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

many of you are, you should absolutely go check out. GoOne is the one subscription, one billing,

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

across your whole company. They're the leader in the space. They're just an awesome company

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,

these other banks see the power and now that B of A is telling them of what this has done for B of A

and they're like, wow, this is already the biggest charge card credit network in America, if not the

world, we can now bring this to our state. And I think B of A offers exclusivity to banks in geographic

areas too to start. That eventually, of course, gets dropped, but it does tempt a lot of people.

So within two years, by 1968, a couple hundred banks have signed up. There are 6 million card

holders across the country and beyond the country. Actually, Barclays Bank in the UK

had signed up to be a franchisee of Bank of America back in the day.

Whoa, what year is this? This is like in the mid 60s.

Whoa, that's way earlier than I realized for international expansion.

Yeah, it was already out of the US because the system is a great system. But as this expands

beyond B of A, it becomes clear that a bunch of stuff that were either just assumptions or ways

of business within B of A or things they didn't have to worry about ain't going to scale to

hundreds of banks, all 50 states, multiple countries around the world. One of the examples

I alluded to this earlier, in California, in the Bank of America owned and operated Bank

AmeriCard system, usually all parties in the transaction were Bank of America customers.

So there wasn't really any difference between the bank of the consumer, the cardholder,

and the bank of the merchant. And B of A controlled both sides. Once they expand the

network and let other banks in, all of a sudden, that's almost never the case.

Right. B of A realized the cardinal sin of many entrepreneurs, which is my particular situation

is actually not a pattern of several other customers. It's actually an end of one.

I'm idiosyncratic. So when I'm just making the same assumptions about all the future customers

about serving my own needs, that's actually a false assumption.

Yep. So B of A has no distinction between what ultimately now in the Visa network and MasterCard

and others is called issuing banks. These are the banks that give the cards to the customers

and merchant banks that are the banks of the merchants. It's all just one for B of A.

Yes. And these merchant banks, we'll come back to some of this terminology later,

has gone on to become the acquiring bank because this is the

bank that acquires the merchant relationship as a customer.

So now in this new world where there's different banks on each side of the transaction,

this creates the need for a network and operational services to settle those transactions.

This comes to be known as interchange and interchange fees are obviously what Visa does today.

Yeah. And this is the first moment that we start to see a departure

from what American Express was doing. The original BankAmericard was very similar to

American Express and Diners Club, where they were closed loop systems. It was a bank that issued a

card to be used at a payment terminal that all stayed within the bank's closed loop network.

And now with this new BankAmericard licensee system that they're starting to develop here

that would become Visa, it's an open loop system. It's, hey, there's one bank on one side who owns

the customer, who owns the cardholder, and one bank on another side. And we're going to enable

those systems to talk to each other, but they're not the same party. This is open loop now.

So this interchange thing, all of the other banks that are now signing up to become

B of A franchisees for the BankAmericard system, they come to B of A and they're like,

hey, this whole thing is a problem. Bank of America isn't providing any service to do this.

There are also all these costs that these other banks are incurring because they need to figure

out this interchange thing. Oh, so the problem they're experiencing is like, hey, Bank of America,

how did you build all the technology to do this? And Bank of America's response is like,

we didn't have that problem because in our corner of the world, we're the bank on both sides.

Right. We're closed loop. So I don't know. You guys figure it out. This sounds like a you problem,

not a me problem. I see. So when these banks are coming to Bank of America,

they're not actually complaining about price in any way. They're literally just saying,

how do you solve this problem? No, I don't think price was an issue. I think it was this and like

a set of other things along these lines where the franchisees were like, hey, we signed up for a

franchise. You operate the whole system, right? And Bank of America was like, no, no, no,

we sold you a marketing system. I see. So it's like, you know, you buy McDonald's franchise

and they ship you some golden arches and they're like, good luck figuring out how to make cheese

burgers. That is exactly right. Okay. Now, to be somewhat fair to Bank of America here,

the golden arches are worth a lot. The Bank of America card, three colored bands, the blue,

white, and gold are also worth an incredible amount here. And of course, the ability to

actually be on the network that sends those payments, right? Yes, of course. The network

has incredible value, but back to the brand and the marketing. So as all these other banks are

considering whether to become franchisees of Bank of America card, and some of them are like, no,

I'm not going to do that. Some of the ones who do become franchisees, well, really all the ones who

become franchisees become very frustrated. Of course, people are going to start competing

systems. And right in this time, over this kind of year or two period, a bunch of local geographical

competing credit card systems by various bank consortiums come together. Those pretty quickly

all merge into a national association called Interbank, which, spoiler alert, Interbank is

MasterCard. But at this point in time, Interbank is a Franken network. There's no common brand,

mark, visual identity for all of these cards. So now you're trying to make this payments network

operate. How do you as a consumer know that my card that I got from XYZ, you know, I don't know,

Bank of Illinois, that's part of the Interbank network, supposedly. Now I go somewhere, I've

that card, it looks like one thing. I'm looking at this store, at this restaurant or whatever,

they've got a thing on the door that says they take something that looks totally different.

I don't know that this is going to work, even though it actually might work because it's part

of the MasterCard Interbank network. I see. It's like when I'm trying to figure out, like,

I have to keep pulling up Alaska Airlines partner network to figure out what international airline

I should fly since I pay no attention to anything other than, well, it's Alaska, you know,

is it one world? I don't, I still don't even know what the one world. Yeah. Yeah. And, you know,

that's today with the internet, you can do that. Back in the 1960s, there's literally no way for a

prospective customer of a merchant to know by looking at their card and looking at the sign

on the door, if that card is going to be accepted, unless they all have the same brand and mark.

It's so funny. This is the original problem of Diners Club, too, because Diners Club, they,

I think it was Diners Club that originally shipped a little folded thing that fit in your wallet with

the card. That was a little booklet that was a list of all the merchants. So you could literally

know if the card would be accepted at the restaurant you're at. That's right. But now,

like the scale that these networks are starting to be at, like, obviously, that's not tenable.

So back to the mark, what these franchisees are buying from Bank of America and what Bank of

America is like, hey, this is what we're selling you. It has value. It's access to the network,

but the network is homogenous. It all is the Bank of America name, brand, and importantly,

mark. So what are the colors of Visa? I'm sure everybody listening probably around the world

knows this. It's blue, white, and gold. Which is the hills of California, right?

There's this amazing origin story to this. It's super reminiscent to the Windows XP Bliss wallpaper,

you know, that is the most viewed photo in the world. You know, the hills. It's actually in

Sonoma, California. Huh. So the story is the B of A team, when they were first rolling out the

program, the guy tasked with card design, he lived in Pleasanton, California, in the East Bay,

the San Francisco Bay Area, where, you know, it's pleasant. And one fine spring morning,

he looks out his back door at the local hillside. The sky is this beautiful blue with white puffy

clouds, very much like the Windows XP Bliss background. And the hill is covered with

beautiful golden colored California poppies in bloom. He rushes back inside. He paints an

abstracted version of his beautiful hillside. Voila, the three bands, blue, white, gold,

Bank AmeriCard, Visa. And this would go on to be incredibly valuable to plaster on your storefront

and say, we accept Bank AmeriCard here. And that just means your sales are going to go up. Friction

to purchase goods goes down. Customers are excited to spend with you because their shiny, cool thing

that they like spending money on works there. And it's good for your business to be able to accept

it. It's so wild that today, you know, we would think, oh, what's a moat? What's a competitive

advantage? What's durable? You know, you need technology advantage. You know, even how we

think of brand, all the companies we've covered on the show, it's so much more than this, but it was

so simple back in the day. It was just, could you create a two-sided network where there was a common

signal of acceptance? Yep. So from B of A's perspective, they're like, yeah, we did all

the work. We created this. This is what you are franchising from us. Take it or leave it.

From the franchisee's perspective, as we were talking about, they're like, you gave us a

marketing program. How do we run this damn thing? Okay. So they got this marketing program. How did

it literally work? Because this is pre-magnetic stripe. Yeah. There's no technology here. I mean,

this is literally like, cool. I've become a Bank of America licensee. What transactions does that

let me do? And how does that happen? So the banks, they have to resort all the way back to how

checks worked back in like the, you know, 1800s, early 1900s in the U.S. where it was all

decentralized. The bank would go sign up a merchant in their local town. Yep. And the banks would take

the sales drafts from their merchants that the merchants had brought to them. And then they would

kind of individually decentralized mail around the country to the issuing banks, the cardholder banks

to get the money. And they just, the way they've financed all this was a discount fee, just like

checks back in the day. Like, oh, hey, this sales draft is for $100. This is all really hard to

figure out. So like, okay, you give me $97 instead, or you give me $90 instead. And there was no

standardization. It wasn't like a set discount fee. It was just whatever they negotiated with

one another. So the sales drafts get handed to the licensee. So you've got, let's say you're

running a department store and keep going with the Illinois example that you said. So you're

running a Chicago department store. After a whole day of sales, you've got a bunch of sales drafts

where you say, all these customers came in with BankAmericard. They said they're good for the

money. So I gave them the goods. And now I'm holding the sales drafts. I actually have no

idea if they were good for the money. But the fact that I have a sales draft and the fact that

I, the merchant, have a contract with a bank and that bank has a contract with Bank of America

means that I feel very good that I'm going to get my, you know, 93 cents on the dollar or whatever.

So then the bank is responsible, probably. Yeah. So the merchant bank, that acquiring bank,

mails all those effectively invoices to all the other banks that the people who bought the goods

there to their banks with their cards. And there was no standardized discount.

Ah, this is ludicrously expensive. Totally. I mean, it's chaos. People are so pissed. And again,

B of A is like, yeah, whatever. Yeah, whatever. For us, we just moved a few numbers internally.

We actually didn't have to do any of this. And you all are paying us now money. So like

our empire dreams are coming true. Wow. This is maybe painting Bank of America into

poor light. You know, like I said, nobody knew this is the first time that a banking

charge card credit card system is operating at scale in the country. And even though Bank of

America had been operating for a couple of years internally to B of A in California,

now it's going across state lines. This had never been a problem before, you know,

the merchant banks versus the consumer banks, the issuing banks, et cetera.

Right. So all of these tensions come to a head in October 1968, when the licensees,

all the franchisees of Bank of America, all these other banks across the country,

they demand a summit. They need to air their grievances with, you know, the parent with Bank

of America. This is untenable. We can't operate like this. We got to fix this. B of A says, OK,

fine. We'll all get together in Columbus, Ohio. Really? You didn't know this? No. I thought you

knew this. Yeah. Columbus, Ohio. Ohio State. Oh, wow. Amazing. This is where the birth of Visa

happens. So the summit gets organized. And for the franchisee banks, this is sort of becoming

existential for their businesses. They're racking up such huge losses. This is such chaos. They're

sending senior representatives from the banks, everybody running their card programs. Everybody's

converging in Columbus. B of A sends to like mid-level marketing managers to go face the

angry mob. None of the senior executives from B of A could be bothered enough to go deal with this.

Wow. Which just says everything. And these poor guys who show up, I mean, they are literally

facing pitchforks. The franchisees are incensed. And they're incensed both because the situation

sucks and they're like, God damn it, B of A, take us seriously. You have meddled in our entire

businesses. This is in chaos. We got to fix this. So what do these two poor B of A guys do?

Right before lunch on the second day, they're like, yo, we got to save our skins. We got to

get out of here. Let's do the smart thing to make sure that everybody gets placated,

but nothing actually happens because they don't have any authorization from Bank of America to

do anything. They're just the people sent to face the mob. Let's appoint a committee

of licensees to quote, unquote, investigate all of the operating problems and report back to us.

You know, they can come out to San Francisco. They can meet us at B of A headquarters and we'll

listen to their problems. Wow. But unfortunately for their goals, their very narrow goals that

particular morning, but very, very fortunately for all involved, the franchisees, the world,

consumers. In the long term, at least. In the long term and also Bank of America in the long term.

One of the people that gets put on that committee is the Bank of America franchisee program manager

from a small bank in Seattle, the Seattle National Bank of Commerce, which would go on to become

Rainier Bank. And then ironically, do you know what happened to Rainier Bank? You can't make

this stuff up. No, I don't, but I can guess where this is going. Yep. Once interstate banking

regulations get loosened up, they get acquired by Bank of America, of course, in the 1990s.

But for the moment, the person running their Bank of America card franchisee program is one D.

Hawk. And I think you could really say on this day, the founder of Visa.

And one of the most interesting characters in anything we've ever studied, because he's not

a tycoon the way that most of these people are. No. And we're gonna talk much more about D in a

minute, but just to keep the story going so we don't leave you all in suspense on this day.

During the lunch break, D has gotten put on this committee. He goes up to the two B of A guys and

he's like, hey, rather than us just putting together a list of grievances and reporting

back to you at B of A, what if instead we do examine all the problems in this system?

But what if we ourselves, this committee, we design and propose a new way of operating the

whole thing? And after some convincing, the B of A guys are like, eh, sure. I mean, they're not

agreeing to anything. Their goal is just to escape the mob anyway. They're like, whatever. If this

makes you happy, if this lets us escape back to California, sure. And probably, almost assuredly,

I mean, this is a committee we're talking about. Nothing is gonna come of this. Yep. So the whole

summit reconvenes after lunch and D gets up on stage, not the Bank of America guys, and he

proposes this idea to the group. Say, hey, we've got this committee. Rather than us taking a list

of grievances back to B of A, what if we try and design a new way that the system could operate

and operate better for everyone? They take a vote on it. Everybody agrees. Mostly, I think, just

because they wanted to get out of there, go back home and away from this disaster of a meeting.

They all get on planes. They all leave, most of them probably thinking that nothing is ever going

to come of this. Certainly the B of A guys thinking nothing is ever going to come of this.

But D kind of thinks he just got authorization to go create Visa. Whole new system. And he has

no power at this point, but he kind of thinks he does. And listeners, now is a great time to tell

you about our next favorite company, Crusoe. Yes. Crusoe, as you know by now, is a cloud provider

specifically built for AI workloads powered by clean energy. Today, right in theme with Visa,

we are talking about reliability and some of those details of Crusoe's infrastructure.

So by this point, you know that their cloud is run on wasted, stranded, or clean energy,

and they can provide significantly better performance for your dollar than traditional

cloud providers. So how do they do it? It is a little bit more than just saying they put data

centers next to natural gas flares or stranded energy from wind turbines. I mean, that insight

alone has value, but this is insanely difficult to pull off, to build this multi-tenant architecture

at scale and implement things like InfiniBand with rail optimization. So here are some of the

things that Crusoe's team has had to do and why it required people with backgrounds in data centers,

oil fields, utilities, networking software, and manufacturing all working together to do it.

So one, they have to trench high bandwidth fiber themselves. And as you might imagine,

putting a data center in a remote location, that is not just magically next to an ISP that you get

plug it into and have redundancy. Two, rugged infrastructure. Not only do they need to custom

design the data center architecture to let customers eke out every ounce of performance,

it also needs to work in these locations. They initially worked with external vendors,

but they've now started something called Crusoe Industries, which manufactures a majority of their

mobile and modular data centers and electrical equipment themselves. And three is operations.

Things go wrong out in the field, especially in remote locations. And Crusoe has a fault tolerant

organization that is able to plan for the maintenance and repairs and manage the failures

when they do inevitably happen. So the team has deep data center operations expertise to ensure

that customer AI workloads operate seamlessly when minimal disruption, and they really do

plan for these things to happen and have great redundancy in place. It's so cool. I mean,

ultimately, this results in a huge win-win. They take what is otherwise a huge amount of

energy waste and environmental harm, and they use it to power massive AI workloads.

How could you do any better? If you, your company, or your portfolio companies could use

lower cost, more performant infrastructure for your AI workloads, go to crusoecloud.com

slash acquired, C-R-U-S-O-E cloud.com slash acquired, or click the link in the show notes.

Okay, so David DeHawk thinks he's got a mandate to go change things up in a big way and create

some big, crazy new proposal. Yeah, and he's not wrong. Fortune favors the bold, you know,

might you say? Yes.

So to say a few more words about why this is so hard to organize this group of now competing banks

to collaborate with one another, you've got multiple banks in the same state that are part

of this system. Let's take Illinois again to stick with this. You've got a bunch of banks in Illinois

that are now all part of the BankAmericard payment network, which is intimately linked

with their banking operations. If I'm any one of those banks, I would want to say like, hey,

no, I want to be the only bank in Illinois doing this. And okay, maybe there are a few others here

with me, but I sure as hell want to shut the door to anybody else coming in and being part of this

network. Whereas when you think about growing the value and power of the network, you want as many

merchants and cardholders in the system as possible. And the merchants obviously want as

many cardholders as possible. And the cardholders obviously want as many merchants as possible.

That means that you need all the banks because you need all the merchants, you need all the

customers, you need all the banks. And you basically want it to happen as fast as possible.

So maybe if you only allow, you know, 20% of the banks in America or 20% of the banks in a state

to be members of this thing, eventually they could sort of bootstrap the whole network. But

it takes a lot of time to go door to door to door to door. And maybe that particular merchant doesn't

want to take on a second banking relationship. They already have one. They're good.

Totally. This is a classic two-sided network. You want to race to get ubiquity as fast as possible

on both sides of the network. Yep. So as D goes off and reflects on all this, he realizes that

the fundamental problem is you've got this huge and diverse set of banks that both directly

compete with one another. But also, if they're gonna make this thing actually work, they need

to collaborate and work together. And that sounds like a really, really, really difficult problem to

solve. Even if you could do that, how are you going to get the DOJ to let you do that? Antitrust is

going to be an issue here for sure. But, and this is D, he's like, okay, if though, if we could do

this, what is the opportunity? Well, we've seen what the opportunity is for Bank of America. That

is the shining case study. So at a minimum, this could do for all the other banks in the world,

what it has done for Bank of America. But even more than that though, Bank of America was trying

to stretch here. They got greedy to a certain extent in franchising this out to other banks.

But other banks signed up for this and they were willing to pay both a franchise fee and a

percentage of transaction volume to Bank of America because the siren song, the reward of

doing this was so great to them. And frankly, all powered by the fact that this is what consumers

want. Yes, absolutely. So in a certain way, this is sort of, I don't want to say inevitable,

because this is definitely not inevitable. But again, in the thought exercise of could you do

this? The actual organization itself, like the network, would have so much value. You know,

if you could get every bank in America, and then every bank in the world, and D is thinking big

from the beginning, to be part of this, and you could power this global payments and credit network

and you were allowed to take a fee on the transaction volume for doing that, the value

that you would unlock and generate, it beggars the imagination to think about what this could be.

And if we could grow the pie enough, would B of A be comfortable not owning the whole thing?

That's the bottom line here. So there's this great passage from him in his book, One for Many. He

says, any organization that could guarantee transport and settle transactions in the form

of arranged electronic particles, that's what he calls digital information, amazing, 24 hours a day,

seven days a week around the globe, would have a market. Every exchange of value in the world

that beggared the imagination. The necessary technology had been discovered and would be

available in geometrically increasing abundance at geometrically diminishing costs. But there

was a problem. No bank could do it. No hierarchical stock corporation could do it. No nation state

could do it. In fact, no existing form of organization we could think of could do it.

On a hunch, I made an estimate of the financial resources of all the banks in the world.

It dwarfed the resources of most nations. Jointly, they could do it. But how? It would require a

transcendental organization linking together in wholly new ways an unimaginable complex of diverse

institutions and individuals. This is the opportunity. And this is what he essentially

takes to Bank of America. And now we got to say a few words about D because this situation is nuts.

D is a banker. He is running the Bank of America franchise program at what would become Rainier

Bank in Seattle. But he's an outsider. He's kind of a nobody. He's not senior in a small bank

in Seattle. He was raised in rural Utah, basically in poverty during the depression.

He didn't go to a four-year college. He only has an associate's degree. He bounced around in a

bunch of random consumer finance jobs on the West Coast, all of which he got fired from because he's

too insubordinate. He now walking into the boardroom in Bank of America, which is what he's

going to do, and standing toe-to-toe with the vice chairman of Bank of America and saying,

I think you should give me the Bank of America card program because it is in your self-interest

to do so, which almost literally are the words that come out of his mouth in that boardroom,

is just absolutely wild. Fortune favors the bold.

Fortune favors the bold. Importantly, though, fortune favors the bold

who have done the work to figure out how to align incentives such that a logical person will think

through and come to the same conclusion he has. This is the thing. Dee is an odd duck for sure,

but he is amazingly smart. He's basically all self-taught. He's incredibly well-read.

He started reading every book on his little farm in Utah that he could get his hands on when he

was seven years old. Super importantly, this is a Steve Jobs, you can only connect the dots looking

backward moment. He was not very good at sports in high school, so he got into debate instead.

And then he also did debate in college when he did his associate's degree. And so he uses all

of the techniques that he learned from competitive debate and persuasion. He has this amazing quote.

He says, during my years of college debate, I held fast to the notion that until someone

has repeatedly said no and adamantly refuses another word on the subject, they are in the

process of saying yes and don't know it. I mean, Dee basically is the prototypical

Silicon Valley founder. He's just a generation too early and in the wrong industry.

I once had a Silicon Valley founder give a talk at a startup weekend I ran 10, 12 years ago,

who said, until your company shuts down, you are just in the act of succeeding.

Totally. Cut from the same cloth, right down to every single stitch.

There's one other important aspect to Dee that I think we should highlight here that enables him

and all of Visa to succeed. And that's that he's about as far from the man and image of JP Morgan

as you could imagine. That is what enables this. Because if he were the CEO of another bank or a

senior executive or some well-respected person marching into the Bank of America boardroom,

and standing toe to toe with their board and saying, I want you to give me your very precious

crown jewel. There's no way it would work. Of course, Bank of America would say, what's in it

for you? I don't trust you. I don't believe you. Even if they did trust and believe this person,

they would lose all of their face and reputation if they were subordinating themselves to somebody

who could conceivably be their equal. So Dee's just gone into B of A with this grand vision of

you should give me this incredible asset because the value that it will create outside of your

hands and your fractional ownership thereof will be so much greater than what it could be on its

own. And miraculously, that works. Would you rather own a few percent of something that is

the default global way that commerce is produced, or would you rather own

a hundred percent of Bank of America cards? Yep. Totally incredible that Dee actually

convinces Bank of America to do this. Nobody in the world would have thought that this could happen.

But now the work is sort of just beginning because there's two things now that he needs to do. One,

he hasn't actually figured out how to architect this thing such that it works. So he's got to

do that. Two, though, then now he has to go back to all of the soon-to-be former franchisee banks

and convince them why they should do this. And this is a different argument from what he made

to B of A. B of A, he's trying to get them to give him the asset. With the other banks, he actually

needs to get them to change their behavior. He needs to be able to go to, say, the couple banks

in Illinois that are existing franchisees of the Bank of America card system and say,

hey, the new regulations, the new operating laws for this organization are going to be all the

banks in Illinois can join. And we actively want to go convince all of your competitors to come

join this system. I see. So he's basically coming to them with a waiver and saying, I want you to

waive your exclusivity to some territory because in our new construct here where we're all working

together, you and everyone else is agreeing that it's good for the value of us all if we waive

our exclusivity. You know what this is like? This is like back in our NFL episode. Yes,

that's exactly right. When the NFL started negotiating national television rights

collectively as an organization. Yep. A bunch of the individual teams hated that because they were

like, if I'm the Jets, I'm making more money in my New York metro area doing my own TV deals

than I'm going to get as a share from you, the NFL of a national deal. But in the long run,

it was absolutely the right decision and value accretive to everybody, including the Jets,

that the NFL centralized this. You'd rather be the Jets with their proportional share of the

$14 billion a year TV deal that the NFL has today than whatever their very fat contract was alone

in what the 60s, 70s. Totally. It is exactly the same thing here. Okay. So how's this whole thing

going to work? D and a few of his other fellow committee members, they go to Sausalito,

California, just north of San Francisco, just across the Golden Gate Bridge. And they do an

offsite for a couple of days at a hotel in Sausalito. And there they come up with a number

of operating regulations guidelines for this hypothetical new entity, four of which we're

going to talk about here that are super critical. One ownership of this new organization, that's

going to be called National Bank of AmeriCard Inc. The new owner of the Bank of AmeriCard program

is going to be in the form of irrevocable, non-transferable rights of participation.

So you're not going to own stock in this thing. There's no equity. The way that you have ownership

and the percentage ownership that you have in the network is by participating in it,

and the amount of volume that you are contributing to the network. Oh, interesting. So this means a

couple of things. One, it's sort of like a representation and ownership according to

value contributed. Two, it's non-transferable. So you can't sell it. Any individual bank,

if they were to say like, oh, this is valuable now, I'm going to go sell it. And then I no longer

have any incentive to participate in the network. If that starts happening, then it'll lead to a

cascade for the exits and the network will lose value. So there's no way to do that.

So it's basically designed for you to kind of break even on it. If you're putting in 17% of

the transactions on the whole network and you're paying in fees on 17% of the transaction, well,

good news for all of the leftover profits from running the network, 17% of them go back to you.

You're making the assumption that this is a cost only organization, forgetting the fact that it is

one of the greatest business models and revenue generators of all time. You are contributing 17%

of the volume to this. You are entitled to 17% of the profits. I see. That we are extracting

from the merchants and the cardholders. Yep. Because this is the natural business model

of interchange to do the exact same things that was being done with the sales drafts,

where you sort of give a discount to the retailer. And when I say discount,

I don't mean a beneficial one. I mean, I'm discounting the amount of money that I am giving

you off of the 100% that you would have received by the customer. Basically taking that old check

courier business model and carrying it into sort of a network form. Yep, exactly. So the actual

legal structure that D and his fellow committee members land on for this is a for-profit,

non-stock membership corporation. That is a mouthful. It is. There's a myth out there that

Visa was originally a non-profit and then was converted to a for-profit before the IPO in 2008.

That's not true. It was always for-profit. It was just a non-stock membership corporation.

And that was to get around banks selling their interest. So you don't participate in it,

you don't own it. So say it one more time. It is a for-profit. A for-profit, non-stock

membership corporation. Your ownership is your membership. Fascinating. It's like a co-op. It's

like REI or something like that. Yeah, yeah. The way that D describes it to all the other banks is

it is a reverse holding company. The parent entity is owned by the subordinate members,

as opposed to the top level holding company owning all the subordinates.

There's actually another NFL analogy here. The NFL doesn't own the teams. The team owners own

the NFL. Yes, but the NFL sets all the regulations for how the game is played and all the teams

submit to it. That's actually probably the best analogy for Visa as the NFL league organization.

I think it totally is. Okay, so that's point number one. Maybe the most important one.

Point number two. It is a self-organizing body with irrevocable governance rights for each

member. And this is, well, I guess also how it's like the NFL. Basically, this means this is a

democracy. Every member has a vote in determining how this organization runs. Anything that you

could conceivably have a vote on, changing our regulations, setting them in the first place,

budgets, fees, all this stuff, every single member bank will have a vote. And importantly,

every single member bank can call a vote at any time. I mean, it's literally like a pure democracy.

Wow. You can imagine nothing happening if everybody has the right to do that.

Well, they set the threshold at 80% for anything to happen.

I see. So there's a strong incentive not to call a vote and waste everybody's time unless

you really think you can round up 80% of the votes. Fascinating. Which in practice just gives

D all of the control and power of the company because everybody's going to listen to him as

the CEO. Point three, we've basically already discussed, and that is that the mission of

this organization is to facilitate cooperation and trust among competing institutions to grow

the Bank of America hard payment network larger than any one institution could on its own,

which is the pitch he gave to Bank of America leadership. Also, though, this is a implicit

kind of forbidding of banks in the network from going off and also forming or participating in

competing networks. So to borrow like a crypto phrase here, like no side chains allowed.

Everything happens on the main network. I see. So none of these banks are members

of Interbank at this point. These banks are exclusively members of whatever the heck

Visa's predecessor name is. National Bank of America, I think.

National Bank of America, I think. Yes. At this point in time,

a antitrust lawsuit would change that very shortly. I see. But at this point in time,

it's like, nope, you are part of MBI exclusively. You don't go join Interbank MasterCard,

and you also don't go start your own networks or peel off parts of the network. Everything that

you are doing in payment card operations needs to route into this network.

That's a big contract to sign. Totally. Again, this is why D needed to paint

the picture both to Bank of America and all the other banks. The prize is worth it.

Yep. And then finally, point four, there will be a singular universal set of operating and

governing procedures that, much like the U.S. Constitution, is infinitely modifiable by a

threshold vote of all members. This is the 80% I talked about. And two, also like the U.S.

Constitution to its citizens, all members agree to be bound by its law both now and as it is so

then modified in the future. So if you're signing up for this, you are signing up for the regulations

and operating procedures as they exist today and for any future changes that come,

of which you will have a vote in. This is a democracy, but you can't go leave the democracy.

Right. You're signing up for something that might change in the future and you don't get

to know today if it's going to change in the future, but at least you have some say in it.

That is exactly the pitch. And amazingly, even describing this now, having done all the research,

read all the books, written the script that we're talking about here, I still can't believe

this actually happens. Dee goes on like a tour across the country. He goes and meets with all

the banks. Bank of America helps him out. They bring senior executives to help convene, you know,

meetings with all the banks to persuade them. Every single member bank of the previous Bank

Franchisee Organization, every single one of them signs up for the new organization led by Dee.

Not a single person jumped ship. How many banks were at this point? Over 200. Wow. Isn't that

wild? I mean, once you get to like 70 or something, then it kind of seems likely that everyone's going

to tip. But in those first 20, the fact that nobody was out is crazy. Totally. And Dee writes

about this too. Bank of America helped him out. They identified the 13 most influential banks

and they convened the first summits with them of like, hey, what do we got to do to horse trade

to get you guys involved? And then you kind of spiral out from there. But yeah, every single

one, nobody jumped ship. And when is this? Like 1970-ish? The process starts in 1968. It all wraps

up in either 1970 or 1971. Importantly, we've talked about antitrust and DOJ a bunch here.

You would think that this would be setting off massive alarm bells in Washington and with the

Department of Justice. They get ahead of this. So Dee goes to see them and he gives the same pitch

to the government. He says like, look, obviously this is the whole industry, all the competitors

in the industry colluding to work together. That's the whole premise of the organization.

But what we can create by doing this would not be possible otherwise. And it will be so profoundly

useful and important to the American consumer and American businesses that it is worth you

letting us do this. So they actually get a letter from the DOJ saying like, Hall Pass, you're good

on this one. Wow. Yeah. It's just like the presidential exceptions for the NFL, like an

antitrust exemption where, yeah, we're amenable to the fact that you're collaborating, potentially

colluding, but it is actually one of the things that we believe will make the country better. So

go for it. America wants both its football and its credit cards. Amazing. And that was a key point

in then going and convincing all the other banks to sign up for this because that was one of the

first questions they asked. Hey, if we do this, aren't we inviting the DOJ on our backs? And Dee

is able to say like, nope, got the letter right here. We're good. Wow. Amazing. So very shortly

after this, after the creation of NBI, National Bank of AmeriCard, Inc. Dee in 1972, he's thinking

globally from the get-go. He goes and creates a parallel, similar organization of international

banks using the Bank of AmeriCard system. Visa was global from basically day one. And it wasn't

just Barclays in the UK. It was Sumitomo Bank in Japan. It was other banks throughout Europe. It

was Canada. It was Latin America. We won't go into all the detail here except one amazing story

we're going to tell. This was actually harder to pull off, if you can imagine that, than forming

NBI because it really is not clear for some of these international banks that it is better for

them to be part of the global network than if they could run the table on their entire country.

Say you're, I don't know, I'll pick Sumitomo Bank in Japan. You have to decide, do I want

to buy Dee's pitch of it's worth it to me to be a proportional owner of Visa? Or I could be the

singular dominant credit card network in my own country, which is more valuable. And for many of

them, they'd be right in saying it actually would be better to be singular and dominant. Like you

look at China Union Pay. I mean, that is the dominant way of payments flowing in China.

That was, for them, the right move. Totally. So once again, in Sausalito,

this all comes to a head. Dee knows that probably not all of the international banks

are going to agree to this and some of them are going to go their own way. So he calls a final

summit in Sausalito. They're going to vote the next morning, final vote on who's going to join

the soon to be Visa network and who's going to go it on their own. And Dee gives this nostalgic

speech at the end of dinner saying like here in Sausalito, looking out at the bay, this is where

me and my colleagues, we dreamed up the original vision for what this could be.

And it's sad that this won't be extended to the whole world and a true global payment

monetary system. But we're all gathered here. We should celebrate having accomplished so much

and had a chance at this dream. Just having the chance is worth it. He's really good with his

debate skills. And then he's like, so before we meet one more time tomorrow to obviously disband

this whole venture and have the dream just be a memory, we have one more thing for you. One more

thing. He's like Steve Jobs, a small gift of appreciation for you giving your valuable time

and effort as part of this global undertaking. Please take this little box out from under your

seats. Everybody takes a little box out from under their seat. They unwrap it. And inside

are a pair of pure gold cufflinks that on each of the two cufflinks, there is one half of the globe.

And under one side, it says in Latin, studium ad prosperitum, which translates as the will to

succeed. And the other side says voluntas in convienendum. My apologies to Latin speakers

out there that I'm butchering that translates as the grace to compromise. And he explains this all

and somebody from the crowd yells out, Do you miserable bastard? Because he just pulled on

everybody's heartstrings. Oh, and like he gets the votes. And the next morning, all the holdouts

reverse course, they all join. And what you can't make this stuff up. It literally happens. The

cufflinks are out there. You can Google him. He did this. So he's basically saying, Hey, whether

you voted for this or not, you're getting to leave with something saying, I'm so great. I had the will

to compromise even if you didn't. And you are the reason that you killed it. D is just such a

character. So the other thing along these lines that he does, which is just hilarious. Once this

is all set up this the international part of visa becomes first I Banco IBA and CEO. Shortly after

this, they rebrand the whole thing into visa, which we'll talk about in a minute for the board.

The board is huge because it's like all the representatives from every region from every

country. There's like 25 people on the board. D holds board meetings all around the world,

you know, different city all the time. It's a global organization, whatnot. He invites the

spouses of all the board members to come to each location because it's a family trip, you know,

and then he gets the idea. He invites the spouses into the board meeting itself.

Oh, what a nightmare. So 25 board members plus their spouses in his board meeting.

This means two things. One, nothing is going to get done. There are 50 people in the room.

Two, though, he needs all these people to behave well together and, you know, be generous and

gallant. What better way to make sure they're on their best behavior than to have their spouse

sitting behind them? Wow. So like, are you really going to act like an asshole

in front of not only your spouse, but the spouses of all these other global bank heads?

That's so funny. I'm gonna start doing that.

We should have our wives in the room while we record.

Definitely not.

Oh, amazing. Amazing.

I think neither would join for that.

Totally. No, they'd be like, no.

Okay, so how does the name visa come about? How does the sort of joining of the international

and the domestic?

Okay. Visa is so important. It's not just a rebrand. It has to happen once this international

organization is set up.

Yeah. America can't be in the name.

Yeah. Bank of America ain't gonna work. And importantly, as we'll get into in a little bit,

this is a huge problem for American Express too. The soon to be visa knows if we're really gonna

realize this global vision, we need a truly global brand and mark. Remember back to the

blue, white, and gold, three stripes. That's iconic. It works internationally. Obviously,

the name does not. So D holds a contest internally within NBI slash IBANCO to generate a new name.

And he offers a $50 prize for the winning entry that is chosen. And as legend goes,

there are so many submissions of the name visa that when they finally unveil it, D makes a big

deal and writes out a $50 check. Check. Why are they using a check? Made out to everyone in the

company, which is funny. But then they changed the name to Visa. Visa, it's the most incredible

name ever created. I mean, Nike was so great. This is like even better. You cannot have a better

name for what this is.

It's interesting it's in English. I mean, I guess it makes sense. It's the most spoken language,

but no, it's not just in English. The name visa in every, if not almost every language on earth.

And when you're traveling and you need a visa for a country, they call it a visa

in other languages too.

That's what it is. But when you are traveling internationally, when you're going through

customs in any country, it is identified as a visa. That is the name.

Yeah. The universality, it's sort of a presumptive close because at this point,

you know, they've got what, three, four, 500 banks, you know, and they have 16,000 today.

It's quite the presumptive close that it will be universally accepted everywhere.

The way that a visa would imply.

Just every dimension, the presumptive close, the implication that this is a global network,

that you can bring your visa with you when you're traveling to other countries and it'll work.

The actual definition of the word visa, that is your entry pass.

This card is now your entry pass to commerce, to experiences,

that it works everywhere. As you said, that it's universal. It's amazing.

Yeah. So the visa name, brand, everything,

there's two more levels at which it becomes really important.

They do something really, really, really smart. So we talked about the need for the universality

of a mark and why early interbank, that was a problem until they standardized on MasterCard.

They've got the three bands, the blue, white, and gold, and now they have a global name.

But all the individual banks, the hundreds soon to be thousands of banks,

they all want their own branding on the card too. So visa says, okay, here's the operating

regulations. Every card has to have the blue, white, and gold. In the middle white band,

visa logo goes there. Nothing but the visa logo. On the top blue band, you can put whatever you

want. You can put your own bank logo. You banks get creative. You can do literally whatever you

want. Banks start going around. They do affinity card programs with NFL teams, with merchants.

This is how you get the Southwest card. This is how you get the San Francisco 49ers card.

This is how you get the XYZ everything that they're a bazillion of now.

So in the blue stripe on the top of the top third of the card,

the banks start co-branding with the name of their bank and some affinity.

And this is kind of the brilliance of the visa model. They were like, it's open.

You can do whatever you want up there. Right. That seems good for us. We're happy with that.

Of course, it's great. The whole goal is just get more consumers and more merchants on the network.

So anything that's going to do that great while maintaining the universality of visa.

Great. We got the middle, you got the top, go wild, do whatever you want.

Wow. And that's how I end up with BB8 on my card today.

Amazing. Maybe the most important thing though, for visa really pulling away and becoming,

at least for many decades, the dominant global payment card network.

The name change ends up becoming this incredible growth hack because what happens is they're the

new operating regulations now that mandate that all cards out there, all the previous Bank of

Merit cards need to be migrated to visa cards. I think within like two years of this being

declared or something like that, some banks start to see this as an opportunity to go poach card

holders from other banks. So the competition within the network, obviously this still exists

because consumers now they know, and Visa runs a national advertising campaign. Hey,

your Bank of Merit card is going to switch to visa. So some banks in a version of the Fresno

drop, they start sending unsolicited letters to consumers who are already Visa Bank of Merit card

customers with another bank. They're like, Oh, Hey, it's time to switch over to your visa card.

Here's the application signed up with this. Nice of them to, at this point in history,

offer applications. I think a hundred million cards got dropped in the United States before

the government made it illegal to just start randomly issuing credit to people without their

awareness or asking for it. Totally wild. But because of this, a whole bunch of consumers start

sort of unconsciously switching the bank that issues their visa card. And then once this starts

happening, this kicks off a total arms race where all the banks in the network are now like, shoot,

we got to blanket the whole country and like preserve our domain and see what we can capture

from others in the one year between when the visa name change first comes online and takes effect,

which is in 1977. And the next year in 1978, the number of banks participating in the visa system

grows by 20% because everybody who's not in the system now is like, I got to get in the visa

system. By the way, this is the thing that pushes visa ahead of what was I believe then called

master charge. Yes. The inner bank had changed to master charge. They hadn't yet turned it to

master card. But in 1976, master charge was actually bigger. They had 7,400 banks. And at

this point in history, visa had about 7,000 banks. Master charge also had more cardholders,

37 million versus Bank of America cards, 31 million before they changed to visa. So this,

despite all the deck chair rearranging between the member banks, it was great for visa to leap

ahead of master card. Totally. So that was number of member banks goes by 20%. The number of active

cardholders in the visa network in this one year grows by 45%. Wow. Isn't that wild? So as you say,

they blow way past master card. Thanks to this, they're already way bigger than Amex because

Amex is a different customer segment, which we'll talk about in a sec. And this really puts them

on the path to becoming the dominant global network that they are today. Yeah. And it's worth

a moment on Amex here because I would have thought just like Facebook or WhatsApp or Google,

when you have this sort of winner take all massive network effect business, that the single

centralized player network effect would win. Why wouldn't Amex win with their closed loop system

where they own the whole thing end to end and can provide the most incredibly custom experience for

everyone on their platform, on the merchant side and on the consumer side? And one of the answers

of why this open loop system beat the closed loop system is visa adopts this strategy of the network

of networks. They go sign up one bank, that bank can go sign up 100 million customers or

2 million merchants. They get so much scale leverage on signing up just one bank that

this strategy makes it so that they have far more scalability than something like Amex.

Amex also is a bank themselves, so is highly regulated. And they're a bank by this point

in history, I believe on both sides of the transaction. So they're both a card issuing bank

and they are a merchant acquiring bank. And so in terms of scaling internationally,

you mentioned their name holds them back. Also, they have to become a bank in another country

in order to expand to that country, whereas Visa just needs to go tap a few banks and say,

why don't you go figure out how to grow for us there? So this network of networks thing,

the open loop system, well, it creates a little bit more of a kludgy user experience because

they're sort of the lowest common denominator of data getting passed through the network.

It's sort of open source versus something that's wholly owned and operated by a company or

a protocol versus fully owned application. Anytime that you have something that's more distributed,

you're going to be compromising a little bit on the user experience because you can't sort of rule

by fiat when you want to make a change. But it does potentially come with much better scalability,

which is the reason why Visa and MasterCard have become the dominant way versus the closed

loop systems. It's also worth closing the loop on MasterCard here, too. I mentioned that the DOJ

eventually came after both Visa and MasterCard and prevented them from being exclusive systems.

That does happen in 1975. And so this concept of duality takes hold for the bank's duality,

meaning they can multi-home on both Visa and MasterCard. In all the testimony and case with

the DOJ, Dee is obviously 100% against this happening. He doesn't want his banks to be able

to join MasterCard, too. But he also makes the surprisingly correct argument. He's like, look,

this would be a huge mistake because U.S. government, if you do this, you are going to

freeze the payment networks in the U.S. Nobody is ever going to develop a new competing open loop

payment network because now there's no more competitive vector between Visa and MasterCard.

We'll all have the same features. Banks will be members of both. They're kind of going to

operate in lockstep. The prices should be identical for both. All this stuff. And the

DOJ is like, no, no, no, we're going to do it anyway. Irony of ironies. Later in 1988,

the DOJ again sues Visa and MasterCard for being a duopoly and not competitive enough.

So Dee was right. Dee was right. And to this day, Dee has been right. There have been many

attempts that we'll talk about toward the end of this episode of displacing Visa and MasterCard or

inventing new payment systems. And like they never work or they haven't worked yet. Great point.

They're in the process of working. So great. It's probably actually worth sharing the Amex

thing. So Amex tried this crazy strategy in the 80s and I'm flashing forward 10 years here,

but they would basically cut their interchange, the discount rate that they were charging merchants

massively if those merchants would go exclusive to Amex. And this actually continued until 1991

for many of their merchants. And for Costco went all the way to 2016 where they had the

exclusive agreement with Amex. And if you were going to use a credit card at Costco,

it had to be Amex. But interestingly, Visa and MasterCard cried foul when all of their banks

were multi-homing and Amex, with their virtue of a slightly different business model, was allowed

to go and try to lock up merchants to be exclusive to them. So eventually the whole thing kind of

stopped. And you know, flash forward to today, all cards are accepted at basically all locations.

Yep. So this basically concludes the full Visa story. Like how did this incredible thing happen?

You know, we've answered these questions. Who owns this? Who runs it? How did it start?

We could end the episode here, but we've actually really only told you half the story.

What we've told you is all the incredible business, organizational, social, human behavior

innovations that Visa and D created. Yeah. As Dave puts it in Electronic Value Exchange,

there is a socio-technical aspect to this company. And we've talked about the

socio, but not the technical. Something that is also true and also I think really

underappreciated about Visa is it's also a technology company. And there is a whole

technology story in parallel with this too that enabled the Visa we know today. To D's question

of where is Visa headquartered and nobody knowing that, it's headquartered in the Bay Area. It's a

Silicon Valley company. It was started in the same place and time as Intel, Atari, Apple. The only

thing that is different about it versus those other companies is it wasn't funded by venture

capital and it thus didn't make anybody rich except the banks who owned it and thus were already

rich. But there's an incredible technology story. Yeah. Great point. All right. So what is it?

Well, that's a great question, Ben. And before we get into it, this is actually the perfect time

to talk about another great technology company and leader. One of our favorite ones, in fact,

Statsig, who has also built a tremendously powerful piece of infrastructure focused just

like Visa on reliability. As we will talk about later this episode, Visa never goes down or

basically never goes down. And that was a super important part of their strategy. But it is

extremely hard for most companies to achieve this level of reliability in their technical

infrastructure. Yeah. Building reliable infrastructure is a very broad topic, obviously,

but one easy way to improve reliability is staged rollouts. So a lot of times what leads to downtime

is unexpected interactions from new releases, which crash a component of your app or service.

By rolling out a new feature in stages, first to employees, then to an increasingly broad set of

users, you can test for bugs in a production environment before you actually launch the

feature. Most companies don't do this, however, largely because unlike, say, Facebook, they don't

have the right tools. Yep. Thanks to Statsig, though, it is now super easy to do this the right

way. If you're building software products, Statsig is the one-stop platform you need for feature

flagging, product experimentation, and analytics. The product just works. It makes it super easy to

roll out features in stages and provides data on the impact at every stage of the rollout. Statsig

is a critical part of how companies, including financial ones like Brex and also like Notion,

launch their features to hundreds of millions of users without causing outages or hurting core

metrics. Yep. It's super impressive. So if you're a startup, they have a generous free tier and a

special program for venture-backed companies. And if you're a large enterprise like those

companies Ben just mentioned, they have transparent and non-seat-based pricing.

Acquired community members can take advantage of a special offer, including 5 million free events a

Just go visit statsig.com. That's statsig.com. To get started on your data-driven journey.

Okay. So David, what is Visa's technical infrastructure look like and how did this

come to be? So everything we just described up until now, amazing, incredible, unlikely,

one in a million, but all it really bought D and Visa was the opportunity. Yes. To actually

realize what he sold to Bank of America and the other banks of a instant global payment network

that a large percentage of global commerce runs on, you had to build a lot of technology to make

that happen. And if you asked the question of D back in 1968, okay, let's assume we do this and

we put one of these soon to be Visa cards in the hand of every consumer on the planet. Do they

actually want to use them instead of cash and checks? And the answer to that was probably not.

Fascinating. Now they wanted to use them in specific use cases. Like Ben, you pointed out

when you want to make a credit purchase, when you want to essentially do what installment financing

was before, when you have any number of X, Y, Z other set of factors in the case of diners club

at Amex, when you want to impress your colleagues and your business partners, there were use cases,

but it wasn't like it is today where obviously you're going to use your credit card, which is

probably a Visa and maybe a MasterCard to pay for everything that you do everywhere instantly.

Yes. And to illustrate, we will link this in the show notes,

but there is an old TV segment from 1993, not that old, pretty recent.

Ben, I have really sad news. 1993 was 30 years ago. We remember it, but it's old now.

1993 to today is like the 1950s were to us when we were kids.

Not good. Not good, David.

Not good. This 1993 TV segment,

the news is that Burger King has just rolled out credit cards. That should tell you a lot.

Burger King prior to 1993 did not accept credit cards, or at least this commercial makes it seem

that way. And they interviewed this woman and she says, I think it's pretty sad when you have

to use a credit card when you go to a fast food restaurant. That was a view of someone

just sitting in a Burger King in 1993. And a second guy is interviewed and says something to

the effect of, I just hope it doesn't slow things down because, you know, they'll have to call New

York and then they'll have to do the thing. And I just hope it doesn't slow things down.

And it's like the prevailing idea is that cash is fast. Cash is easy. Cash is respectable.

Credit cards are debt. What this woman is saying is really sad if you need to use debt to buy a

burger. Yes. But even at this point in history, it was viewed as this cumbersome thing rather

than a convenient thing to bust out the card rather than, you know, like, I actually think

Burger King corporate crunched the numbers and they were like, geez, for the amount of time we

spend handling change, we just want to encourage everyone to be swiping the card all the time,

even if they're, you know, losing some money on the interchange.

It's crazy. That was 1993. I mean, yeah, compare that to today. And I mean, I don't know about you,

but I get pissed when somebody ahead of me in line starts breaking out cash and coins. I'm like,

oh, my God. Oh, what are you doing? So start us back. I think the last time we checked in on how

the settlement worked was around literally collecting paper sales drafts and then starting

to mail it around. Yes. So to get from there to today, three major pieces of technology

needed to be built by Visa. One was transaction authorizations. So when we were talking about

transactions happening earlier and the person in Burger King was referencing like, oh,

they got a call to New York and they got to authorize the transaction and all that.

We glossed over one sort of stopgap slash bandaid that Visa and other credit card networks

implemented around authorization. They didn't actually authorize every transaction. So when

you paid for something with a credit card in a store, all merchants had what was called a floor

limit. And the floor limit was any transaction over that limit could not be authorized directly

on the floor and say it was, I don't know, 50 bucks or something like that. Anything paid with

credit card under $50, it was basically within the judgment of the cashier to say yes or no.

And so everybody just said yes. I mean, the reality was this was the threshold below which

the banks and Visa were willing to say, okay, we'll accept a certain amount of fraud. Interesting.

And then above that limit, the cashier had to go call up the merchant bank, say, hey,

we got a card here. It's this number. Somebody's buying a refrigerator. Then that merchant bank

would have to look up that card number, figure out based on the card number, what bank issued

the card to the cardholder, call up the cardholder bank. Oh my God. Get somebody on the horn there.

Say, hey, I've got your cardholder, Benjamin Gilbert. His card number is XYZ, you know,

one, two, three. Can you look up his credit and, you know, he wants to buy a $500 refrigerator.

Can you tell me if he's good for it? Right. And this effectively would be like, have they

hit their limit yet? Yes. Have they hit their limit? The issuing bank would go look that up.

The person there, literally the person, talk on the phone to the person at the merchant bank,

give them the answer. The merchant bank then switches the line back to the cashier

at the store and says like, yeah, Ben is good for it or no, Ben is not good for it.

So you had banks talking to banks, people at merchants, talking to people at their bank,

talking to people at the cardholders bank, and then reversing the whole chain.

But importantly, you had a person at the merchant's bank calling a person at the cardholders bank.

Yes. Today, that is known as VisaNet. There's this piece of technology that sits in the middle

that eliminates that bank to bank phone call. And so this is a big part of one of the first things

that Visa builds. And that process that we just described, that could take like 20 minutes.

And it just didn't work outside of business hours for those banks. So say, you know,

now that Bank of AmeriCard is nationwide, soon to be international. Imagine you're trying to

buy something in Japan and the Japanese merchant bank calls your cardholder bank back in America,

closed for business, just no way for that transaction to happen. Wow. That's crazy.

Not good. Definitely not good. So D and Visa know that this is like the first thing that they have

to address. In 1971, right after NBI is formed, D starts a project called the Bank of AmeriCard

Authorization System Experimental, or BASE, to build technology to address this problem.

The whole thing actually started rather inauspiciously, because right after all the

approvals came through for D to form NBI, I think it was literally the evening before the first board

meeting, Bank of America comes up to D and they're like, can we take you aside? There's something you

need to know. Oh God, that's always fun before our first board meeting. And they're like, well,

it's kind of hard to tell you. We've been in secret negotiations with American Express for months to

create a joint venture together, Bank of America and American Express, that will create an automated

system for transaction authorization for multiple credit card systems across the whole country.

And we're going to do this. So, you know, D, if you want us to remain part of NBI, remember this

is Bank of America, the most important part of NBI. Oh my God. I know, you know, that part of

the operating agreement is like, you know, we can't really operate outside of the bounds of NBI, but

this isn't really outside the bounds of the NBI. This is a separate thing. This is authorization

systems. We're going to do this. And if you say we can't do this, we're out. Whoa. So not good.

And it's true. It's not really like they're issuing new cards or acquiring new merchants.

They're being a technology provider. Because they and American Express both see that, hey,

this is a really, really, really valuable piece of technology. D is of course pissed,

but what's he going to do? B of A says, take it or leave it. D takes it. As D then tells the story,

Bank of America and Amex go out and they try and pitch the other banks in NBI and

Interbank and MasterCard on joining the system. But there's all these problems with it,

and they don't know how to build technology. And the whole thing dies on the vine. Maybe,

maybe that might be part of the story. The other thing that happens is Interbank and MasterCard

actually get involved in the project. The whole thing then morphs into a tripartite consortium of

Interbank, American Express and Bank of America and thus by association NBI. Our old friends,

the Department of Justice start sniffing around and they're like, all right, now this is actually

collusion and anti-competitive behavior. So if you go forward with this, we're going to sue you.

And then they all abandoned the project. And this is huge for Visa because this means they can

build it on their own. Fascinating. So they do the natural thing at the time. I mean,

these are bankers, even though they're based in San Francisco and Silicon Valley, these aren't

tech folks. They put out an RFP to folks like IBM, systems integrators, you know, the Accentures of

the day to go build this technology for them. Go build a computerized authorization system for the

Bank of America Visa network. All the bids come back. And of course they are all way over budget

and way over time. So Dee says, well, screw it. We're going to do it ourselves. How hard can it be?

Wow. So in his very Dee way, he goes and he recruits the guy from the firm that impressed

them the most throughout the bidding process was a firm named TRW and a guy named Aram Tatoulian.

Dee goes back to him and he's like, I like you. You come work for me. Leave TRW. I'm going to

hire you. You build this here in-house. Wow. And I'll give you the resources. You come join us and

you'll build out your own tech team here within NBI slash Visa. Aram comes and joins and starts

the core of the Visa tech team. Dee gives him nine months to build this entire thing from scratch.

And to do this involves building a first nationwide and then ultimately worldwide telecom network

so that the electronic communication can happen. Two, installing computer systems in each of the

member banks around the country so that instead of the banks calling the other banks, you know,

this can happen over computers. Three, training the people at the banks on how to use these new

computer systems. And then four, maybe most importantly for the long run, building a new

centralized data center for Visa in the Bay Area. And this becomes the San Mateo campus.

You can see it right off of 101 as you're driving between San Francisco and Silicon Valley. It is,

I believe, still the headquarters of Visa today now. Huge campus in San Mateo where they build

the data center. Until I think next year, it's going to go back up to San Francisco when they

finish a new building. That's right. I think it's going to Mission Bay. So miraculously,

Aram and his new Tiger Visa tech team, they do it. They do it in nine months and it works.

So Dave Stearns writes in his book about this whole situation and about D.

D maintained that if you give computer people more time, they will just consume it. So he always

insisted. So it's so true. So he always insisted on shorter projects with uncompromising deadlines.

They will just consume it. They'll just consume it. Fascinating. Okay. So they build

what becomes VisaNet in-house. At this point, there's no internet, so it's all just working

over telephone communication. Yep. Direct networking.

Amazing. And so they're just operating the whole network out of this data center in California.

Yep. Now, importantly, this is only for transaction authorizations. So the cards

and the point of sale have not been digitized yet. That's going to be the final third piece

of the stool of technology that Visa builds. This is just when a merchant makes a call to

their bank saying, hey, is this card good for this amount? This is then the interbank communication.

I see. So how does the settlement happen at this point in history?

So that's what's next. That's the next big operational technical problem that Visa

needs to solve. It's like literally moving the money when it needs to be moved.

Reconciling the transactions, moving the money, getting everything wrapped up at the end of the

day, week, month, sending out statements, all this stuff. You can sort of think of the first piece

that we just described as the authorization as sort of the front end of a payment card system.

The settlement is the back end. The front end piece consumed a lot of phone time and people.

The back end piece consumed a lot of paper and time too. Maybe more time, but like a lot of paper.

Because you're effectively mailing checks.

And even more perniciously, as the network grew, and at this point in time, soon-to-be Visa is

growing explosively, the complexity of this settlement piece also grows sort of exponentially.

Every new bank node that you add into the system now has to interact with all the other bank nodes,

and so like this is a hard computer science problem.

It's an N-squared problem.

Well, it's a problem that is easily solved by computers,

but when you're doing all this manually with paper, this is a big, big problem.

N-squared is much worse when you're doing it with paper than with computers.

Yes. So what you really need to do this efficiently,

to bring it all the way back to the beginning of the episode, is a clearinghouse.

You need an automated clearinghouse.

And this is unbelievable.

A few people had referenced this to us as we were doing the research,

but I kind of forgot about it till the end when I got to this point.

And I was like, holy crap.

Visa builds an automated clearinghouse for themselves to do settlement electronically

over the network.

They end up calling this project Base 2 after Base 1, which was the first thing doing authorizations.

This happens at the exact same time and place as when the Federal Reserve

is building their own ACH system for checks,

automated clearinghouse, ACH, everything in the banking system.

That was built by the San Francisco branch of the Federal Reserve in the exact same years,

in the 70s, when Visa was building their own essentially automated clearinghouse system.

That is wild.

Now, I've never read anything.

I couldn't find anything.

I've never heard anybody say that they talked to each other,

that they knew anything about what was going on, that they were sharing practices.

I assume they probably didn't.

But it's wild.

The same place, the same time.

Solving the same problem.

Solving the same problem.

Which, again, the problem is this gigantic list of a whole bunch of transactions just happened.

People just agreed to make them happen.

And now we need to settle up at the end of the day.

And if you paid me $100, 500 times, and I paid you $100, 400 times,

what is the net that actually needs to get transferred?

And that is a far more efficient way.

Batching them up is a far more efficient way than transferring the money back and forth

every single time, but still can be a complicated problem,

especially when you have thousands of banks on each side of that equation.

It really is like the exact same problem that both of these teams are solving.

And with the same users, the same banks.

It's totally wild.

Once base two is done, and again, it also happens in less than a year,

that it's live and up and running,

average settlement time for transactions on the Visa network

go from taking a week on average to happening in batch overnight every single night.

Every transaction on the network settled every single night.

So the speed is super important.

This has lots of implications for float amongst the banks,

you know, like some good, some bad between the banks,

between the merchants, the issuing banks.

If you're the one that owes the money, you kind of want the payment to take more time.

Yes, exactly.

Exactly.

Also importantly, this is from Dave's book.

It ends up saving about $15 million in labor and postage costs

to the banks by automating this just in year one.

Wow.

And imagine if this were done manually today.

It wouldn't be possible to do this manually today.

No, you needed the technology solutions that they've put in place

to enable the commerce scale that flows on this network today.

Yep.

It is also during this project that one of the most famous

Visa tech team stories in history happens.

This is a good one.

This is in Dave's book.

So one of the guys, I think he was working on base one

and then maybe got transferred into base two.

He is thinking about the system and reliability is so important.

You know, this network can't go down.

He's like, huh, we actually have a pretty serious vulnerability in this system.

So he goes to see Dee.

The whole Visa organization, I think, is like less than 50 people at this point in time.

Wow.

Just wild.

He's like, Dee, you know, all this technology we're building, you know,

we've got authorizations running.

We're in the middle of getting settlement running.

Like the whole Visa network now depends on this technology.

We're providing the service off of one computer in one data center,

which is made out of wood and sits on a hillside that has dry grass

right by a freeway below a parking lot that is perched on a cliff.

And we're also about a mile from the San Andreas fault.

So, you know, we really might want to think about having

some sort of redundant parallel site, a data center out there.

And Dee, in his very Dee way, he thinks about it.

He's like, all right, let me think about this over the weekend.

He comes back on Monday and he's like, all right, you're right.

Thought about it.

You now have a new job.

Your job is to solve this problem.

You're marching orders.

You are to go move somewhere on the East Coast.

I don't care where.

Find a site where you can build a redundant data center,

get it all built and have it done within six months.

And invent the technology to keep these things synchronized.

So they are actually redundant.

Yes.

So now Dee is not technical enough to talk about that, but this is super important.

Up until this point in time, state of the art in the sort of fledgling data center world

was, yes, to have redundant other location backups.

But the way that it was typically done was you had your primary data center

that operated at full capacity all the time.

The backups were just like cold storage.

They were like dormant backups that only were there to come online

if you had to fail over from the primary system.

Visa though, and the Visa tech team, they're like, you know,

if we're going to go through all this trouble and expense of building another data center.

Let's use it.

Let's use it.

So they re-architected base one and completed architecting base two

to run concurrently across multiple data centers as like

shared operations running across multiple data centers,

which I think may have been either the first or one of the first examples of that ever happening.

Totally wild, right?

I don't know that it was the first, but it was definitely not state of the art before.

This whole data center world was still pretty new

and Visa definitely like through ingenuity invented a way to do this.

It's fascinating.

And of course, this is now how every data center in the world runs today.

Pretty amazing.

So that was data center innovation, which sort of happens in concert with settlement digitization.

The third big leg of the technology stool that Visa builds is finally digitizing

the point of the transaction itself.

And that requires both figuring out some way to make the cards

digital or capable of being read in a digital manner

and digitizing the point of sale terminal in the merchants.

Those Verifone, you know, traditionally they had a huge market share.

Well, this is when Verifone gets built.

There was no Verifone before this.

Yep.

This is huge.

This is the holy grail.

The base one authorization system, that was still only for transactions above

the floor limits at the merchants.

So, you know, above 50 bucks or a hundred bucks or whatever,

it replaced the need for phone calls, but it didn't digitize the transactions themselves.

So this is actually every transaction now is running digitally for authorization over the network.

Exactly.

Not only authorization, but just think about all the things that happen

digitally around transactions, the data, you know, everything.

This is the beginning of it all.

So the first step to doing this, as we mentioned, is digitizing the cards.

And that really meant making them machine readable.

So before this, the cards were just pieces of plastic with embossed

numbers on them.

Like you had to say or type the numbers into something.

And the nice thing about the embossing is that if you run a shunk shunk on it.

A zip zap.

With the zip zap or the card imprint reader, you actually can get the numbers off of it

without writing it down yourself.

That was a huge productivity gain when they launched the sort of imprint reader machines.

Yep.

So Visa makes the decision, they end up going with the mag stripe technology.

This is the magnetic strip on the back of still to this day,

almost everybody's cards out there.

There's a whole bunch of drama around this.

Citibank had financed a proprietary magnetic solution

that they were trying to push on the industry.

I think they're a bunch of lawsuits.

And didn't they try to like hack the magnetic stripe?

And then they did just to prove that like the proprietary thing would have been more secure.

Yes, but it was proprietary.

So Visa's like, hey, we're not going to pay you Citibank a skiff on everything that we do here.

We take the skiff.

You pay us a skiff on everything.

You pay us a skiff.

Exactly.

So they standardize on the mag stripe for the cards.

The next step then is they have to create a digital point of sale terminal.

Now, this is pretty far outside the scope of what Visa itself could do,

like mass produce a small, inexpensive piece of hardware

that needs to get distributed to millions of merchants around the globe.

That is outside their circle of competence.

Yes, we mentioned earlier and you alluded to this is when Verifone takes off.

So what Visa does is they create a spec.

They're like, this is the spec of what we kind of need to be created.

And they invite different technology vendors to bid on it.

Verifone ends up becoming the large dominant.

I actually don't know what their market share was or is.

I think they had like two thirds of the market at peak.

Yeah.

And it's pretty crazy.

They come up with this sub $500 device that can sit pretty easily on a merchant countertop

that already has a bunch of other stuff on it and not a lot of space

and get it distributed and installed at all these merchants.

Now, the merchants didn't exactly want this thing necessarily,

but the way Visa incentivized them to get it is they gave

merchants who used it a discount on transaction fees,

I think for a period of time for transactions that happen digitally over the digital network.

I see.

If you use this instead of the Zip Zap, you'll get cheaper fees.

Yeah, exactly.

Which that business model carries through to today.

I mean, the way that you charge a card massively affects the interchange that gets charged,

whether it's keyed in with numbers or whether it's swiped or whether it's an e-commerce transaction.

Totally.

One really fun piece of implementation detail around this,

just like with base one and authorization,

where Visa had to build out a telecommunications network amongst all the banks.

Now Visa needs a telecommunications network amongst all the merchants around the whole

world, the country and the world.

That's another whole step change.

That's like single digit millions of nodes.

Yes.

So what are they going to do?

For the pilot program, they work with one of the big telecom vendors

and essentially build it out themselves.

We're now in the 1980s here.

But they realized during this that there's this new

fledgling kind of consumer networking service out there called CompuServe.

And for folks who either weren't alive in the U.S. at this time or

not Americans, CompuServe was like an AOL competitor in the early days of the internet.

I think they invented the GIF.

Oh, I think that might be right.

Yeah.

So as a consumer, you would pay a monthly fee to CompuServe or AOL or whatever,

and it would be your internet service provider, but also like your email and,

you know, your portal to the web.

It was a proprietary internet.

So they somehow get in touch with CompuServe.

And they realized that CompuServe has this dynamic where they've architected out their

network for peak capacity demand, which is probably when consumers are home at night.

The rest of the day, they've got all this capacity that's unused sitting on their network.

Visa ends up renting CompuServe network capacity to send their digital transactions from merchant

point of sale terminals.

And I think this goes on for like years.

That's crazy.

I had no idea.

That's fascinating.

Totally wild.

Normally, you run into the problem where with spare capacity, where like the time where

people want your extra capacity is when you have none.

So it's kind of amazing to find two complementary use cases for the same infrastructure that

when one is waxing, the other is waning.

Yeah, pretty cool.

So now, finally, with this third step, all the pieces of the transaction are digitized,

computerized, fully implemented as part of the network.

This has a huge impact on cutting down fraud.

So like tons of fraud was happening below the floor limits.

If you're charging a $5 transaction to a card, it's just not worth it to the banks and Visa

to figure out whether that's fraudulent or not.

Now, because it's all digital and instant, they can figure out whether that's fraudulent

or not.

So during the pilot, banks and merchants that were participating in this program reduced

chargebacks to the system by 82% relative to what was happening before.

So it's just like a massive amount of fraud gets eliminated.

Which actually should totally justify a lower interchange.

If you're not paying for all the fraud in the system, then the system should cost less

to run.

Absolutely.

In many ways that, hey, we're going to reward you with lower interchange to install these

terminals.

Like at the end of the day, Visa probably could have maintained a margin and all the

banks could have maintained a profit margin and not lost any margin percentage because

implementing this technology lowered the cost of running the whole thing.

Yep.

Two other results from now having all parts of the system aggregated digitally.

One, this is what enables the modern payments world we know today.

You walk up to a terminal, you double click your Apple Watch or you insert a card or you

tap your reader, whatever, and it just works and it gets authorized and you get your thing

immediately.

This is the backbone to all of that being possible.

Two, though, for Visa as a company and Visa as a business, they are now fully digital.

They can scale infinitely with essentially zero marginal cost.

We will later talk about what an astonishing financial profile this business has, but for

now, just know that at this point, they got to stop spending money and they got to only

make every dollar after this basically fell to the bottom line.

This unlocks just like an unfathomably good business model.

Before this, some element of adding scale into the system required manual labor.

Now, it's all just ones and zeros.

Now, the toll booth is fully built.

It is a high-functioning toll booth.

It's an immovable toll booth.

It's digitized.

It no longer has a human sitting there.

Oh, they've got the fast pass system or whatever.

Yep.

Well, David, catch us up to today.

I will give us a bunch of information about the business today, some changes to the business

model, and then we can go into analysis.

But before that, I know there's obviously the IPO event that we want to talk about in

2008 and sort of how the structure of the whole thing changed.

But I think you've got a marketing thing that you want to talk about, too.

Yeah.

There's one more really fun marketing piece that I want to come back to before we move

on to today, and that's the Olympics.

A lot of people, probably everybody listening now, knows Visa is associated with the Olympics.

They're probably the most associated brand other than NBC.

But that's only in America.

NBC doesn't mean anything around the globe.

Visa is the Olympics everywhere.

So this happens right around the same time as the digitization of Point of Sale and the

Cards.

It's 1986.

The Olympics, for the first time, they are going around to companies and offering a global

Olympic sponsorship.

This is just like the NFL episode.

Before this, you could sponsor the Olympics in specific countries.

You could sponsor whatever broadcast, whatever television radio was covering the Olympics

in certain countries.

You could have billboards and whatnot, but you couldn't do a global sponsorship.

And there's no event like the Olympics that could really do this.

I mean, certainly not the Super Bowl, not even the World Cup.

You're missing a large part of America.

Like, this is the only thing where you're going to reach everybody in the world.

And up until this point, one of the mainstay, largest Olympic sponsors in America was American

Express, because this fits perfectly with American Express.

It's for American business people who are traveling abroad.

Olympics.

Great.

Amazing.

The Olympics, the IOC, goes to Amex to try and sign them up to take this marquee global

sponsorship slot.

They think it's a no-brainer.

They give Amex a sweetheart introductory offer deal.

You're the first people we're going to $14 million.

Amex declines.

Whoa.

So they had their bite at the apple and they missed it.

A couple of years before this, right as the Visa empire was being completed with the full

digitization of the network, D ends up getting ousted from the company.

I think, you know, if he were still alive today, he would probably agree with the characterization

that D was one of the most amazing zero to one entrepreneurs in history.

Not so much a one to end kind of guy, especially when the industry in which you are going from

one to N and your shareholders and board is all some of the most conservative financial

institutions in the world.

A lot of conflict starts to erupt, ends up with D leaving the company in 1984.

After this happens, Visa brings on a new global chief marketing officer, a guy named John

Bennett, who came from 20 years at American express.

So he and his team see that Amex has passed on this new, amazing global opportunity with

the Olympics.

They're also formulating the new Visa marketing strategy.

Up until that point, the marketing strategy had been mostly generate category awareness

for consumers around the world.

To the extent we competed with anybody, we competed with MasterCard.

So we positioned against them.

John comes in and he's like, no, no, no, no.

The path to victory here is not positioning against MasterCard.

The path to victory is positioning against American express.

Not because we want to kill American express.

We don't actually care.

We're way, way, way bigger than American express, but we need global ubiquity and adoption.

And people to get comfortable with using Visa and using credit cards.

Remember, there's still this social stigma.

That woman in 1993 in Burger King who's like, oh, it's sad if you're using debt to buy a

hamburger.

Which is so interesting because a signature piece of the Bank of America card since it

launched was that it is actually a charge card where at the end of the first month,

you have the option to turn it into a loan.

But I have never elected that option.

I hold these things called credit cards, but that's a misnomer.

I've never once used any credit.

And if this were certainly 1986 and still 1993, you would not feel that way.

You might feel that way about your American express card, but you wouldn't feel that way

about your Visa card.

Right.

Although I should say it's probably false to say I've never used any credit.

The bank does float you the money for a month, but they have a one month grace period where

you have no interest.

Yes, you are using debt.

You're just not paying interest.

Yes.

Which, you know, hey, that's a great thing to do.

That's an amazing gift that these banks give the world.

It's the American way.

So John had just started.

The strategy is use American express to eliminate the stigma around Visa and by association,

paint MasterCard as having that stigma because we're not even bothering to talk about them.

So how do we go after American express?

Well, the network is much smaller.

The American express merchant network at the time was about 25% the size of visas.

So they design a whole marketing campaign around going after American express and the

tagline of the campaign, you know, they show these exotic locales that the type of customers

who would be using American express, that they would be dining at these restaurants

or going to these events or going on these vacations.

And the end folks who are of our similar age, probably remember exactly the words here.

If you go there, remember to take your Visa card because they don't take American express.

So great.

And then the second tagline to it was Visa.

It's everywhere you want to be.

So the Olympics come up after Amex declines, John and the team get in touch with the IOC.

The price tag has gone up to $17 million just for the rights.

That's before any media buys, no advertising.

It's just for the right to be a global sponsor of the Olympics.

They pull the trigger.

They become the founding like global Olympic sponsor.

They spend another $23 million in media for the 1988 Olympics.

So $40 million in total on one global event.

Well, the two, there's the summer and the winter Olympics, but like one year of global

events.

That's about $110 million in today's dollars.

Yeah.

Wild way more than they spent on any of the technology projects that we were just talking

about.

I mean, yeah.

R and D costs money, but go to market costs more.

Yeah.

What's the line?

First time founders focus on technology.

Second time founders focus on distribution.

Yep.

And then the real kicker, they of course become the exclusive payment provider at the Olympics.

So everybody now coming to the Olympics, which is like a lot of people from around the world

that are going to the Olympics, the only payment card provider accepted there is Visa.

So they're training all these people that are going to the Olympics year after year

after year.

It has now been 37 years that Visa is the exclusive payments, global sponsor of the

Olympics.

They're contracted through 2032, so it will be at least 46 years where Visa is the only

card accepted at the Olympics.

Which that's not that big a deal because there's not that many people that go relative

to the people that see the media and understand the brand association.

Of course, of course.

But the reason we're talking about this, hey, it's an awesome story, but to the last

outstanding piece of enabling the global Visa empire, this last thing is the stigma.

How do they get rid of the stigma of I can use my credit card and not feel like it's

a taboo?

This was it.

Position against Amex, go to the Olympics.

It's the perfect event.

You're around the world, the type of people who go to the Olympics, the type of people

who use Amex.

They use their Visa cards and they're proud of it.

Love it.

So David, take us to the IPO.

This thing was an organization that was owned but not with stock.

A for-profit non-stock membership organization.

And now they're an enormously profitable public company.

So how did we get from there to here?

Yep.

Just about a half a trillion dollar market cap.

So the precipitating event wasn't actually the banks trying to get greedy and monetize

their asset, although they did monetize the asset.

They were monetizing it just fine the way that they currently owned it.

Yes.

The profits being spit out of the system were just fine.

In 2005, there finally was another huge antitrust lawsuit.

I think against both Visa and MasterCard.

It actually is a class action lawsuit that the merchants brought.

And they basically got fully fed up with interchange.

And every 10 years or so, there's some meaningful merchant push to try to change interchange.

And they either do it in Congress or they do it in a class action case.

You know, there's a variety of different ways.

And this particular class action suit in 2005 is still running today.

And the numbers have mostly been figured out of how much Visa will owe from a 2012 ruling

that then got appealed.

So it's sort of still going on.

But basically, there was a lot of uncertainty in the 2005 and 2006 time frame of,

geez, what's the liability here going to be?

And MasterCard had gone public and did not sort through this issue at all.

They just said, oh, we're going public.

And shareholders, yep, there's lots of uncertainty in our future.

And like, we'll see, but buy our stock.

And that, as you can imagine, did not go well at all.

And so as they're getting ready to go public for lots of reasons, basically, it was time.

They wanted to have some liquid currency that floated for acquisitions.

They had to be competitive with MasterCard, who was going public.

Amex was already public.

You can reward and retain talent easier.

There's just lots of reasons why you would want this thing to be sort of a standalone entity,

especially at this point in history.

And what they had to do was they created these B shares,

and they isolated all the liability from this class action suit to the B shares.

So while MasterCard had a pretty flubbed IPO, Visa had a great IPO because they said,

whatever the court's rule, the banks who own the B shares,

the pre-existing shareholders will own all that liability and all the A shares,

the new people who are coming in as owners of the company will be protected.

Oh, that's awesome.

I didn't realize that in the research.

It finally happens in 2008.

Visa goes public right as the financial crisis is starting, which obviously wasn't planned,

but ends up being great for the banks and probably for Visa too.

It becomes the largest U.S. IPO in history.

Up to that point, they raised $18 billion at a $90 billion initial market cap,

but that $18 billion wasn't primary capital to the company's balance sheet because

obviously Visa was incredibly profitable, did not need capital.

It prints money.

Why would you want to raise capital in dilute?

That $18 billion was secondary selling to the banks that owned the company,

which I think for many of them proved to be a total lifeline through

the financial crisis that helped them survive.

Yep.

I mean, now Visa is owned mostly by big institutional shareholders,

the vanguards and fidelities of the world, and the banks are much smaller shareholders.

Well, at this point, Visa's market cap is significantly larger than any of its former

member banks.

It's wild.

I mean, DHOC basically was right.

That's the TLDR on this is this thing, this information network that doesn't have to take

on any of the risk of any of these transactions.

It's purely about connecting buyers to sellers and moving information back and forth has

proven to be maybe the best business model ever.

And let's go through the shape of the business today and listeners, you can decide.

So David and I have made passing references to the idea that this is this ludicrously

cash generative business.

And I think it's time to actually examine interchange fees today, how they've changed

over time, how they flow, who benefits, what's Visa's cut, all of that.

So you can kind of understand it.

So Visa's business model.

The first thing to know is almost nothing has changed since the 80s to today on how

the transactions work.

So the authorization flow is exactly the same as it was where all the auth flows upstream.

The merchant runs the card, checks with their bank, who checks with VisaNet, who checks

with the issuer's bank.

Is this account in good standing to make this transaction or not?

And once they get the yes, then the response flows all the way back down the chain in the

order that ultimately the flow of funds will happen later on.

And, you know, within milliseconds, unbelievably short period of time, no matter where you

are in the world, no matter what currency you are transacting in, your transaction can

happen.

Pretty unbelievable.

Amazing that within seconds you can know for certain that someone is vouching for the customer's

money and paying in full.

Well, nearly in full.

Minus a merchant discount rate.

So what is this merchant discount rate?

There are a few things at play here.

There are interchange fees, and those interchange fees go to the issuing bank.

There are assessment fees or network fees, and that network fee goes to Visa, MasterCard,

et cetera.

And then there are payment processing fees, and those go to the acquiring bank, the bank

that acquired the merchant.

This is the merchant's bank and the technology provider of whatever they're using to process

their payments.

So three fees, interchange, network fees, payment processing fees.

Here's what those could look like.

And again, I say could because they are different in every scenario.

There's a very long PDF on Visa's website that is available with every different concoction

you could imagine.

So here's an example of a large merchant in the United States, so no foreign transaction,

accepting a credit card.

It is obviously different whether we're talking debit, smaller merchants, but large merchant,

U.S. credit card.

The merchant is charged a 2% discount off the sale price.

So it was $100 a pair of shoes.

You're now making $98, and what happens to that 2%?

So that 2%, the lion's share of it is the interchange, the 1.6%.

That goes to the bank that issued the card.

To the cardholder, to the consumer.

Right.

So when everybody on the planet is marketing credit card offers to you, they get the lion's

share of the interchange.

So they actually have a lot to play with in customer acquisition for their cards because

they make the lion's share of the transaction, the interchange.

There's a lot of costs in there too because they bear all the fraud risk.

There's a lot of things they got to do, but you know, they get most of the money.

A small amount on the order of like 0.2% or 20 bips for you finance people out there

goes to the bank that acquired the merchant.

This could be Chase, Fiserv, Wells Fargo.

This is, you know, the merchant's bank.

It is important to know this may also get split with a technology provider.

So sometimes the financial institution directly has technology that you can use.

But other times the checkout terminal or software that you're using is not actually

the financial institution behind it.

So that 0.2% can kind of get split between the financial institution and the technology

provider.

And those are folks like First Data and stuff like that, right?

Yes.

0.15 to 0.2% goes to the network.

This number is actually quite hard to find.

You read Visa's entire annual report and you're like, wait, but what part of the split do

you actually get?

And it's because they get it in a variety of different ways.

I would say I don't know if the Visa people would tell you this is intentionally obfuscated

or if it just ends up being kind of obfuscated, but it's not super easy to figure this out.

So Visa, let's round it to 0.2%, gets 20 cents of that $100 shoe sale.

But the cool thing about their 20 cents is there's basically no variable costs.

It's not dealing with fraud.

It's not moving heavy data around.

I mean, merchants are allowed to have a 20-character name in Visa's network.

Like, this is tiny amounts of data.

Stack as much metadata as you want on top of that.

We are not shipping around huge payloads here.

There is not like NVIDIA chips that need to run in these data centers to do any crazy

LLM processing.

Like, this is just shipping very small pieces of information around.

The payload size of the data has remained infinitesimally small relative to the amount

that technology has progressed.

This 0.2%, the 20 cents on the $100 transaction, very low variable costs associated with that.

So a few caveats on this.

Debit is significantly less in most cases and often thanks to regulatory reasons.

And the logic here is nobody's actually taking any risk to extend credit.

So banks should not get to make a bunch of money on debit.

It's literally just moving money out of your account and into the merchant's account.

So debit cards are going to be less.

Smaller merchants often pay closer to 3% than 2% because they're just doing lower volume.

And for these small businesses, the acquiring bank actually has to do a lot more work.

Think about how difficult it is to market a credit card to an individual.

Well, small businesses kind of behave like individuals.

So because the acquiring bank actually has to do a lot more work and incur costs,

they get to make more money.

So there's sort of this very interesting thing that has happened where interchange

is intentionally quite flexible.

This is a playbook theme that I want to pull forward.

This business is probably the greatest master class in the entire world on incentive alignment.

And I was talking with Lisa Ellis at Moffitt Nathanson, who sort of woke me up to this idea.

The interchange pool has an elegance to it.

Since the money never actually gets sent to the merchant,

the network and its partner banks or constituent banks can kind of figure out

exactly how it should flow in each of these particular types of transactions.

It's an envelope of value that the whole ecosystem can sort of play with.

And I think that's an important thing to realize about interchange

is that it's intentionally flexible.

Yep.

Which brings up an obvious point that we perhaps didn't highlight as specifically

as we should have earlier.

This network is actually a five-sided system.

There's the consumer that is buying something.

There's the merchant that is selling that something to them.

There's the Visa network in the middle.

That's the third party.

But then there also are the fourth and the fifth parties,

which are the banks for each of the consumer, the issuing bank, and the merchant, the merchant bank.

So this sort of envelope of value concept makes sense

because those three parties in the middle, Visa and the two banks,

they need to split up the value.

And depending on who is doing what work, it should be split different ways.

And Visa has created these products where, you know, it's not just a Visa card.

You might get a Visa signature, a Visa signature business, or a Visa...

I don't even know what they are.

But they basically have said,

why don't we come up with other types of Visa cards that just have higher interchange?

And merchants are like, what do you mean just have higher interchange?

Your new product is you charge me more?

And Visa says, well, the cool thing about higher interchange is that there's more money

in the envelope to play with to reward other constituents in the transaction.

And so let's say we want to tell the issuing bank,

hey, for this tier, this Visa signature, you actually get more money.

Well, then they turn around and say,

cool, I'm going to go and I'm going to give better rewards

to higher spending, you know, more credit worthy customers.

And then Visa's argument back to the merchant is, well, hey,

because we're actually taking more money on this fancier card,

you're getting access to customers that we've now brought onto our network

who are much better customers that you really want to have at your establishment.

And so it's this very interesting, again, envelope of value,

I think is the way to describe it, where, you know,

I'm sure the merchants wish they could be more a part of the decision process.

But it does theoretically enable incentives to be spread around

that benefit everyone in the ecosystem.

Yep. And for merchants of scale today, they're cut in on this too, right?

There's the Alaska Airlines mileage card.

There's the Costco card.

Like merchants are able to, by working with banks,

be part of this discussion too, if you're of a certain size.

Right. In the olden days, you know, if you're the Affinity logo

that got printed in the top stripe, the way that works today is

you have a special deal with the issuing bank where you're going to say,

hey, we're going to help you get more card members

by putting our logo on the card.

And so even though oftentimes we're the merchant,

well, actually what we're doing is we're helping you

distribute cards on the issuing side.

And maybe there's cool things we can do when those cards are spent

at our establishment where we give extra awards,

but it's effectively marketing channel for the issuing bank.

So they get to split some of those economics.

And I guess at the absolute very highest levels of scale,

you have something like the Amazon and JPMorgan Chase relationship