Visa

In this episode of "Acquired," hosts Ben Gilbert and David Rosenthal delve into the remarkable story of Visa, a company that revolutionized global commerce by creating a ubiquitous electronic payment network. Visa's journey began with a daring initiative by Bank of America, which mailed out unsolicited credit cards to customers in Fresno, California, in 1958. Despite initial setbacks, including massive fraud and skepticism, the concept gained traction, leading to the creation of a five-sided network involving consumers, merchants, Visa, and the issuing and merchant banks. Visa's success hinged on a series of socio-technical innovations, including the development of authorization systems, settlement digitization, and the introduction of digital point-of-sale terminals. Alongside these technological feats, Visa's strategic marketing, particularly its association with the Olympics, helped dispel the stigma around credit card usage. Today, Visa stands as one of the world's most valuable companies, with a network that processes trillions of dollars annually, a testament to its extraordinary ability to align incentives across the financial ecosystem.

• Ben Gilbert and David Rosenthal discuss the history and impact of Visa.
• Visa's role in global transactions is highlighted, along with its competition with Mastercard.
• The episode aims to explore the creation, value, and cost distribution of credit and debit card systems.

"Welcome to season 13, episode four 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."

The quote introduces the hosts and the focus of the episode, which is Visa's remarkable global payment system.

• Visa is the 11th most valuable company in the world.
• It surpasses the value of any bank, including those involved in its creation.
• Visa is highly trusted for reliability and security.
• Most people are unaware of Visa's actual functions.
• Visa does not extend credit, issue cards, work with merchants or consumers directly, or bear any risk.
• Visa's role is to connect banks to other banks, creating a network for transactions.

"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."

This quote explains Visa's primary function as a network facilitator rather than a direct financial service provider.

• Visa's story is intricate, with many people unaware of its origins and operations.
• Dee Hock, Visa's founder, would demonstrate the lack of public knowledge about Visa in his speaking engagements.
• Visa's story is unique, especially since it is not based in New York like most financial infrastructure.

"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."

The quote highlights the general public's lack of knowledge about Visa's management and operations despite its significance.

• In 1958, Bank of America launched the Bank America card in Fresno, California.
• The unsolicited distribution of credit cards to customers was a revolutionary but chaotic move.
• The Bank America card was the first to allow customers to roll over their balance, introducing the modern credit card concept.

"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 is 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."

The quote refers to a significant event in financial history where Bank of America's credit card initiative began, known as "the drop."

• Charge cards existed before credit cards, used for specific purchases with full payment due monthly.
• Consumer credit has historically driven economic growth in America.
• Bank of America's credit card combined the convenience of a charge card with the option for credit.

"Consumer credit built this country. Whatever one's feelings about personal debt is difficult to disagree with this assertion."

This quote reflects on the pivotal role of consumer credit in America's economic development.

• Bank of America faced significant losses and fraud initially but managed to make the program profitable.
• The bank kept the program's success quiet, leading to a slow adoption of credit cards by other banks.
• In 1966, the Bank America Service Organization was created to license the program to banks nationwide, laying the groundwork for Visa.

"From 1960 to 1966... there were only ten new credit cards introduced in the entire United States... from 1966 to 1968, approximately 440 credit cards were introduced by banks large and small throughout the country."

The quote indicates the explosive growth of credit cards once Bank of America's success became known.

• The franchise model of Bank America faced operational challenges as it expanded.
• The need for a standardized interchange system became apparent as different banks were involved.
• Dee Hock played a crucial role in transforming the Bank America card into Visa.

"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."

This quote describes the bold strategy of Bank of America in launching their credit card initiative, which would eventually evolve into Visa.

• The initial credit card system was based on trust between merchants, banks, and Bank of America.
• Merchants would accept credit cards based on the belief that the issuing banks would honor the transactions.
• This system was complex, expensive, and lacked standardization, leading to frustration among all parties involved.

"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 whatever."

This quote emphasizes the reliance on trust and contractual relationships in the early credit card system, where actual funds verification was not immediate.

• The tensions between merchant banks and issuing banks led to the demand for a summit by Bank of America licensees.
• The summit in Columbus, Ohio, aimed to address grievances and operational chaos within the system.
• Bank of America's lack of senior representation at the summit indicated their underestimation of the issues at hand.

"This is untenable. We can't operate like this. We got to fix this."

The urgency of the situation is highlighted, showing that the existing system was unsustainable and required significant changes.

• Dee Hock, a key figure from Seattle National Bank of Commerce, played a pivotal role in the transformation that led to the creation of Visa.
• Hock was not a typical banking tycoon but was instrumental in proposing a new way of operating the credit card system.
• His background and unconventional approach were crucial in convincing Bank of America to cede control and allow for a new organizational structure.

"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."

Dee Hock's unique character and approach are emphasized, contrasting him with typical industry leaders and highlighting his importance in Visa's history.

• Visa's structure as a for-profit, non-stock membership corporation allowed for democratic participation and ownership based on transaction volume.
• The organization operated on the principle of cooperation among competing banks to maximize the network's value.
• Visa's regulations and governance were designed to be modifiable by the members, ensuring adaptability and commitment to collective decisions.

"Any 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?"

This quote reflects the grand vision and challenge of creating a new kind of organization that could harness the collective power of banks worldwide.

• Visa's international expansion required convincing banks around the world to join a global network, overcoming the desire for domestic dominance.
• The rebranding from Bank of America to Visa was a strategic move to create a universally recognizable and neutral brand.
• Visa's marketing and operational strategies led to rapid growth in member banks and cardholders, outpacing competitors like Mastercard.

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

The potential impact and value of creating a global payment network are highlighted, showcasing the ambitious scope of Visa's vision.

• Visa needed to develop technology for transaction authorizations, data processing, and network reliability to realize its vision of a global payment system.
• The initial system relied on manual authorization for transactions above a certain floor limit, demonstrating the need for technological advancements.
• Visa's infrastructure evolved to support instant authorizations and electronic data processing, essential for widespread credit card adoption.

"It is a little bit more than just saying they put data centers next to natural gas flares or stranded energy from wind turbines."

This quote underscores the complexity and innovation required to build Visa's technological infrastructure, which was critical to its success as a payment network.

• The initial credit card authorization process involved a series of phone calls between banks and merchants.
• This process was time-consuming, taking up to 20 minutes, and was not feasible outside bank business hours.
• Transactions in different time zones or international contexts were particularly problematic due to bank closures.

"Have they hit their limit? The issuing bank would go, look that up. The person. They're literally the person. Talk on the phone to the person at the merchant bank. Give them the answer."

This quote illustrates the manual and personal nature of the early credit card authorization process, where bank employees would communicate directly to verify transactions.

• Visanet was a technological solution that replaced the bank-to-bank phone calls with an automated system.
• The Bank America Authorization system, or BAS, was an experimental project started by Dee Hock to address the inefficiencies in transaction authorization.
• The new system significantly reduced the time taken for authorizations and enabled transactions outside of business hours.

"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."

This quote explains the function of Visanet, which streamlined the authorization process by eliminating the need for direct communication between banks.

• Bank of America (BofA) secretly negotiated with American Express to create a joint automated system for transaction authorization.
• This proposal was a potential conflict with the National BankAmericard Inc. (NBI) operating agreement.
• The Department of Justice eventually deemed the joint venture as anti-competitive, forcing abandonment of the project.

"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."

This quote reveals the clandestine discussions between BofA and American Express to develop an automated authorization system, which posed a challenge to NBI and later Visa's plans.

• Visa decided to develop its own in-house technology after receiving overpriced bids from external firms.
• Aram Tatullian from TRW was recruited to lead the development of Visa's technology.
• The project involved building a telecom network, computer systems for banks, training, and a centralized data center.

"We're going to do it ourselves. How hard can it be?"

This quote demonstrates Visa's determination to build their own technology system despite the complexity, leading to significant advancements in their operational capabilities.

• Visa faced the challenge of efficiently handling settlement, which involved reconciling transactions and moving money.
• They created an automated clearinghouse system, coinciding with the Federal Reserve's development of a similar system for checks.
• The new system significantly reduced settlement times and operational costs.

"You need an automated clearinghouse. And this is unbelievable."

This quote highlights the revolutionary nature of Visa's automated clearinghouse system in solving the complex problem of settlement in the banking industry.

• Visa aimed to digitize the point of sale and cards to facilitate every transaction digitally.
• Magnetic stripe technology was adopted for cards, and Visa worked with vendors like Verifone to create digital point of sale terminals.
• The digitization process reduced fraud and enabled the modern payments ecosystem.

"So they build what becomes visanet in house. At this point, there's no Internet. So it's all just working over telephone."

This quote underscores the innovation of building Visanet and the digitization of transactions before the widespread adoption of the Internet, leading to the efficient payment system we know today.

• Visa's marketing strategy focused on positioning against American Express rather than Mastercard.
• They aimed to eliminate the social stigma around using credit cards and promote global ubiquity.
• Visa became the exclusive global Olympic sponsor, reinforcing their brand and acceptance worldwide.

"Visa. It's everywhere you want to be."

This quote encapsulates Visa's marketing message, emphasizing the universal acceptance and convenience of Visa cards, which was bolstered by their association with the Olympics.

• Visa has an exceptionally high net income margin of 50%.
• Mastercard has a net income margin of 43%.
• Microsoft, a software company, has a net income margin of 34%.
• Apple, with highly marked-up products and strong brand differentiation, has a net income margin of 25%.
• Google, holding a monopoly in the information market, has a net income margin of 21%.

"50% net income margin, including Mastercard, which is 43%."

"Microsoft, 34% net income margins. Microsoft sells software."

"Apple, 25%. They have an incredibly marked up product that is differentiated wildly by brand."

"Google. Google has a monopoly in a market of information. What are the costs involved in that business? 21% net income margin."

These quotes highlight the remarkably high profit margins of Visa compared to other major companies, underscoring Visa's financial efficiency and the profitability of the payments industry.

• Visa has 27,000 employees, which seems large but relatively small given the scale of their operations.
• Nvidia, a company discussed on "Acquired," also has 27,000 employees but does not match Visa's gross margins.
• Visa's employee count is contextualized by its value-added services and global reach.

"They do have 27,000 employees."

"Interestingly, there is another company that we have talked about recently on acquired that does $30 billion in revenue and has 27,000 employees. Do you know what it is, David?"

"That would be Nvidia."

The comparison between Visa and Nvidia's employee count juxtaposed with their revenue and margins provides insight into the operational efficiency and profitability of Visa's business model.

• Visa processes 707 million transactions per day, equating to 8,600 transactions per second.
• The company's infrastructure supports 99.99% uptime, reflecting high reliability.
• Visa's global presence includes 16,000 banks in 200 countries and six data centers worldwide.

"Visa does 707,000,000 transactions per day. That is 8600 transactions per second every second throughout the year."

"It is 99.99% uptime, which I am not a site reliability engineer, but I think that is five nines, which is wild."

"That's 16,000 banks in 200 countries. They have six data centers distributed across the world."

These quotes emphasize Visa's impressive global infrastructure and its capacity to handle a vast number of transactions with minimal downtime, showcasing the company's technical and operational excellence.

• Visa's network transmits minimal information, adhering to a "lowest common denominator protocol."
• Banks prefer minimal data sharing to maintain a strategic advantage and customer relationships.
• Visa only knows card numbers, not personal identities, which banks favor to retain customer ownership.

"Lots of people in this ecosystem would love it if you could send entire receipts in machine-readable form across this network."

"Your bank knows your name, knows your Social Security number, knows your address. Visa, I'm running transactions across their network all the time. All it knows is my card number."

The discussion highlights the deliberate design of Visa's network to transmit limited data, balancing the ecosystem's needs for privacy and functionality while maintaining the banks' control over customer data.

• Debit cards were introduced to the Visa network decades after credit cards, despite being a simpler product.
• Banks initially resisted debit cards due to concerns over encroaching on banking relationships.
• Consumer demand for a payment method like credit cards but without loans led to the eventual inclusion of debit cards in the system.

"It's pretty fascinating that debit came later."

"The banks were, no, no debit cards. That sounds like banking relationships."

The introduction of debit cards to Visa's network reflects the evolving consumer preferences and the strategic considerations of banks in protecting their core business areas.

• Merchants in the U.S. paid an estimated $93 billion in Visa and Mastercard credit card fees last year, a significant increase from $33 billion in 2012.
• Half of Americans carry a credit card balance, with interest rates around 22%.
• Anti-usury laws and state regulations have historically influenced where credit card programs are issued.

"Us merchants paid an estimated 93 billion in visa and Mastercard credit card fees last year."

"Half of Americans carry a credit card balance, which is absolutely brutal since those interest rates right now are around 22%."

These quotes shed light on the financial burden placed on merchants and consumers due to credit card fees and the high-interest rates associated with carrying a credit card balance, raising questions about the sustainability and ethics of such practices.

• Visa's growth includes offering value-added services to merchants and banks as a high growth area.
• These services include anti-fraud analytics and other products necessary for participating in the Visa ecosystem.
• Visa's approach involves making some aspects more affordable while introducing high-margin products to maintain profitability.

"Visa is sort of a master of packaging, figuring out how can we take some things and sort of make them more affordable to our merchants or give them away for free, while also figuring out how can we sort of move things around or invent new products that are super high margin that give us a lot of room to run in the future."

The quote reflects Visa's strategic maneuvering within the payments industry to balance competitive pricing with the introduction of profitable, value-added services, ensuring sustained growth and revenue.

• Visa is the 11th largest company in the world, valued at half a trillion dollars with around $30 billion in revenue.
• The company retains half of its revenue after taxes as net income, without taking on financial risk.
• Visa's success is based on processing transactions and moving information globally.

"But 11th largest company in the world valued at half a trillion dollars, around 30 billion in revenue. And they get to keep half of that at the end of the day, and they take no financial risk, and they are just moving information around."

This quote encapsulates Visa's market dominance and financial success, highlighting the remarkable profitability of its business model, which capitalizes on the movement of information rather than physical goods or services.

• Visa and Mastercard function as a duopoly with no significant competitive advantage over each other.
• They rely on operational excellence and clever product bets to maintain their position.
• Visa's brand positioning and partnerships, such as with the Olympics, have contributed to its perceived premium status.

"At the end of the day, Visa and Mastercard have basically no sustainable competitive advantage over each other."

"Visa made a genius move, positioning against American Express, going up market in perception and partnering with the Olympics."

The discussion acknowledges the unique competitive landscape Visa and Mastercard operate in, where differentiation is subtle and brand perception plays a significant role in maintaining their duopoly status.

• Visa's future growth may involve expanding into B2B payments, cross-border transactions, and business-to-consumer payments.
• The company's ability to innovate and position its services as beneficial to both consumers and the ecosystem is key to its continued success.
• Visa's role in ecommerce is particularly significant, as credit card networks are essential for online transactions.

"The credit card networks really are providing a huge amount of value to ecommerce."

"There's been downward pressure on interchange for a long time."

These quotes highlight Visa's potential for growth in various market segments and the importance of its services in facilitating ecommerce, despite the challenges posed by interchange fee pressures.