can we do it too, we can do it better

than you because we're American Express. We have relationships with companies. We

have relationships with restaurants. We have relationships with hotels. We don't need

you Diners Club. So just within like a year or maybe even two from when Amex launches

their charge card, you know, business traveler program, they sign up 700,000 members, which

is almost as much as Diners Club had signed up, you know, many years of working on it.

And importantly, here, the thing you're seeing is this is the first time a real financial

company is coming into the industry. All of the we know you're good for itness was

happening directly from retailers before or by organizations that represented retailers

and restaurants. And so now you sort of have not a bank, but a bank like entity that is

starting to say, Oh, this could be an interesting business.

So this brings us right back to Fresno in 1958, because the timelines match up exactly.

This is crazy. Amex launched their charge card program in 1958. B of A sees what's

happening. They, of course, had seen everything else going on in the industry before they

understand the transformative power that this can have for their scaled consumer banking

business in California. And they're like, OK, the time is right. Let's do credit cards.

Let's go to Fresno. But hopefully, as we painted the picture, their motivation and

Diners Club and Amex and even the merchants and retailers motivations are very different.

B of A wants two things out of this. One, like we were saying earlier, they want to

streamline and simplify all their wildly diverse lending programs. This is going to be huge

operational savings for the bank if they can pull this off. Two, though, the bigger opportunity

for B of A is what can this do for our banking business itself? Because remember, how do

banks make money? They make money on loans. And this is going to enable so much more effective

loan volume to flow through our system that we can make money on.

So this is where B of A, informed by their previous business model of lending to consumers,

really paves the path of what credit cards would become today. Often in the past, before the Bank

AmeriCard, what would happen is you'd have this charge card, not a credit card, and the bill would

arrive at the end of the month and then you would pay it. The innovation baked into the Bank AmeriCard

is they say, well, after the 30 days, you can get your statement, you can pay it in full, or

you can roll it into a loan. And we love loans. We would be happy to extend loans to our customers.

We can learn a lot about them. We can make good amount of money on that interest. And so the

modern credit card is born. And it was already happening at B of A. They were doing these loans.

This wasn't actually like new behavior. It was just a way easier, way more streamlined on-ramp

into this consumer lending that turbocharged it. This product is the combination of three things,

the charge card that had been happening over in Diners Club, Amex, the gas stations, the

retailer land. Then the second pillar is this consumer lending. And the third thing is it is

now from a real and proper bank that you already have your primary financial relationship with,

not from some industry association or hodgepodge of retailers, but now this is issued by your bank.

The big takeaway for Bank AmeriCard is it really bundled two different things together.

One was convenience and the other is credit. And there's one more really, really important

sub point here to what this loan is. And it relates to the banks and why this is so powerful

for B of A and for all banks. Think back to the old way that B of A was doing this.

A California homeowner wants to go buy a new refrigerator. They walk into a B of A,

talk about it with the lending officer, blah, blah, blah, a bunch of operational costs. Who

cares about that? At the end of the process, B of A gives them the money. The money is now out of B

of A's hands. It's out the door. The consumer then goes to the merchant and gives the merchant the

money and buys the refrigerator. What's happening now with credit cards is actually a little

different. The consumer goes to the store, the consumer buys the refrigerator with the credit

card. No money has left B of A's hands yet. They get to keep the money. Right. A transaction has

been authorized, but yes, they get to keep the money. And because we're talking about California

here, there is a very high likelihood chance. And I think at the beginning, I suspect a 100% chance

that the merchant also banks with B of A. So that money is never leaving Bank of America's hands,

which frees up more capital, which frees up flow, which is just like

the B of A management must have been besides themselves with glee about this.

Well, in theory, if they managed to put any sort of financial controls or proper risk underwriting

on this whole thing, but it turns out, David, as I'm sure you are about to tell us.

It's exactly where we're going.

When you mail 65,000 cards indiscriminately with the same credit limit to every single customer

and say, have at it guys. And this is a brand new consumer behavior that they've heard about,

or they might've witnessed in one form or another, but now they have a bona fide charge plus credit

card sitting in their hands. You're going to lose a lot of money at first.

Yeah. Because there's another more pernicious way that this type of lending is different than the

previous type of lending that B of A was doing. It's unsecured. If you give a customer a loan to

go buy the refrigerator, you don't want to go repossess the refrigerator, but push comes to

shove, you can go repossess the refrigerator. This whole consumer credit card land is unsecured

lending. So you probably shouldn't apply the assumptions about your loss ratios from secured

lending to unsecured lending, but that is exactly what happened. And this all comes back to why

it really had to be bank of America to start this program because they do this, they do the drop in

Fresno, 65,000 unsolicited cards go out to unsuspecting consumers. Fraud is out of control.

$20 million of fraud within the first pilot program, 22% of the credit that they issued

to that initial Fresno cohort ends up being default or delinquent, which I think is like

five or six times what their delinquency rate was before on traditional lending.

Yeah, it is pretty crazy. So it's worth pointing out, we're talking a lot about credit and debt

at this point in time. And now in 2023, some of these kind of sound like bad words. And frankly,

it's because of the situation that the society has sort of like push Americans to, but it was

very different time back when credit cards were first getting started and when this sort of

practice of installment loans was extremely common in the pre-card era. So I want to read, there's a

great passage from a piece of the action that I mentioned earlier that I just want to read here.

Despite the denunciations, despite the free floating anxiety, Americans have always borrowed

money to buy things. If not from a bank, then from somebody, from a finance company or a credit union

or a department store or a loan shark for that matter. There isn't another Western country that

has relied so heavily on consumer credit. Between 1958 and 1990, there was never a year where the

amount of outstanding consumer debt wasn't higher than the year before. Years later, a Bank of

America executive could look back on his lifetime in the credit card industry and say proudly,

consumer credit built this country. Whatever one's feelings about personal debt is difficult

to disagree with this assertion. So interestingly, what's basically happening here is people are

using debt not because of this bleak, horrible time that they're in. It's actually because of

their optimism. They believe that the future is brighter than the present and so they're fine

taking on debt. And that is sort of what has sort of led us to today, where because the growth of

the American economy and the global economy has been so strong, people have always generally been

fine, or at least we exist in a system that teaches you you should kind of be fine betting

that the future is going to be better than today. Such a good point. As long as growth is happening

in an economy, a society, industry, whatever, you should absolutely use capital to fuel into that

growth. Yep. And that may not be true on an individual basis, but it is absolutely true on a

societal basis. Yep. So back to what I was saying about why B of A is so important. B of A can

absorb this loss. No other consumer bank at the time, if they had seen $20 million of losses in

like a set of months, they would have pulled the ripcord immediately. B of A, though, they can

absorb this loss, no problem. And they know if we can make this work, this is going to transform

our business. So rather than pulling the ripcord, they expand. They roll it out quickly across

the whole rest of California. Over the next year, all within the first year, they sign up 20,000

merchants in California and get this. Do you know how many cardholders they sign up in that first

year? No. 2 million California cardholders signed up using the card in the first year. It took Diners

Club years to get to a million. Amex was so proud in the first year or two, they get to 700,000.

B of A instantly, at scale, is the largest charge card, credit card program, certainly in America,

I suspect in the world. And that's one year and one state. This is like meta launching threads

or Microsoft launching teams. You can sort of sit back for a while and watch the innovation and

figure out what the very best product is that people want. And then you can go ram it through

your distribution channels when you invent one of your own. And it's even more than that. As we

said, this really was a big innovation. It wasn't just that they copied Amex and Diners Club or

anything else. They were adding credit to this. This was a huge innovation. So by 1961, year three

of the program, they're able to get fraud under control enough that the whole program is profitable.

But they keep that under their hats. Yes. They don't want anybody else to know about this.

So there's been all these newspaper articles about all this money that B of A is losing.

So many banks that had been thinking about launching a similar program abandoned it because

they were like, oh, man, we thought this was going to work, but clearly it's not working for B of A.

So people were shutting down their efforts. There was rumors that another bank was going to launch

in L.A., in San Francisco. And B of A had actually rushed theirs to market to go be sooner than these

other banks that actually never ended up launching because the market perception was that it was

such a gigantic failure. Here's a crazy stat. From 1960 to 1966. So this whole era is actually

a profitable era for B of A, but no one else knows it. There were only 10 new credit cards

introduced in the entire United States because they did such a good job keeping what became

a cash gusher for them quiet. But secret comes out in 1966. And from 1966 to 1968, just two years,

approximately 440 credit cards were introduced by banks large and small throughout the country.

Yes. And it is specifically 1966 when the secret gets out because phase two of Bank of America's

grandmaster plan here gets unveiled, which is maybe worth a quick setup. As we said,

this was transformative for their business in California, but they're the biggest bank in

and they have been itching for any kind of way to expand to truly be the Bank of America. Like,

why the hell did they change the name to Bank of America? It's not because they wanted to be

the Bank of California. So they're like, maybe this is our path. And California is only like

10% of the U.S. population. In 1966, they create the Bank Americard Service Organization

with the express purpose of licensing out the Bank Americard program and network to banks across

the country, across all 50 states. And this is the seed of Visa. But listeners, before we talk

about how the Bank Americard Licensing Association morphs into Visa, now is the perfect time to tell

you about one of our favorite companies, Blinkist and their new parent company, Go One, where David

and I are proud angel investors. Yes, Blinkist, as you know, takes books and condenses them into

the most important points so you can read or listen to the summaries. It's great if your job,

unlike ours, isn't just to sit around and read books all day, but you still want the amazing

insights. So as Blinkist has been doing throughout the season, they are creating blinks of our

research books for each episode and making them available to you all for free. You can find our

material for this episode, including Dave's awesome book and D. Hawk's memoir, one for many

at Blinkist.com slash Visa. Yep. And they have also created something very cool that I never

thought anyone would ask for from us. They created a page that represents David and my bookshelves.

So if you want to read our favorite books broadly, having nothing to do with this episode,

but like literally what's behind me on that bookshelf that I feel are kind of our trophies

from all the episodes that we have researched, you can go to Blinkist.com slash acquired and look

at Ben and David's bookshelf and you can get those for free. So beyond that, Blinkist is always giving

acquired listeners an exclusive 50% discount on all their premium content, which is really great

stuff. All these summaries and especially the audio summaries of really important books.

Yeah. So many of you may be wondering why is Blinkist giving such an awesome deal to the

acquired community? I don't say that tongue in cheek. It really is. The reason is that GoOne,

where we're investors in which acquired them this year, is an amazing corporate learning and

development content platform that if you're a L&D manager, a team lead, or a founder, which obviously

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So this is HR trainings, specific skillset development classes, everything you need

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that you should definitely work with if you are not already. Yep. Our huge thanks to Blinkist

and GoOne. Go take advantage of all this free content by clicking the link in the show notes.

Okay, David. So how do we get to Visa? You have been telling me about the BankAmericard from Bank

of America, and I opened this show saying Visa's not a bank, and Visa doesn't have direct

relationships. It's this big indirect thing where they work with other banks. This is a big mismatch.

This story is so wild because this first chapter that we just told, there's only one entity in

the world that could have done this, Bank of America. In this second chapter, there is also

only one person in the world that could have taken BankAmericard and turned it into Visa,

and that is DHOC. So here we are in 1966. B of A now starts going around to all the other

consumer banks in other states and selling them on joining the network as BankAmericard

licensees. And the deal is that you pay B of A a $25,000 franchise fee to get your franchise of

the BankAmericard. This is like a Wendy's or something. Plus then you pay them a percentage

of the gross transaction revenues. It literally is like a McDonald's. This is wild. I mean,

I get the executives must have just been throwing party after party because A, this whole thing

turbocharged their own business. B, now they're like, oh, we're going to make all the other

consumer banks in the country essentially into like serfs on our kingdom here.

Right. And one of the assumptions they made was correct, and the other one was too hubris.

The first assumption is a good business model decision, which is, okay, we've now created this

distributed asset, which is all these customers with our card that want to use our card at lots

of merchants. People still weren't using credit cards the way we do today, just treating it like

cash and using it for coffees and little things here and there. It was still sort of treated as

this is the card for big purchases, some of which I may want to finance and decide later.

It was also an intensely private thing, kind of taboo thing, right? Because when you were using

a credit card in these days, you were implicitly saying, I'm using debt to buy this transaction.

And so you didn't want other people to necessarily know that.

Right. It's a bit odd, but consumers clearly did want to use this thing for some subset of

the purposes that they did today. And so Bank of America is kind of leaning into it and saying,

we've got this asset, surely we can leverage that for great gain. But the specific implementation

of it was a bad assumption where they said the way that we can take advantage of the fact that

now all these consumers have the card and all these merchants out there and accept the card

is this weird franchising thing. Well, the bad assumption was that

other banks would consent to basically being serfs in their kingdom.

Yes. But at the outset,