Visa

0:00 It's funny, when we picked this episode, I was like, Oh, this is gonna be pretty down the middle and easy and then of course as we get into the research, as always, it's like oh nope, big story here. Nope. There's always a story. Who got the truth? Is it you, is it you, is it you Who got No.

0:19 Is it you, is it you, is it you? Down. Straight. Another story on the way Welcome to Season 13, Episode 4 of Acquired, the podcast about great technology companies and the stories and playbooks behind them.

0:35 I'm Ben Gilbert. I'm David Resenthal. 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.

0:51 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.

1:08 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 why the value that the credit and debit card system creates compared with how much it captures and by whom in what situations.

1:36 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.

1:55 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.

2:07 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.

2:19 David, it is insane. This is such an insane story. I can't believe we're all the way in season thirteen. And we haven't talked about this company yet. But As we will get into

2:27 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 acquire.fm/slash email. Two new fun things. One emails now include little hints and some

2:46 Teasers about what next episode will be. So if you want to play the guessing game, sign up at acquire.fm slash email. And The emails have another new feature. We are including follow-up from previous episodes when we learn new things from you after release. Come talk about this episode with us after listening at acquired.fm slash slack. And if you want

3:06 More from David and I outside of these big long main acquired episodes. Check out ACQ two 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.

3:25 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.

3:46 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 De Hawk, the founder of Visa, who we will talk a lot about as we go along here.

4:04 He told this great story of how after His time at Visa and his kinda 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 Visa card.

4:19 And he would ask, How many of you recognize this? Mm. 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?

4:33 Yeah. 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.

4:42 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.

4:56 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 is not run out of New York. So Our task today is to tackle Yeah. And we start.

5:09 Where some of you I suspect know. But the vast majority of you I also suspect don't. We start in nineteen fifty eight. In Fresno. California.

5:19 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 as chapter one, the drop. nineteen fifty eight. The drop has become

5:33 Like If you say the drop to someone in the fin tech industry, they're like, Oh, September nineteen fifty eight, Fresno. Yep. And the rest of the world has no idea. Yeah. All right, so what happened? Well

5:46 The then largest Bank in America. The San Francisco based Bank of America. Which formerly was called the Bank of Italy.

5:56 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.

6:22 So Bank of America. Decides. That they are going to mail out Little

6:29 Rectangular pieces of plastic. to every single One. Of their sixty five thousand Customers.

6:38 In the city. Of Fresno, completely unsolicited. Now, a couple things about this. One, it's wild. I think the Fresno population at this point in time was like Maybe two hundred, two hundred and fifty thousand people. So like

6:50 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.

7:02 People don't know what they are, they have no idea what to use them, mass chaos in Seos. 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.

7:25 All right. So We need to spend a few more minutes on Bank of America's history and the history of banking and payment industries in the US more broadly.

7:36 So Like we said, B of A was the biggest bank in America in the nineteen fifties. But it was not like All the other big banks at the time. It was

7:45 A consumer bank. The other large and influential banks in America back then were like the JP Morgans. They were white shoe corporate banks. Based in New York. We talked about this a lot in the Nike episode.

7:59 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 JP Morgan's, you know, the Morgan Stanley's, et cetera, of the world came to be.

8:29 For the most part, consumer banks were kinda 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

8:45 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

9:11 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

9:32 You know, the business of Banking is well. Banking. You take deposits, you make loans. You make your money on the loans.

9:40 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

9:54 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

10:31 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. Consolidated into just one card.

10:45 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 And they call it The Bank Americard.

10:57 Beautiful name. Beautiful then. And it would survive for quite a long time. No. This wasn't exactly

11:03 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

11:15 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.

11:27 Worked. But They also had a bunch of problems. one until the creation of the Federal Reserve in the nineteen tens. The parties.

11:36 Caching 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.

12:00 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 big problem. It took a really long time.

12:20 Imagine, you know, we're talking like the eighteen hundreds, early nineteen hundreds. 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.

12:48 I have this check, so you owe me six dollars and eight cents. Okay, next check, oh, I owe you four dollars and twenty cents. And it was this crazy system of individual couriers bringing checks from the person who uh 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 US until the nineteen seventies. Wow. Humans though.

13:13 R 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.

13:27 And that is. Credit accounts. Charge counts. Rather than Giving me money or a check.

13:33 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 nineteen eighties, we had this at our local gas station near our house. Really? We had a credit account and it was just like Whenever

13:53 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 see if my dad would go Give them some money. Which saves on operations for everyone. It's uh 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.

14:13 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 Uh

14:25 card or account that would work it. 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.

14:40 Yep. In nineteen thirty nine, Standard Oil of Indiana sent two hundred and fifty thousand unsolicited cards directly to all of their customers. Yeah, making the Fresno drop look like a uh drop in the bucket, shall we say? Well, and interestingly, this is twenty 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.

15:07 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.

15:18 But It sucks running these. charge account programs. On our own. We could collaborate and have a

15:26 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 fifty seven different charge cards in your wallet, or would you rather have

15:46 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 a huge benefit of a shared history. Now all these merchants who were losing money on people

16:01 coming and getting a loan from them in the form of I'm gonna 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 shar, you actually can have a shartion of who a consumer is across locations and across different retailers. Yep. So this comes to be kind of Post depression in the nineteen thirties, nineteen forties in the US. And this really is starting to sound a lot like Visa. Except as you point out Ben. There is

16:32 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.

16:45 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.

16:56 But also B, once you get past, I don't know, a couple hundred, a thousand participants here, like are 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 pooling their capital into in order to run the network on behalf of all of the merchants, it gets messy. Or

17:18 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.

17:29 So Diners Club was first important. People might No one have heard of Diners Club. It still exists today. It's like a sub brand of Discover. Totally. There's a very Famous

17:39 Legendary origin story. Diners Club. And it goes like this. In

17:45 Nineteen forty nine, you know. Post World War Two, economic prosperity beginning of the Madman years in New York and Manhattan. A New York businessman. Named Frank McNamara is hosting a lavish

17:58 Business dinner. In downtown. Halfway through the dinner. He realizes. That he forgot his wallet at home.

18:05 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.

18:16 With enough cash in time. To pay the bill for the dinner and, you know, face is saved, his reputation as a Ariadite businessman is preserved. And then afterwards, you know, he's like talking to his wife, he's like oh There's gotta be a better way to do this. There really should be a

18:32 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

19:11 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.

19:24 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 diners club, early American Express, we're talking about a five to seven percent discount.

19:48 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.

20:12 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

20:25 Restaurants in Manhattan. They're competitive with one another. But it's not exclusive competition. This isn't JCPenney'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.

20:42 at their Restaurant. Great point. So there's some incentivized Sharing. It's almost like the reason to enter into a bundle.

20:51 for your most extreme fans, which are only gonna 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 gonna use your business, you should figure out some kind of bundling system. that makes you work with compliments 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 other restaurants'cause they're gonna do that anyway.

21:29 It's crazy. Like you said, Diners Club is able to charge restaurants and other merchants. They expand to hotels, you know, airlines, anything that a business person traveler would need. Seven percent of the gross bill. You know, merchants complain about three percent today. Seven percent. And these are restaurants. Like that's crazy. Eventually. They have so much power in what they're doing. This product is so good.

21:52 They also add a fee for the card holders. And It's companies. Like 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.

22:05 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.

22:36 And Diners 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, still a brand today. But it's basically impossible to create a independent from the ground up.

22:53 network of this at the time because You were just talking about the operational cost of running this thing. Think about that. merchant and customer acquisition costs. Nobody knew what diners club was. They have to now go canvas the entire island of Manhattan and ultimately, you know, the whole country and world and sign up all of these merchants and

23:12 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?

23:29 Of course brings us to The brand you're all probably thinking about here. Americ. Which is the diners club of today. It's the favored card by businesses. It is the card that is most used for travel and entertainment and

23:45 Meals. Yep. And so as you might remember from our Berkshire Pathaway series a couple years ago. Amex at this point in time. was primarily a traveler's checks business.

23:55 That's how they started, right? Well Actually no. They started in eighteen fifty. This is amazing. Do you know who started American Express? This is a version of Dee Hawk holding up the Visa card. Ooh.

24:06 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. Eighteen fifty. 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.

24:30 Yeah, something like that. The infrastructure of America was getting built out. So American Express, 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. And I think it's fascinating that

24:51 Wells Fargo came after Amex. Like you think Wells Fargo as this old timey foundation of America. American Express is even older than that. So Air Mac. By this point in time had become a traveller's checks. Primarily. That was their primary business. As we talked about on the Berkshire episode.

25:08 That was a Freaking Awesome business. Partially because travelers checks, you know, they made good money. You would buy a hundred dollar travelers check and pay MX a little fee or whatever. But the float

25:19 And the breakage. Like there's travelist checks out there today that are fifty, a hundred years old that have never been cast and Amex has just been Sitting on that cache 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.

25:42 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.

25:54 Because we're American Express. We have relationships. With companies. We have relationships with restaurants. We have relationships with hotels.

26:04 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 traveller.

26:14 Program. They sign up seven hundred thousand 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

26:29 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.

26:52 Back. To Fresno. In nineteen fifty eight. Because the timelines match up exactly. This is crazy. Amex launched There.

27:00 charge card program in nineteen fifty eight. 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, Okay.

27:16 The time is right. Let's do credit cards. Let's go to Fresno. But hopefully as we've painted the picture. Their motivation and diners club and Amex and even the merchants and retailers' motivations.

27:28 R Very different. B of A wants Two things out of this. One, like we were saying earlier. They want to streamline and simplify

27:37 all their wildly diverse lending programs. This is gonna be huge. operational savings for the bank if they can pull this off. Two though. bigger opportunity for B of A

27:51 is what can this do for our banking business itself. 'Cause remember, how do banks make money? They make money on. Loans. And

28:00 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

28:12 informed by their previous model of lending. Two 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.

28:28 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 thirty 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.

28:52 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.

29:06 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.

29:21 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

29:43 There's one more really, really important sub point here too. What this loan Is And it relates to the banks and why This is so powerful for B of A and for all banks.

29:55 Think back to the old way that B of A was doing this. A California, you know, homeowner. Wants to go buy a new refrigerator. They win into a B of A. talk about it with the lending officer, blah, blah, blah, a bunch of operational costs. Who cares about that?

30:09 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.

30:20 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.

30:32 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.

30:43 And'cause we're talking about California here. There is a very high likelihood chance. And I think at the beginning I suspect a one hundred percent chance. That the merchant also banks with B of A.

30:55 So that money is never Leaving Bank of America's hands, which frees up more capital, which frees up float, which is just like The B of A management must have been besides themselves with glee about this. Well, in theory. If they manage to put any sort of financial controls or proper risk underwriting on this whole thing.

31:13 But it turns out David, as I'm sure you are about to tell us. That's exactly where we're going. When you mail sixty five thousand 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 have witnessed in one form or another, but now they have a Bonafide charge plus credit cards sitting in their hands.

31:36 Uh you're gonna lose a lot of money at first. Yeah. Because there's Another more pernicious way that this type of lending is

31:43 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

31:51 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.

32:08 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, sixty five thousand unsolicited cards go out to unsuspecting consumers.

32:23 Fraud is out of control. twenty million dollars of fraud within the first Pilot program. Twenty two percent.

32:32 Of the credit. that they issued. To that. Initial Fresno cohort. ends up being default or delinquent.

32:39 Which I think is like five or six times what they're delinquency rate was before on traditional lending. Yeah, it is pretty crazy. So it's worth pointing out, you know, we're talking a lot about credit and debt at this point in time. And now in twenty twenty three, some of these kind of

32:56 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 a 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.

33:23 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 fifty eight and nineteen ninety, there was never a year where the amount of outstanding consumer debt was wasn't higher than the year before.

33:49 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, it is difficult to disagree with this assertion. So Interestingly, what's basically happening here is people are using debt На

34:08 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 kinda be fine betting that the future is gonna be better than today.

34:37 Such a good point. As Long as growth is happening. In an economy, a society, industry, whatever. You should absolutely use capital to

34:47 fuel into that growth. Yeah. 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.

35:00 No other consumer bank at the time, if they had seen twenty million dollars 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

35:13 If we can make this work, this is gonna transform our business. So Rather than Pulling the ripcord. They

35:22 Expand. They roll it out. Quickly. Across. The whole rest of California. Over the next year, all within the first year.

35:30 They sign up. Twenty thousand Merchants. In California. And get this. Do you know how many card holders they sign up in that first year?

35:39 No. Two million. California. Card holders. Signed up.

35:45 Using the card in the first year. It took Diners Club years to get to a million. MX was so proud in the first year or two, they get to seven hundred thousand. B of a Instantly.

35:55 at scale is the largest Charge card, credit card. program. Certainly in America. I suspect in the world.

36:04 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.

36:19 And then you can go ram it through your distribution channels when you invent one of your own. Yep. And it's even more than that. As we said, this really was a big innovation. Like it wasn't just that they Copy Dam X and Diners Club or anything else. Like they were adding credit to this. This was a huge innovation. Yep. So by nineteen sixty one, year three of the program.

36:37 They're able to get fraud under control enough. That The whole program is profitable. But they keep that under their hats. Yes, 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.

36:51 So many banks that had been thinking about launching a similar program abandoned it because they were like, Oh man, we thought this was gonna 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 gonna launch in LA 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 Nieten sixty to nineteen sixty six. So this whole era. is actually a profitable era. for B of A, but no one else knows it.

37:28 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 nineteen sixty six, and from nineteen sixty six to nineteen sixty eight, just two years. Approximately four hundred and forty credit cards were introduced by banks large and small throughout the country. Yes. And it is specifically nineteen sixty six when The Secret Gets Ot, because Phase two of Bank of America's

37:59 Grandmaster plan here. Gets unveiled. Which is Maybe worth a quick setup. As we said, this was transformative for their business in California.

38:09 But they're the biggest bank in America. 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? The Bank of America. It's not'cause they wanted to be the Bank of California.

38:23 So they're like. Maybe this is our path. And California is only like ten percent of the US population. In nineteen sixty six. They create

38:33 The Bank Americard Service organization. With The express purpose. of licensing out

38:42 the Bank Americard program and network. to banks across the country across all fifty. States. And this is the seed of Visa. All right listeners.

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41:03 If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at Lagora.com/slash acquired. And just tell him that Ben and David sent you. Okay, David, so how do we get to Visa? You have been telling me about the Bank Americard 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.

41:30 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.

41:41 Think of America. In the second chapter. There is also only one person. in the world that could have taken Bank Americard and turned it into Visa.

41:51 And that is Dhawk. So here we are in nineteen sixty six. B of A now starts going around to all the other Consumer banks.

42:00 In other states. And selling them on joining the network as Bank Americard licensees. And the deal is that you pay B of A a twenty five thousand dollar franchise fee to get your franchise of the Bank Americard is like a Wendy's or something. Plus then

42:17 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 throw in party after party because A this

42:29 whole thing turbocharge their own business. B, now they're like, Oh, we're gonna make all the other consumer banks in the country essentially into like surfs 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

42:49 distributed asset, which is all these customers with our card that wanna 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 like private thing kinda taboo thing, right? Because when you were using a credit card in these days, you were

43:16 implicitly saying I'm using debt to buy this transaction. And so you didn't want other people to necessarily know that. Right. It was 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

43:51 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.

44:09 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 nineteen sixty eight, A couple hundred banks have signed up, and There are six million

44:29 card holders across the country. And beyond the country. Actually, Barclays Bank then the UK had signed up to be a franchiseee of Bank Americard back in the day. Whoa, what year is this? This is like in the me know mid sixties.

44:43 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

44:55 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 gonna scale. to hundreds of banks.

45:09 All fifty states, multiple countries around the world. One of the examples. I alluded to this earlier. In California, in the Bank of America.

45:19 Owned and operated bank. Americard system. Usually all parties in the transaction were Bank of America. Customers. So like there wasn't really any difference between the bank of the consumer, the card holder.

45:32 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.

45:43 Right. You know, B of A realized the sort of cardinal sin of many entrepreneurs, which is My particular situation is actually not a pattern of several other customers. It's actually an N 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

46:07 Issues. These are the banks that give the cards to 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.

46:27 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.

46:39 This comes to be known as Interchange. Fees. R Obviously.

46:45 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 Bank Americard 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

47:08 this new Bank Americard licensee system that they're starting to sort of 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 card holder, and one bank on another side. And we're gonna enable those systems to talk to each other, but they're not the same party. This is open loop now. So this interchange thing.

47:29 All of the other banks that are now signing up to become you know, B of A franchisees for the Bank American 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.

47:49 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.

48:00 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

48:25 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 a McDonald's franchise and they ship you some golden arches and they're like, Good luck figuring out how to make cheeseburgers. That is exactly right. Okay. Now, to be somewhat fair to Bank of America here.

48:46 The golden arches. Are worth a lot. The Bank Americard. Three colored bands, the blue, white, and gold. are also worth an incredible amount here.

48:58 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

49:09 As all these other banks are. considering whether to become franchisees of Bank Americard. And Some of them are like, No, I'm not gonna do that. Some of the ones who do become franchisees, well, really all the ones who do become franchisees become very frustrated. Of course people are gonna start competing systems.

49:27 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

49:43 Interbank. Which Spoiler alert. Interbank is. Mastercard.

49:48 Panana. But at this point in time. Interbank is a Franken network. There's no common Brand. Mark.

49:57 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.

50:12 Now I go somewhere. I've got 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 gonna work. Even though it actually might work'cause it's part of the MasterCard Interbank network.

50:28 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 nineteen sixties, 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.

50:57 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 shipp a little folded thing that fit In your wallet with the card.

51:13 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 homogeneous. It all is the bank American name

51:39 Brand and importantly mark. So What are the colours 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 X P Bliss wallpaper, you know, that is the most viewed photo in the world. You know, the hills and it's actually in Sonoma, California. Huh.

52:01 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 of the San Francisco Bay area. Where you know it's Pleasant.

52:13 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 clouds. Beautiful. Golden colored California poppies in bloom. He rushes back inside, he paints an abstracted version of his beautiful hillside.

52:35 Voila. The three bands. Blue white gold. Bank American. Pizza.

52:41 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 gonna go up. Friction to purchase goods goes down, customers are excited to spend with you because they're shiny cool thing that they like spending money on works there. And it's good for your business to be able to accept it.

53:01 It's so wild that Today, you know, we would think, Oh, what's a mo 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

53:18 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

53:26 Yeah. We did all the work. We created this. This is what you are franchising from us. Take it or leave it.

53:33 from the franchiseees 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?'Cause this is pre magnetic stripe. Yeah, there's no technology here. I mean this is literally like

53:49 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 eighteen hundreds, early nineteen hundreds in the US.

54:04 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

54:13 They're merchants. That the merchants had brought. To them. And then they would go kind of individually decentralized. mail around the country to the issuing banks, the cardholder banks.

54:26 To get the money. And they just the way they financed all this was a discount fee, just like checks back in the day. Like Oh hey, this sales draft is for a hundred dollars. This is all really hard to figure out. So like Okay. You give me

54:39 Ninety seven dollars instead, or you give me ninety dollars 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 Bank Americard. They said they're good for the money.

55:05 So I gave him 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 gonna get my, you know, ninety three cents on the dollar or whatever.

55:24 So Then The Bank is responsible, probably. Yeah, so the merchant bank, that acquiring bank.

55:31 Males 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. Uh, this is ludicrously expensive. Totally.

55:46 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.

56:06 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 Americard had been operat for a couple of years internally to B of A in California. Now it's going across state lines.

56:21 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.

56:32 In october nineteen sixty eight, 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 gotta fix this.

56:50 B of A says okay, fine. We'll all get together. In Columbus, Ohio. Really? You didn't know this? No. Oh amazing. I thought you knew this. Yeah. Columbus, Ohio. Ohio State. Oh wow.

57:04 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.

57:17 They're sending senior representatives from the banks. Everybody running their card programs, everybody's converging in Columbus. B of A sense Mid level marketing managers to go face the angry mob. None of the senior executives from B of A

57:33 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 like pitchforks. No.

57:43 Franchisees are In Sensed. And they're in sense both'cause the situation sucks and the like God damn it, B of A, take us seriously. You have

57:53 metaled in our entire businesses. This is in chaos. Like we gotta fix this. So What do these two poor B of A guys do? Right before lunch on the second day, they're like

58:06 Yo, we gotta save our skins. We gotta get out of here. Let's do the smart thing to make sure that everybody gets placated. But nothing actually happens'cause 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.

58:25 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

58:37 Problems. Wow. But Unfortunately for their goals. They're very narrow goals.

58:44 that particular morning. But Very, very fortunately for all involved. The franchisees. The world.

58:51 Consumers. In the long term, at least. In the long term. And also Bank of America. In the long term. One of

59:00 The people that gets put on that committee. Is The Bank Americard franchisee program manager. From a small bank in Seattle. The Seattle National Bank of Commerce, which would go on to become Renier Bank.

59:13 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

59:22 Interstate banking regulations get loosened up. They get acquired by Bank of America. Of course, in the nineteen nineties. But For the moment.

59:32 The person. Running their Bank Americard franchisee program. Is one D Hawk.

59:40 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.

59:54 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, Dee has gotten put on this committee. He goes up.

1:00:04 to the two B of A guys and he's like Okay. Rather than us just Putting together a list of grievances and reporting back to you.

1:00:13 Happy A. What if instead We do examine all the problems in this system. But What if we ourselves, this committee

1:00:24 We design and propose A new way. Of operating the whole thing. And After some convincing.

1:00:32 The B of A guys are like Yeah. Sure. I mean They're not agreeing to anything.

1:00:38 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.

1:00:48 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.

1:00:59 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.

1:01:09 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.

1:01:19 They take a vote on it. Everybody agrees. Mostly I think. Just'cause they wanted to get out of there. Go back home and

1:01:28 Away from this disaster of a meeting. They all get on planes. They all leave, most of them probably thinking that nothing is ever gonna come of this. Certainly the B of A guys thinking nothing is ever gonna come of this. But D Kinda thinks he just got authorization to go.

1:01:45 Create. Visa. Whole new system and he has no power at this point. But He kinda thinks he does.

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1:03:41 Okay, so David, Dhawk 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. Uh 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 these group of now competing banks.

1:04:01 You've got multiple banks in a 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 Bank Americard. Payment network. Which is intimately linked with their banking operations.

1:04:17 If I'm any one of those banks. I would want to say like, hey, no, I wanna be the only bank in Illinois doing this. And okay, maybe there are a few others here with me, but I sure as hell wanna 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 card holders in the system as possible. And the merchants obviously want as many card holders.

1:04:42 as possible and the card holders 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.

1:04:54 And you basically want it to happen as fast as possible. So maybe if you only allow, you know, twenty percent of the banks in America or twenty percent of the banks in a state to be members of this thing, eventually they could sort of bootstrap the whole network. But Okay. 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 baking relationship. They already have one, they're good. Totally. This is a classic two sided network. You want a race to get ubiquity as fast as possible on both sides of the network.

1:05:24 Yep. So as D goes off and reflects on All this. He realizes that The fundamental problem.

1:05:32 Is you've got this huge and diverse Set. Of banks. That both directly compete with one another.

1:05:40 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.

1:05:53 How are you gonna get the DOJ? To let you do that. Antitrust is gonna be an issue here for sure. But You know, and this is D. He's like

1:06:02 Okay. If though. If we could do this. What is the opportunity.

1:06:09 Well We've seen what the opportunity is for Bank of America. That is the shining case study. So at a minimum

1:06:17 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.

1:06:31 to a certain extent in franchising this out. Two. 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.

1:06:47 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

1:06:59 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.

1:07:13 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

1:07:27 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 be a vague be comfortable not owning the whole thing. That's the bottom line here.

1:07:45 So there's this great passage from him in his book one for many. Says. Any organization that could guarantee transport and settle transactions is In the form of arranged electronic particles. That's what he calls. Digital information.

1:07:59 Amazing. Twenty four 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 and would be available in geometrically increasing abundance at geometrically diminishing costs.

1:08:18 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.

1:08:27 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.

1:08:40 Jointly. They could do it. But how? It would require a transcendental organization to Linking together in wholly new ways and

1:08:49 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 gotta say a few words about D. Because

1:09:02 This situation is nuts. D Is a banker. He is running. The Bank Americard franchise program.

1:09:11 Uh. what would become air bank in Seattle. But He's an outsider. He's kind of a nobody. He's not senior in a small bank in Seattle.

1:09:21 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.

1:09:39 He Now walking into the boardroom In Bank of America, which is what he's gonna do. And standing toe to toe. with the vice chairman of Bank of America and saying

1:09:50 I think you should give me. the Bank Americard 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. It's just Absolutely wild. Fortune favors the bull. Fortune favors the bulldog.

1:10:08 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. And this is the thing. D is An odd duck for sure. But he is amazingly smart. He's like basically all self taught. He's incredibly well read. He started reading every book on, you know, his little

1:10:30 farm in Utah that he could get his hands on when he was seven years old. Super importantly, you know, 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.

1:10:48 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 That until someone has repeatedly said no. And

1:11:03 Adamantly refuses another word on the subject. They are in the process of saying yes and don't know it. I mean, D basically is the prototypical Silicon Valley founder. He's just a generation too early and in the wrong industry.

1:11:21 I once had a Silicon Valley founder give a talk at a startup weekend I ran. Ten, twelve years ago. Who said Until your company shuts down, you are just in the act of succeeding. Totally. I mean, cut from the same cloth. Yeah, right down to every single stitch.

1:11:36 There's one other Important aspect to D that I think we should highlight here. That enables him And

1:11:44 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,

1:12:02 Marching into the Bank of America boardroom. And standing toe to toe. With their board. And saying

1:12:10 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.

1:12:23 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 D's just gone into

1:12:37 B of A with this grand vision of like You should give me this incredible asset. Because the value that it will Create. Outside of your hands.

1:12:46 And your fractional ownership thereof will be so much greater. Than what it could be on its own. And miraculously. That works. Like 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

1:13:03 You know, bank Americans. Yep. Totally incredible. That's D actually convinces Bank of America to do this.

1:13:11 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.

1:13:22 how to architect this thing such that it works. So he's gotta go do that. Two though, then now he has to go back to all of the soon to be former franchisee banks and 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.

1:13:41 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 Americard system and say Hey, the new regulations, the new operating laws for this organization are gonna be

1:14:00 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?

1:14:26 This is like back in our NFL episode. Yes. It's exactly right. When the NFL started negotiating national television rights Collectively as an organization. Yep. A bunch of the individual teams hated that'cause 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 gonna get as a share from you, the NFL of a national deal. But in the long run.

1:14:50 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 fourteen billion dollar a year TV deal that the NFL has today. than uh whatever their very fat contract was alone in the what the sixties, seventies. Totally. It is exactly the same thing here. Okay. So how's this whole thing gonna work?

1:15:15 D and a few of his other fellow committee members. They go To Saucelito. California, just north of San Francisco, just across the Golden Gate Bridge. And they do an off site for a couple of days at a hotel in Saucelito.

1:15:28 And there they come up with A number of Operating regulations, guidelines for this hypothetical new entity. Four of which we're gonna talk about here that are super critical.

1:15:40 One. Ownership of this new organization that's gonna be called National Bank Americard Inc. The new owner. of the Bank Americard program. is going to be in the form of irrevocable

1:15:53 non transferable rights of participation. So You're not gonna own stock in this thing. There's no equity. The way that you have ownership and the percentage ownership that you have in

1:16:06 The network. is by participating in it and the amount of volume that you are contributing Two The network. Oh interesting.

1:16:16 So this means a couple things. One It's sort of like a Representation and ownership according to value contributed. Two

1:16:25 It's non transferable, so you can't sell it. any individual bank if they were to say like ooh this is valuable now, I'm gonna 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.

1:16:42 So it's basically designed for you to kind of break even on it. If you're putting in seventeen percent of the transactions on the whole network and you're paying in fees on seventeen percent of the transaction, well, good news for all of the leftover profits from running the network, seventeen percent 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 seventeen percent of the volume to this, you are entitled to 17% of the profits. I see.

1:17:15 From the merchants and the card holders. 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 hundred percent that you would have received by the customer.

1:17:37 Basically taking that old Czech 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

1:17:50 For profit. non stock Membership. Corporation. That is a mouthful. It is. There's a myth out there that Visa was originally a nonprofit and then was converted to a for profit before the IPO in two thousand eight.

1:18:04 That's not true. It was always for profit. It was just a non stock. membership corporation. Hm. And that was to get around banks. Selling their interest.

1:18:14 So You don't participate in it? You don't own it. So say it one more time. It is a for profit. A

1:18:21 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.

1:18:33 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.

1:18:56 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.

1:19:07 Point number two. It is a self Organizing Body. With irrevocable governance rights for each.

1:19:16 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.

1:19:26 Yeah. 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. We'll have a vote.

1:19:40 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.

1:19:52 Well, they set the threshold at eighty percent 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 eighty percent. Of the votes. Fascinating. Which. In practice.

1:20:06 Just gives D all of the control and power of the company. Because everybody's gonna 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 Americard payment network larger than any one institution. could on its own. Which is the pitch he gave to Make America leadership. Also, though

1:20:32 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.

1:20:47 Everything happens on the main network. I see. So none of these banks Error. members of inner bank at this point. These banks are exclusively members of Whatever the heck Visas.

1:21:01 Predecessor name is. National Bank Americard Inc. National Bank of Mary Card Inc. Yes. At this point in time.

1:21:08 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

1:21:22 networks or peel off parts of the network, everything that you're 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.

1:21:38 The prize is worth it. Yep. And then finally Point four. There will be a singular

1:21:45 universal set of operating and governing procedures That's the Much like the U S Constitution. Is infinitely modifiable by a threshold vote of all members. This is the eighty percent I talked about.

1:21:58 And two, also like the US 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 like if you're signing up for this

1:22:13 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.

1:22:27 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.

1:22:42 written the script that we're talking about here. I still can't believe this actually happens. D 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 too to help convene. You know, meetings with all the banks to persuade them. Every

1:23:00 Single. Member bank. Bank Americard franchisee organization. Every single one of them. Signs up.

1:23:09 For the new organization led by D. Not a single person jump ship. How many banks were it at this point? Over two hundred. Wow. Isn't that wild? I mean once you get to like Seventy or something.

1:23:21 Then It kinda seems likely that everyone's gonna tip, but in those first twenty, the fact that nobody was out is crazy. Totally. And D writes about this too. Bank of America helped them out. They identified the thirteen most

1:23:33 Influential banks. And they convened the first summits with them of like Hey, what do we gotta do to horse trade to get you guys involved? And then you kinda spiral out from there. But yeah, every single one. Nobody jumps ship. And when is this? Like nineteen seventy ish?

1:23:49 The process starts in nineteen sixty eight, it all wraps up in either nineteen seventy or nineteen seventy one. Mm. Importantly, we've talked about antitrust in 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 D goes to see them. And he gives the same pitch.

1:24:10 To the government. He says like Look. Obviously. This is

1:24:15 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.

1:24:34 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. It's football.

1:24:57 And it's credit cards. Amazing. And that was a key point in then going and convincing all the other banks to sign up for this. 'Cause that was one of the first questions they asked. Hey, if we do this, aren't we inviting The DOJ on our backs.

1:25:11 And D 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 Americard Inc.

1:25:23 D in nineteen seventy two, he's thinking globally from the get go. He goes and creates a parallel similar organization of international banks. Using the bank American system. Visa was global from basically day one.

1:25:37 And it wasn't just Barclays in the UK, it was Sumatomo 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 gonna tell. This was actually harder to pull off, if you can imagine that. Then Forming NBI.

1:25:55 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.

1:26:07 Say you're I don't know, I'll pick Sumatomo Bank in Japan. You have to decide Do I want to buy D's pitch of it's worth it to me to be a proportional owner of Visa.

1:26:19 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

1:26:33 That is the dominant way. of payments flowing in China. That was For them the right move. Totally. So

1:26:40 Once again. In Saucelito. This all comes to a head. D knows that probably Not all of the international banks. are gonna agree to this and some of them are gonna go their own way.

1:26:51 So he calls you know a final summit in Sausalito. They're gonna vote the next morning, final vote on who's gonna join the soon to be visa network. And who's gonna go it on their own. And D

1:27:05 gives this nostalgic speech at the end of dinner saying, like here in Salsalito, 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 in a true global

1:27:23 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.

1:27:37 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.

1:27:49 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.

1:28:05 And inside. Are a pair of pure gold cufflinks. That on each of the two cuff links. There is one half of the globe. And under one side it says in Latin.

1:28:17 Studium ad prosperidum. Which translates as the will to succeed. And the other side says Валентас In

1:28:25 Convenindum. My apologies to Latin speakers out there that I'm butchering that. Translates as the grace to compromise. And he explains this to all. And somebody from the crowd.

1:28:38 Yells out. D you miserable bastard. Because he just pulled on everybody's heartstrings. And like he gets the votes. And the next morning All the hold out's reverse course. They all join.

1:28:52 And you can't make this stuff up. It literally happens. The cuff links are out there. You can Google them. 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 were 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.

1:29:14 Once this is all set up, this the international Part of visa becomes First, I banko I B A N C O Shortly after this they rebrand the whole thing into Visa, which we'll talk about in a minute.

1:29:27 For the board. The board is huge. Because it's like all the representatives from every region, from every country, there's like twenty five 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

1:29:43 The spouses. Of all the board members. To come to each Location. It's a family trip, you know, et cetera.

1:29:50 And then he gets the idea. He invites the spouses. Into the board meeting itself. Oh, what a nightmare. So twenty five board members plus their spouses in his board meeting. This means two things. One, nothing is gonna get done. There are fifty people in the room.

1:30:05 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 gonna act like an asshole? in front of not only your spouse, but the spouses of all these other global bank heads.

1:30:25 That's so funny. Uh let's 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.

1:30:48 It has to happen once this international organization is set up. Yeah, America can't be the name. Bank Americard. Ain't gonna work. And importantly, as we'll get into it in a little bit. This is a huge problem for American Express, too. The soon to be Visa knows if we're really gonna

1:31:04 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.

1:31:15 So D holds a contest internally. within N B I slash Ibanko. Two

1:31:22 generate a new name and he offers a fifth dollar prize for the winning entry that is chosen. And as legend goes, there are so many submissions of the name Visa. Yeah. When they finally unveil it. D makes a big deal and writes out a fifth dollar check.

1:31:36 Check. made out to everyone in the company. Which is funny. But then they changed the name. Visa. Visa. It's the most incredible name.

1:31:48 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 Well no, it's not just in English. The name Visa.

1:32:03 In every if not. almost every language on earth. But 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. Cause at this point, you know, they've got what, three, four, five hundred banks. You know, and they have sixteen thousand today.

1:32:27 It's quite the presumptive cloth that it will be universally accepted everywhere. The way that uh visa would imply. Just every dimension. The presumptive closed, 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 it 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.

1:32:57 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.

1:33:08 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

1:33:20 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.

1:33:34 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.

1:33:43 On the top Blue band. You can put whatever you want. You can put your own bank logo. You banks.

1:33:51 Get creative. You can do literally whatever you want. Bank 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 Forty Niners card. This is how you get the X Y Z everything that they're a bazillion of now.

1:34:09 So in the blue stripe on the top of the top third of the card the bank start co branding. With the name of their bank and some affinity. Yep. And this is kind of the brilliance of the Visa model. They were like

1:34:23 It's open. 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 gonna do that, great. while maintaining the universality of visa

1:34:38 Great. We got the middle, you got the top. Go wild. Do whatever you want. Wow. And that's how I end up with B B eight on my uh card today. Amazing. Maybe the most important thing though. For Visa.

1:34:51 really pulling away and becoming At least for many decades, the dominant Global. Payment card network. The name change

1:35:01 ends up becoming this incredible growth hack. Because what happens is There are the new operating regulations now that mandate that all cards out there, all the previous Bank America cards, need to be migrated to Visa Cards. I think within like two years of this.

1:35:17 being declared or something like that. Some banks start to see this as an opportunity. To go poach. Card holders. From other banks.

1:35:27 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 Mary Card is gonna switch to Visa.

1:35:39 So some bags. In a version of the Fresno drop, they start sending unsolicited letters Two consumers. True. Are

1:35:47 Already Visa Bank Americard customers with another bank. They're like, oh, hey, it's time to switch over to your Visa card. Here's the application. Sign 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 uh government made it illegal to just start randomly issuing credit to people without their awareness or asking for it. Totally wild.

1:36:10 But because of this. A whole bunch of consumers start sort of unconsciously. Switching the bank. That

1:36:17 Issues there. 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

1:36:33 between when the visa name change first comes online and takes effect, which is in nineteen seventy seven. And the next year in nineteen Seventy eight. The number of Ban participating in the visa system grows by twenty percent. Cause everybody who's not in the system now is like, I gotta get in the visa system.

1:36:48 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 nineteen seventy six, Master Charge was actually bigger. They had seventy four hundred banks. And at this point in history, Visa had about seven thousand bags. Master Charge also had more card holders, thirty seven million versus Bank Americard's thirty one 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 MasterCard. Totally. So that was number of member banks grows by twenty percent. The number of active card holders in the Visa Network in this one year.

1:37:31 Grows by forty five percent. Wow. So as you say, they blow way past MasterCard 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

1:37:46 On the path to becoming the Dominant. global network that they are. Today. Yeah, and it's worth a moment on Amex here because

1:37:55 I would have thought Just like Facebook or WhatsApp or Google, when you have this sort of winner take all massive network effect business.

1:38:06 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

1:38:28 Is Visa adopts this strategy of the network of networks. They go sign up one bank, that bank can go sign up you know, a hundred million customers.

1:38:40 Or Two 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

1:38:51 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

1:39:11 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 Clue G user experience because there's 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 fulned application. Any time that you have something that's more distributed. you're gonna 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

1:39:51 It does potentially come with much better scalability, which is the reason why these Ed MasterCard have become the dominant way versus the closed loop systems. Yep. It's also worth Closing the loop on MasterCard here too. I mentioned that The D O J

1:40:06 eventually came after both Visa and MasterCard and prevented them from being exclusive systems. That does happen in nineteen seventy five, 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,

1:40:24 D is obviously a hundred percent 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

1:40:37 US government, if you Do this. You are going to freeze the payment networks in the US. Nobody is ever gonna develop a new competing open loop payment network.

1:40:49 Because Now there's no more competitive vector between Visa and MasterCard. We'll all have the same features. Ban be members of both. They're kinda gonna operate in lockstep. The prices should be identical for both. All this stuff. And the DOJ's like, No, no, no, no, we're gonna do it anyway.

1:41:06 Irony of ironies later in nineteen eighty eight. The DOJ again sues Visa and Mastercard. For being a duopoly and not competitive enough. So D was right. D was right. And to this day, Dia's been right.

1:41:20 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.

1:41:33 So great. It's probably actually worth sharing the Amex thing. So Amex tried this crazy strategy in the eighties, and now I'm flashing forward ten years here, but They would basically cut their interchange, the discount rate that they were charging merchants.

1:41:48 massively if those merchants would go exclusive to Amex. And this actually continued until nineteen ninety one for many of their merchants and for Costco went all the way to twenty sixteen, where they had the exclusive agreement with uh AMX and if you were gonna use a credit card at Costco. It had to be MX.

1:42:08 But interestingly, Visa and MasterCard cried foul when uh, you know, 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. Except that at basically all locations. Yep.

1:42:29 So This basically concludes The full Visa story. Like how did This incredible thing happened.

1:42:38 You know, we've answered D's questions. Who owns this? Who runs it? How did it start? We could end the episode here.

1:42:46 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.

1:43:00 That V Z N D created. Yeah, as Dave puts it in electronic value exchange, there's 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.

1:43:17 Is it's also a technology company. And there is a whole technology story. In parallel with this too, the That enabled. The visa we know today.

1:43:27 Two 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.

1:43:40 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 we're already rich. But there's an incredible technology story.

1:43:54 Yeah, great point. All right listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team, and deploying them is uh no longer the hard part. Yeah. The hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making.

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1:44:45 Every device on your network, every permission across every system. Every AI agent visible and secure in one place. And ServiceNow can do this because they've spent more than twenty years building the operational backbone of the enterprise, the workflows, governance, approval, security controls, and institutional knowledge that power how work actually gets done across IT, HR, customer service, finance, and security. ServiceNow already runs more than a hundred billion workflows annually and trillions of transactions for more than eighty five percent of the Fortune five hundred. So when companies need a place to govern AI at enterprise scale, they're building on a platform at the center of how their business already operates. And in a future, that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company. But the question is

1:45:32 Who's managing them all? So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely at scale, go check out service now.com slash acquired and tell them that Ben and David sent you. 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.

1:45:54 Amazing. Incredible. Unlikely. One in a million. But all it really bought D and Visa. Was

1:46:04 the opportunity. Yes. Two Actually realize what he sold to Bank of America and the other banks.

1:46:13 Of a Instant. global payment network that A large percentage of global commerce runs on.

1:46:22 You had to build a lot of technology to make that happen. And If you asked The question of D Back in nineteen sixty eight. Okay, let's assume we do this.

1:46:34 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

1:46:47 To that. Was probably not. Fascinating. Now they wanted to use them in specific use cases, like Ben, you pointed out.

1:46:55 When you want to make a credit purchase. When you wanna Essentially do what installment financing was before. When you have any number of XYZ other set of factors. In the case of Diners Club and Amex, when you want to impress your colleagues and your business partners. There were use cases.

1:47:12 But it wasn't like It is today where Obviously you're gonna use your credit card, which is probably a Visa and maybe a MasterCard. To pay for everything that you do everywhere instantly.

1:47:23 Yes, and to illustrate. We will link this in the show notes. But there is an old TV segment from nineteen ninety three, not that old, but Pretty recent. Then.

1:47:34 Of really sad news. Nineteen ninety three was thirty years ago. Yeah. We remember it, but it's old now. Nineteen ninety three To today is like the nineteen fifties were to us when we were kids. Not good. Not good, David. Not good.

1:47:49 This nineteen ninety three T V segment. The news is that Burger King has just rolled out credit cards. That should tell you a lot. Burger King, prior to nineteen ninety three, did not except credit cards. Or at least this commercial makes it seem that way.

1:48:04 And they interview 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 nineteen ninety-three. And A second guy is interviewed and says something to the effect of

1:48:21 I just hope it doesn't slow things down,'cause 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, Jeez, 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

1:49:01 Crazy. That was nineteen ninety three. I mean, 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.

1:49:24 Yes. So to get from There to today. Three. major pieces of technology.

1:49:31 Needed to be built by Visa. One. was transaction authorizations. So When we were talking about

1:49:38 Transactions happening. Earlier. And the person in Burger King was referencing, like oh they got a call to New York and they gotta authorize the transaction and all that. We glossed over one sort of

1:49:51 Stop gap slash band aid. Yeah, 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.

1:50:08 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, fifty bucks or something like that. Anything paid with a credit card under fifty dollars. It was basically within the judgment of the cashier to

1:50:25 Oh wow. 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.

1:50:39 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.

1:50:53 figure out based on the card number what bank Issue the card to the card holder. Call up the card holder bank. Get somebody on the horn there, say Hey, I've got your card holder, Benjamin Gilbert. His card number is XYZ you know one two three.

1:51:10 Can you look up his credit and you know, he wants to buy a five hundred dollar 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.

1:51:31 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.

1:51:42 talking to people at the card holders bank and then reversing the whole chain. But importantly, you had a person at the merchants bank calling a person at the cardholders bank. Yes. Today, that is known as VisaNet.

1:51:57 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 Peace of build. And that process that we just described, that could take like twenty minutes.

1:52:09 And it just didn't work outside of business hours for those banks. So say, you know Now that Bank Barry Card is Nationwide. Seem to be international.

1:52:21 Imagine you're trying to buy something in Japan and the Japanese merchant bank calls your card holder bank back in America. Clothes for business. Just no way for that transaction to happen. Wow. That's crazy. Not

1:52:35 Good. Definitely not good. So D and Visa know that this is like the first thing. that they have to address. In nineteen seventy one, right after NBI is formed. D starts a project called the Bank Americard Authorization System Experimental, or BASE.

1:52:52 Base. Two. Build technology to address this problem. The whole thing. Actually started rather inauspiciously.

1:53:00 Because right after All the approvals came through for D a formation. N B I I think it was literally the evening before the first board meeting.

1:53:09 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 a firstborn being. And they're like, Well

1:53:19 It's kinda 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.

1:53:34 For Multiple credit card systems. Across the whole country. And We're gonna do this. So, you know, D

1:53:43 If you want us to remain part of MBI, remember this is Bank of America, the most important part of MBI. 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 MBI, but this isn't really outside the bounds of the MBI. This is a separate thing. This is authorization systems. We're gonna do this and if you say we can't do this, we're out.

1:54:03 Whoa. Not good. And it's true. It's not really like their Issuing new cards or acquiring new merchants There being a technology provider.

1:54:14 Because they and American Express both see that hey, this is a really, really, really valuable piece of technology. Hm. D is of course pissed, but what's he gonna do? B of A says take it or leave it. D takes it.

1:54:26 As D then tells the story, the Bank of America and Amex go out and they try and pitch the other banks in NBI and Inner bank and Mastercard. On. joining the system.

1:54:37 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.

1:54:52 The whole thing then morphs into a tripartite consortium of Inner bank American Express. And Bank of America and thus by association NBI.

1:55:03 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 gonna sue you. And and they all abandoned the project. And this is huge for Visa because this means they can. Build it on their own.

1:55:21 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.

1:55:38 Build this technology for them. Go build a computerized authorization system for the Bank Americard Visa Network. All the bids come back. And of course they are all way over budget and way over time. So D says

1:55:53 Well screw. We're gonna do it ourselves. How hard can it be? Wow. So in his very D way. He goes and he recruits The guy

1:56:02 From The firm that impressed them the most throughout the bidding process was a firm named TRW. And a guy named Aram Tutoulian. Digo's Back to him and he's like

1:56:13 I like you. You come work for me. Leave TRW, I'm gonna 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.

1:56:25 A Ram comes and joins. And starts the core of the Visa Tech team. D gives him nine months. to build this entire thing from scratch. And to do this involves building a

1:56:37 First nationwide and then ultimately worldwide telecom network. So that the electronic communication can happen. to 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.

1:56:55 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.

1:57:09 And this becomes the San Mateo campus. You can see it right off of one oh one 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 gonna go back up to San Francisco when they finish a new building. That's right. I think it's going to um

1:57:28 Mission Bay. Hm. So miraculously. Aram and his new Tiger Visa Tech Team.

1:57:36 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.

1:57:45 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

1:58:06 What becomes Visa Net in house. At this point, you know, there's no internet, so it's all just working over Telephone communication. Yep. Direct networking. Amazing.

1:58:16 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.

1:58:29 That's gonna 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?

1:58:43 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. Is 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.

1:59:05 Sending out statements, all this stuff. You could 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. You know, the front end piece consumed a lot of Phone time and people.

1:59:21 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.

1:59:30 And even more Perniciously. As the network Grew and at this point in time. Soon to be Visa is

1:59:39 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.

1:59:58 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

2:00:15 Is A clearing house. You need An automated Clearing house.

2:00:21 And this is Unbelievable. A few people had referenced this to us as we were doing the research, but I kinda forgot about it till the end when I got to this point. And I was like, holy crap. Visa.

2:00:33 Builds. An automated clearing house for themselves to do settlement electronically over the network. They end up calling this project Base Two. After base one, which was the first thing doing authorizations. This happens.

2:00:47 At the exact same Time and place. as when the Federal Reserve is building their own ACH system For Checks, you know, automated clearinghouse, A C H everything in the banking system. That was built

2:01:00 by the San Francisco branch of the Federal Reserve. In the exact same years. In the seventies, when Visa was building their own Essentially automated clearing house system. That is wild. Now I've never read anything. I couldn't find anything. I've never heard anybody say that they like talk to each other.

2:01:18 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

2:01:31 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 a hundred bucks five hundred times and I paid you a hundred bucks four hundred times, what is the net that actually needs to get transferred? And that is a far more efficient way, you know, batching them up is a far more efficient way than transferring the money back and forth every single time.

2:01:56 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

2:02:13 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.

2:02:27 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. Right. If you're the one that owes the money, you kinda want the payment to take more time. Yes, exactly. Exactly.

2:02:46 Also importantly. This is from Dave's book. It ends up saving about fifteen million dollars in labor and postage costs. to the banks by automating this. Just in year one.

2:02:58 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's it.

2:03:14 One of the most Famous Visa tech team. Stories in history. Happens.

2:03:21 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

2:03:33 the system and reliability is so important, you know, this network can't go down. He's like Huh. We actually have a pr sí

2:03:43 serious vulnerability. in this system. So he goes to C D. And I mean the whole visa organization I think is like less than fifty people at this point in time. Wow. Just wild. He's like D.

2:03:55 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.

2:04:09 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.

2:04:21 So, you know, we really might want to think about having some sort of redundant parallel site. a data center out there. And uh D uh in his very D Way he thinks about it, he's like, All right, let me think about this over the weekend.

2:04:37 All right. You're right. Thought about it? You now have a new job. Your job is to solve this problem.

2:04:43 Your 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

2:04:56 Invent the technology to keep these things synchronized so they are actually redundant. Yes. So now D is not technical enough to uh talk about that, but This is super important. Up until this point in time.

2:05:09 State of the art in the sort of fledgling data center world. was yes to have Redundant. other location back ups. But the way that it was typically done was you had your primary data center.

2:05:23 That operated at full capacity all the time. The back ups 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.

2:05:36 Visa though, and the Visa Tech team, they're like, you know If we're gonna 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.

2:05:49 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.

2:06:06 Every Happening. Wow. 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

2:06:20 through ingenuity invented a way to do this. Fascinating. And of course this is now how. Every data center in the world runs today. Pretty amazing.

2:06:29 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.

2:06:40 Is Finally. Digitizing The point of the transaction itself. And that requires both

2:06:48 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.

2:07:00 In the merchants. Those Veraphone, you know, traditionally they had a huge market share. Well this is when Veriphone gets built. There was no Veriphone before this. Yeah.

2:07:10 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 fifty bucks or a hundred bucks or whatever. It replaced the need for phone calls.

2:07:25 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.

2:07:46 So The first step to doing this. As We mentioned is Digitizing the cards.

2:07:52 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.

2:08:07 With the uh 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.

2:08:21 So Visa makes the decision, they end up going with the magstripe 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. There I think there are a bunch of lawsuits.

2:08:41 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 gonna pay you Citibank a skiff on everything that we do here. We do pay us a ski on the ski. Exactly. Oh so they standardise on the mag stripe for the cards. The next step then is

2:09:04 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.

2:09:17 That needs to get distributed to millions of merchants around the globe. That is outside their circle of competence. Yes. mentioned earlier and you alluded to this is when Vera phone takes off.

2:09:29 So what Visa does is they create a spec. They're like this is the spec of what we kinda need to be created. And they invite different technology vendors to bid on it. Veriphone ends up becoming

2:09:41 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

2:09:49 It's pretty crazy they come up with this sub five hundred dollar 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 uh installed at all these merchants.

2:10:05 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.

2:10:22 I see. If you use this instead of the zip zap, you'll get cheaper fees. Yep. Exactly. Which that business model carries through to today. I mean the way that you charge a card

2:10:32 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.

2:10:42 Piece of implementation uh 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 in the world. That's a

2:11:00 Another whole step change. That's like single digit millions of nodes. Yes. So what are they gonna do? For the pilot program. They work with one of the big telecom vendors and essentially like build it out themselves. We're now in the nineteen eighties here.

2:11:15 But they realize during this that there's this new fledgling Kinda consumer networking service out there called CompuServe. And for Folks who

2:11:27 either weren't alive in the US 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. 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.

2:11:46 But also like your email and you know. Your portal to the web. It was a proprietary internet. So They

2:11:53 Somehow get in touch with CopyServe. And they realize that CompuServe has this dynamic where they've architected out Their network for peak. capacity demand.

2:12:05 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 Comp you serve. network capacity

2:12:18 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.

2:12:29 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 too complimentary.

2:12:41 use cases for the same infrastructure that when one is waxing and the other's waning. Yeah. Pretty cool. So Now Finally with this third step.

2:12:51 All the pieces of The transaction or digitized. computerized, fulmented 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.

2:13:05 You know, if you're charging a five dollar transaction to a card It's just not worth it to the banks in Visa to like figure out whether that's fraudulent or not. Now'cause it's all digital and instant. They can figure out whether that's fraudulent or not.

2:13:18 Hm So During the pilot. Thanks and merchants that were participating in this program. reduced

2:13:25 Chargebacks. to the system. By eighty two percent. relative to what was happening before. So just like a massive amount of fraud.

2:13:35 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.

2:13:45 Absolutely. In many ways that hey, we're gonna, you know, 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 just 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.

2:14:08 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 whatever.

2:14:20 And it just works and it gets authorized and you get your thing immediately. This is the backbone to all that being possible. Two though. for Visa as a company and Visa as a business. They are now.

2:14:34 Fully digital. They can scale. Infinitely. With essentially zero marginal cost. Yes. We will later talk about

2:14:43 What a 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. Yes.

2:14:58 This unlocks just like an unfathomably good. Some element of adding scale into the system required manual labor. Now It's all just ones and zeros.

2:15:11 Now the toll booth is fully. It is a high functioning toll booth. It's a im immovable toll booth. Yeah. They've got the fast pass system or whatever. Yep.

2:15:26 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 two thousand and eight and sort of how the structure of the whole thing changed. But I think you've got

2:15:45 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.

2:15:53 Before we move on to today. And that's the Olympics. A lot of people, probably everybody listening. Now Nose visa is associated with the Olympics.

2:16:03 They're probably the most associated brand other than NBC. But that's only in America. MB C doesn't mean anything around the globe. Visa is the Olympics. Everywhere. So

2:16:15 This happens right around the same time as the digitization of point of sale and the cards. It's nineteen eighty six. The Olympics For the first time They

2:16:27 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.

2:16:44 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.

2:16:55 Not even the world cup, you're missing a large part of America. Like this is the only thing. W you're gonna reach everybody in the world. And Up until this point. One of the main stay largest

2:17:08 Olympic sponsors in America. was American Express. Cause this fits perfectly with American. It's for American business people who are traveling abroad. Olympics. Great. Amazing.

2:17:20 The Olympics. uh 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

2:17:35 Fourteen million dollars. MX. declines. Whoa So they had their bite at the apple and they missed it.

2:17:43 A couple years before this. Right as the Visa Empire was being completed. With the full digitization of the network.

2:17:52 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 kinda.

2:18:08 Guy. Especially when the industry in which you're going from one to N And your shareholders and board. Is all

2:18:16 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 nineteen eighty four. After this happens. Visa brings on a new

2:18:29 Global chief marketing officer. A guy named John Bennett. Who came from Twenty years at American Express. So he and his team see that

2:18:41 MX. Has passed on this new amazing. global opportunity with the Olympics. They're also formulating The new visa marketing strategy.

2:18:50 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. The path to victory here is not positioning against MasterCard.

2:19:11 The path To victory. is positioning against American Express. Not because we wanna kill American Express, we don't actually care. We're way, way, way bigger than American Express.

2:19:22 But We need Global ubiquity and adoption and people to get comfortable with using

2:19:31 Visa and using credit cards. Remember, there's still this social stigma. That woman in nineteen ninety three 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 Americans 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. Right.

2:19:59 And if this were Certainly nineteen eighty six and still nineteen ninety three, 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.

2:20:23 That's an amazing gift that these banks give the world. It's the American way. So John and just started. The strategy is use American Express to eliminate the stigma around Visa.

2:20:35 And By association. Paint MasterCard as having that stigma. Because We're not even bothering to talk about them.

2:20:43 So How do we go after American Express? Well The network is much smaller. The American Express merchant network at the time was about twenty five percent the size.

2:20:53 Visas. So they designed A whole marketing campaign. Around.

2:20:59 Going after American Express. And the tagline of the campaign, you know, they show these exotic locales, the 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. In the end. Folks who are of our similar age probably remember exactly the words here.

2:21:18 If you go there. Remember to take your Visa card because they don't take American. Express. So great.

2:21:25 And then the second tagline to it was Visa, it's everywhere. You want to be. So The Olympics come up. After M X declines.

2:21:34 John and the team get in touch with the IOC. The price tag has gone up to seventeen million dollars just for the rights. That's before any media buys. No advertising was just for the right to be a global sponsor of the Olympics. They pull the trigger. They become

2:21:51 the founding like global Olympic sponsor. They spend another twenty three million dollars in media. For the nineteen eighty eight Olympics. So forty million dollars In total.

2:22:03 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 a hundred and ten million dollars in today's dollars. Yeah. Wild.

2:22:15 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, uh first time founders focus on technology, second time founders focus on distribution. Yeah. And then

2:22:30 The real kicker. The Of course become The exclusive payment provider. at the Olympics. So everybody now

2:22:39 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.

2:22:50 His visa. So they're training all these people. That are going to the Olympics year after year after year. It has now been thirty seven years that Visa is the exclusive payments global sponsor of the Olympics. They're contracted through

2:23:04 Twenty thirty two. So it will be at least forty six years where Visa Is the only card. Accepted.

2:23:12 At the Olympics. Which that's not that big a deal,'cause 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, A, it's an awesome story, but To the last outstanding piece of enabling the global visa empire.

2:23:29 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.

2:23:42 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

2:23:56 that was owned but not with stock. A for profit nonstock membership organization. Right. 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 It wasn't

2:24:13 Actually The banks. trying to get greedy and monetize their asset. Although They did. Monetized 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

2:24:26 Just fine. In two thousand five, there finally was another huge antitrust lawsuit. I think against both Visa and MasterCard. It actually is a class action lawsuit. Oh that the

2:24:40 Merchants brought. And they basically got fulfed up with interchange. And you know, every ten years or so there's some meaningful A 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 variety of different ways. And this particular class action suit in two thousand and five

2:25:00 is still running today. And the numbers have mostly been figured out of how much Visa will owe. from a twenty twelve ruling that then got appealed, so it's sort of still going on. But basically there was a lot of uncertainty in the two thousand five and six time frame of

2:25:17 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.

2:25:35 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 know, you can reward and retain talent easier. There's just like lots of reasons why you would want this thing to be sort of a standalone entity, especially at this point in history.

2:25:57 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 Whenever the courts rule, the banks who own the B shares. the pre existing shareholders will own all that liability and all the A shares, the 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.

2:26:26 It finally happens in Two thousand eight. visa goes public right as the financial crisis is starting, which obviously Wasn't planned. But

2:26:36 Ends up being great. for the banks and probably for visa too. it becomes the largest US IPO in history up to that point. They raised eighteen billion dollars at a ninety billion dollar initial market cap. But that eighteen billion dollars

2:26:53 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 and dilute? That eighteen billion dollars. was secondary selling to the banks.

2:27:08 The company. Which I think for many of them proved to be a total lifeline through the financial crisis that helped them survive. Yeah. I mean now Visa is owned mostly by big institutional shareholders, the vanguards and fidelities of the world.

2:27:24 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.

2:27:33 It's wild. I mean D Hawk basically was right. That's the TLDR on this is this thing This information network. That

2:27:42 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

2:27:59 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 Visas cut. All of that so you can kind of understand it.

2:28:17 So Visa's business model. The first thing to know is Almost nothing has changed since

2:28:25 on how the transactions work. So the authorization flow is exactly the same as it was. where all the off flows upstream, the merchant Runs the card, checks with their bank, who checks with VisaNet, who checks with the issuers 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.

2:28:52 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.

2:29:11 Well Nearly in full. Minus a merchant discount rate. So what is this merchant discount rate? There are a few things at play here.

2:29:18 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.

2:29:32 And then there are payment processing fees. And those go to the acquir, the bank that acquired the merch. This is the merchant's bank. and the technology provider of whatever they're using to process their payment. So three fees. Interchange Network fees. Payment processing fees.

2:29:49 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. Here's an example. Of a large merchant.

2:30:04 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 US credit card. The merchant is charged a two percent discount off the sale price. So it was a hundred dollar pair of shoes. You're now making ninety-eight dollars, and what happens to that two percent?

2:30:26 So that two percent, the lion's share of it is the interchange, the one point six percent. That goes to the bank that issued the card. To the card holder, 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

2:30:48 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 gotta do. But

2:30:58 You know, they get most of the money. A small amount on the order of like point two percent or uh twenty bips for you finance people out there. goes to the bank that acquired the merchant. This could be Chase, Fiserve, Wells Fargo.

2:31:13 This is, you know, the merchants 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. It's not actually the financial institution behind it. So that point two percent can kinda get split between the financial institution and the technology provider. And those are folks like first data and stuff like that, right?

2:31:39 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

2:31:52 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

2:32:07 Super easy to figure this out. So Visa. Let's ground it to point two percent. gets twenty cents of that hundred dollar shoe sale.

2:32:17 But the cool thing about their twenty cents is there's basically no variable costs. Yes. It's not Dealing with fraud. It's not moving heavy data around. I mean, merchants are allowed to have a twenty 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

2:32:39 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 point two percent, the twenty cents on the hundred dollar transaction.

2:33:00 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

2:33:25 debit cards are gonna be less. Smaller merchants often pay closer to three percent than two percent'cause 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.

2:33:42 to an individual while 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

2:33:58 Interchange is Intentionally quite flexible. This is a playbook. theme that I want to pull forward. This

2:34:06 Business is probably the greatest masterclass 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.

2:34:24 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.

2:34:38 And I think that's an important thing to realize about interchange is that it's intentionally flexible. Yep, which brings up, you know, 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

2:34:56 That is buying something. There's the merchant that is selling That's something to them. There's the visa network in the middle, that's the third party. But then

2:35:05 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.

2:35:22 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 or a Visa Signature Business or a Visa I don't even know what they are, but they basically have said

2:35:39 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?

2:35:52 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.

2:36:11 They turn around and say, Cool, I'm gonna go and I'm gonna 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,

2:36:28 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.

2:36:48 Well it's Does it be a good thing. theoretically enable incentives to be spread around that benefit everyone in the ecosystem. Yep. And for Merchants of scale.

2:36:59 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

2:37:10 By working with Thanks. Be part of this discussion too. If you're of a certain size. Right. In the olden days, you know, if you're the

2:37:19 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 gonna say, Hey, we're gonna 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.

2:37:54 And I guess at the absolute very highest levels of scale, you have something like the Amazon and JP Morgan Chase relationship, where JP Morgan Chase is the Merchant Bank. And JP Morgan Chase is one of the largest issuing banks for cards in the world. And so the Amazon

2:38:13 Chase credit card that I have and I do all my shopping on Amazon with and all my shopping at Whole Foods with. is able to give me five percent cash back rewards. So Amazon Or JP Morgan, and in this case the two of them working together represent three of the five parties in this transaction. The only people Not.

2:38:32 party to this. are the consumer and visa the network itself. And so thus that's how they're able to do so much special stuff. They can control so much of that envelope of value. Yes. It is worth pointing out the system today is pretty tough to change absent government intervention.

2:38:50 Consumers who spend the most love the system the way that it is. A huge amount of the fees that merchants pay come back to these consumers in the form of rewards. So the issuers and the networks end up with the consumer as their advocate.

2:39:06 for the system as it exists today. And meanwhile no retailer own enough of the total transactions to actually go invent their own better system. So when merchants have tried to go and get consumers to go direct and give them their bank account information, typically consumers won't do it unless they get some very high number of percent back. And that's actually more expensive than the interchange. The way that you end up having to pay your consumers in order to change their behavior away from credit cards. that they love the rewards so much on

2:39:36 is to do something non-economic. Like you have to believe that there is some long term benefit to doing it. Yep. And famously Walmart and Target too, I think, have been trying to do this for years and years and years. And they never can make it work. Nope. And the reason is basically like No one can ever figure out how to incentivise all the parties that need to change behavior enough to change the behavior.

2:40:00 And The merchant in most cases. is really the only party that is not thrilled with this arrangement. Totally. I mean the most negative way someone could paint the ecosystem as it exists today is that the whole credit card system is a wide scale bribe of the American consumer. To like

2:40:17 extort the world's retailers using the retailers' own money. But That is like a very cynical Way to view it. Yeah. I mean, I guess you could take that one step further and say consumers actually do bear the brunt of it because merchants will just raise their prices to compensate for it.

2:40:33 So that's a strong argument. There's been independent research firms that have looked into this. And basically determine that This is a reverse Robin Hood scenario that the wealthiest consumers are the ones who have rewards cards. And Because all the goods are marked up.

2:40:50 to accommodate interchange. Right. No matter who's buying the goods are marked up. Right. If you aren't someone that has a rewards based credit card then your stuff just got more expensive. And so the research firm that uh looked into this, actually, I think it was the Fed, the Federal Reserve Bank of Boston, determined that on average each year A household that uses cash to pay for things.

2:41:13 Pays a hundred and forty nine dollars. inflated prices because all prices, no matter how you pay, have to go up. in order to make it so that paying in cash and cards is equivalent,'cause in most states it's actually illegal to charge a meaningful premium to people who are using credit cards. So

2:41:30 On average, a cash using household pays a hundred and forty nine dollars. Effectively in subsidy. Yes. But a card using household receives eleven hundred dollars in value. Eleven hundred dollars. I mean, I guess that makes sense. I think about the value of the rewards I get every year.

2:41:47 It's on average, what is it, two percent of everything you put in your card? Yeah. Which I mean, especially us running a business. Like, yeah, we put a lot of stuff on cards. Right. That is the other argument that this is like

2:41:57 kind of net bad for the world is that it's regressive in who it rewards and who it penalizes. The other reason why it's really hard to change The system. Is This whole thing is a chicken or the egg problem. I mean every two sided marketplace is a chicken or the egg problem.

2:42:13 Bank of Ericard solved this when there were no regulations by dropping sixty five thousand Credit lines on Unwitting Americans. And you can't do that now. So how do you bootstrap one side of the marketplace when you can't do something like a drop? And they were in a unique position at that moment in time in California, where they had such large market share of both consumers and merchants that they could

2:42:36 kind of effectively create this network themselves. Right. So what you're basically relying on now is some sort of extrinsic paradigm shift, probably a technology paradigm shift. that enables a new entrant to bootstrap one side of the marketplace in one way or the other.

2:42:55 to create a new system. And without A new Paradigm emerging. This is the system. Uh it'd say a new paradigm or the government intervention. This kind of is the system that we've made our bed and we're stuck with.

2:43:08 For good and for bad. Yep. I mean I love my rewards cards. Right. And look at all of the economic value that it created by enabling e commerce. It is truly astonishing.

2:43:20 that without UPS to ship packages and without credit cards to let us pay for things on the internet, like it just wouldn't have happened. It's trillions of dollars of transactions in the economy that would not exist. So the arguments to merchants are Look, people spend more when they use a card. There's a broader range of buy that use a card. Uh very cool feature of these credit card and debit cards. Is there's guaranteed payment with no risk.

2:43:45 There's instant authorization for this consumer wants this thing. Now they could return it, but you know for sure that they're good for the money and you're gonna get the money very soon when they walk out the door, which That wouldn't happen in checks. There's a cost to checks. Right. If you're gonna accept a check from somebody

2:44:04 There's a strong element of trust that you have to have with that. Individual or entity. Yep. And if you're saying you better come in here bearing cash or a cashier's check, you're gonna have way fewer customers. Not to mention, like, there's totally a cost of facilitating cash. You know, it's one thing for a coffee shop, but let's say you run a running shoe store and everything you sell is a hundred and fifty to two hundred and fifty dollars.

2:44:26 there's a pretty meaningful amount of cash that piles up in your establishment. And so you need to make sure that you have security or like, you know, let's pick an even higher ticket item thing, like a jewelry store. You need security, you need to move that cash somewhere, you need to like make time to go to the bank to deposit it. Totally. The operational overhead associated with that. There is a value to providing payment and there is a cost to whatever the payment method is. And so Am I saying that the cost is three percent or in the old days five percent or seven percent? No, absolutely not. But There certainly is some cost no matter what form of payment is used.

2:45:03 Absolutely. All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig. Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI powered experiences at scale. Yep.

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2:45:54 So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com slash acquired to get started. So The business today. What? Does Visa look like?

2:46:11 Well, last year Visa processed fourteen trillion dollars of volume through their network, which is a Almost meaninglessly large number. How do you even think about that? One fun way to think about that that I calculated. Is if you start from nineteen seventy one.

2:46:26 The first full year that The Bank Americard network was liberated from Bank of America. The growth. in payment volume on the network since then.

2:46:37 has been seventeen point three percent Compounded. Annually. For fifty one. Years.

2:46:45 Oh my god. Wild. It turns out the world eventually did want to pay. with frictionless fast And often credit extending methods.

2:46:55 Yep. Wow, seventeen percent compounded for fifty one years. Yeah. I mean this is like Berkshire levels of compounding that is happening here. Yep. And it's not like you know people may think, Oh, seventeen percent like oh I'd have seen IRRs greater than that. Have you seen them greater than that over fifty one years?

2:47:14 Right. Not many of those. It's amazing. The number of transactions they processed last year was over a hundred and ninety billion. So that is twenty seven transactions per person on earth, including young children, every single year.

2:47:29 Hey man, young children require a lot of commerce, let me tell you. So I hear. There are four point one billion Visa cards in circulation. Their net revenue is twenty nine billion dollars. twenty nine.

2:47:45 That's up from twenty two billion two years ago. So There's an interesting thing that I didn't really realize with Visa, which is It's had a hell of a decade.

2:47:56 Yeah. In my head, Visa has been this steady state thing in the world, as has MasterCard, but the last decade has been the story of Visa's incredible dominance in revenue and transactions and volume. It's just actually true that a lot of their growth has been recent in the last decade. Their value added services. This is an interesting thing that I wanna come back to was six billion.

2:48:20 So look at their overall revenue number of twenty nine billion, their value added services is six billion, and we'll talk about what that means. The most Shocking thing about the business is They have fifty percent net income margins. So of the thirty ish billion that they made in revenue

2:48:39 Their net income was fifteen. Yeah. This is absurd. All the picture we painted in the whole story. It was all building toward that climax of They

2:48:50 have created something with essentially zero marginal costs. In Perhaps the largest market out there, certainly one of them. Global commerce.

2:49:02 Both. E and non E commerce. And as Visa would argue, both consumer but also B to B commerce. Yeah. Fifty percent net income margins on thirty billion in revenue.

2:49:13 There it is. And you might say. So wait, if they have fifty percent net income margins, what is their gross margin? Because is it SAS level good at seventy five, eighty five percent? Nope. There are gross margins. Are ninety eight percent.

2:49:27 Unreal. There are no variable costs in this business. There are no costs of goods sold. Unreal. It's crazy. So I think

2:49:37 With fifty percent net income margins, this is literally the most profitable large scale company in the world. I don't know of any other businesses that Of This size or even like five or ten times smaller.

2:49:49 that have over a fifty percent net income margin, including MasterCard. Which is forty three percent. And just to throw some numbers out for people that are like not you know, looking at financial statements all the time. Microsoft. thirty four percent net income margins.

2:50:03 Microsoft sells software. They ship bits. Apple, twenty five percent. They have An incredibly marked up.

2:50:12 product that is differentiated wildly by brand. Twenty five percent net income margins. Google Google has a monopoly market of information. What are the costs involved in that business? Twenty one percent net income margins. Wow, I would have thought Google would be higher. As we were talking in my mind. I was like, Well Google's probably the only one that can come close, but wow.

2:50:33 Microsoft desire. I didn't realize that. Yeah, it's nuts. Nuts. They do have twenty seven thousand employees. In some ways it feels like an oddly large number, and in other ways it feels small, but I think that we should talk about that in the context of the value added services.

2:50:48 Interestingly, There is another company that we have talked about recently on acquired that does thirty billion dollars in revenue and has twenty seven thousand employees. Do you know what it is, David? That would be NVIDIA. Yeah. So weirdly mirror image. Even NVIDIA doesn't have gross margins like Visa.

2:51:06 It is the ultimate solution. I think that is the takeaway. Yes. Visa does seven hundred and seven million transactions per day. That is eighty six. hundred transactions per second.

2:51:20 Every second throughout the year. So A big takeaway should be like, My God, they have built high throughput infrastructure globally. That's a unbelievably impressive thing with almost no downtime. It is ninety nine point Nine nine nine percent uptime. Which I'm not a

2:51:36 site reliability engineer, but I think that is five nines. Which is wild. I mean, you hear about AWS going down more frequently than you hear about Visa going down. Totally. That's sixteen thousand banks in two hundred countries. They have six data centers distributed across the world. It's kind of amazing. It's only six.

2:51:54 To be honest, with that kind of reliability and uptime. You know, related to that though. You raised a good point earlier. Could Data.

2:52:02 Envelope. As opposed to the value envelope. Although I guess sort of the same. relative to The importance and the value. Right.

2:52:12 This is not YouTube. Yeah. The transactions themselves, in part because this was all architected in the seventies. Right. That is definitely why. Yeah. Lots of people in this ecosystem would love it if you could send entire receipts in machine readable form across this network. You can't. We're stuck with a lowest common denominator protocol. that were shipping very crude pieces of information across.

2:52:35 Yeah. I will say There are other people that are participants in this ecosystem that are perfectly fine with it having almost no information or minimal information going across it. An example of which is The banks.

2:52:49 The banks don't want to be sharing any of this information that could put them at a strategic disadvantage. Your bank? knows your name, knows your social security number, knows your address. Visa.

2:53:01 I'm running transactions across their network all the time. All it knows is my card number. It has no notion of identity. Isn't that crazy? I didn't realise that. Yeah, that is crazy. And the banks like that because then the banks get to say, No, no, no, this is my customer. Visa, we will use your network because it is the way that I need to accomplish something for my customer, but I'm not just gonna like turn my customer into your customer. Why would I do that?

2:53:24 And one of the things we didn't talk about in the story, because it was Long enough as is. is the whole debit card struggle. Obviously debit cards are a big part and debit transactions a big part of the visa network today. But when Visa first tried to introduce them, this was one of the things that led to Dhaw's ouster. Hm. The banks were like, No, no, no, no, no. Debit cards, that sounds like banking relationships.

2:53:46 Banking relationships are my domain. That's where I make my money. Those are my deposits. You look like you're trying to reach your hand across from being in service of us into competing with us. Uh uh. And obviously debit cards did eventually become part of the system, but not in the way that You know, it was looking like D initially wanted them to. It's pretty fascinating that debit came later.

2:54:08 Functionally to me as a consumer. Even though I get floated for a month. My credit card is essentially a debit card. Where If I want to, I can turn it into a loan at the end of thirty days. It's a debit card with a lot of benefits.

2:54:22 Right. And Obviously like I get to keep the money for thirty more days, so it's not quite the same thing, but debit is a simpler product. So it's so interesting that debit came decades after credit cards on the Visa Network. you would think they would have started with debit, but of course they couldn't have started with debit. The banks would never have gone for that.

2:54:42 Right. That was the domain of the banks. And actually there was a big fight. between Visa and all the ATM networks and D wanted your Visa card to also be your ATM card. I mean it makes sense, right? Like why would you have different cards? Mine is today. They basically are now.

2:54:57 For many, many years they weren't. And they certainly weren't back in D's Day. Right. And I think part of the reason why debit cards were sort of like forced into existence was that consumers basically demanded it, where they were like, look, if I can pay with a card. for this high value purchase.

2:55:12 And I don't want To use credit. You're telling me that if I don't want credit, then I have to walk down the street, withdraw cash from my bank and bring the cash. Is there not something like a credit card but doesn't extend me alone? So in closing on the numbers today.

2:55:28 This is the important number to know and one that may make you uncomfortable, but I'm curious how this lands for you, David. US merchants paid an estimated ninety three billion in Visa and MasterCard credit card fees last year, according to the Nielsen report in industry publication. That ninety three billion was up from thirty three billion in twenty twelve. Wow. That's A lot more billions.

2:55:53 That's a lot more billions. So we've talked a lot here about the interchange. and how Visa makes money in the transaction. I will say half of Americans carry a credit card balance. Which is

2:56:06 absolutely brutal since those interest rates right now are around twenty two percent. Oof. David, you and I learned in doing some research that the reason why we all get these credit cards from North Dakota. is because every state used to have anti usury laws, like no one was allowed to make usurious loans, and North Dakota was the first to drop them. And that's why all the banks issued all their card programs out of North Dakota.

2:56:30 Because You could do things like have twenty two percent loans made to consumers. And have that be entirely fine. So that's the sad history of why your credit cards always get mailed from there. And there's no denying. That is really sad and unfortunate on the consumer.

2:56:46 debt side of all this. You know, on the fee side. On the one hand, I'm tempted to say like Oh, obviously tripling the amount of fees that merchants are paying for credit card processing over ten years. Like that's ridiculous. But transaction value has meaningfully gone up too. Like gross volume is way up.

2:57:03 Yes. Transaction value. But also I have to imagine a big part of that is share of commerce that's happening is e commerce versus traditional commerce. The credit card networks Really are providing

2:57:17 A huge amount of value to e commerce as You were saying earlier. They are to physical commerce too. Nobody wants to pay with cash or check anymore these days. But like E commerce, there's no other way that that can happen. So does it make sense that the credit card networks And their associated parties.

2:57:34 Take more value. In that world? I think so. Yeah. There's been downward pressure on interchange for a long time. I think industry average right now is down around two point two four, which is You know, compelling considering we started at seven percent. Right.

2:57:49 That downward pressure has been Easy to give on by Visa. for things like in person transactions with card present. But for a lot of their super high margin online transactions where the growth is, that's where they decide. Oh actually.

2:58:06 We have a really high interchange for that area. So Visa is sort of a master of packaging, figuring out You know, 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? Yep. And it makes sense, just do the thought exercise, right?

2:58:29 Let's say you're a physical merchant. And you decide to walk away from Visa and all the credit card. Networks. Say your only cash or check. I mean you probably are committing suicide as a business, but like you

2:58:41 could operate. If you're providing enough value, like ATMs exist, you know. You can operate. There's plenty of cash only bars. Yeah, exactly. Bars, great example. If you're on the internet and you say I'm walking away from the credit card companies, you are literally committing suicide.

2:58:59 Right. I mean you could use PayPal. I guess. But you're paying just as much for that. Yeah, totally. Unless you are literally getting people to type in their account and routing numbers, you are paying

2:59:10 credit card like fees to accept on the internet. Yep. It's worth sharing so w while we're in the revenue streams here. The money that

2:59:20 Card issuers make. only a minority of it is actually from the interchange. And keep in mind the card issuers are the ones that make that one point six percent the bulk of the transaction. Most of the money that card issuers make is is from interest payments. Right.

2:59:36 I mean, they're banks. That's the thing. All the way back to the beginning of the episode. What was the motivation for Bank of America? in the early days, it was turbocharge my banking operations. What is your banking operation? It's taken deposits Make loans with them. make money on the interest rates on those loans. Nothing has changed in the banking industry.

2:59:56 Totally. Visas incentives are more transactions because we want more point two percents. And the Issuers incentives are carry a balance because that's where we make most of our money. Yes. Because even though they're getting the lion's share of the transaction fee, that's going all right back to the consumer in the form of rewards.

3:00:14 And anti-fraud measures and other value added services that they have to buy from Visa. Probably a good time to introduce that six billion that Visa's doing in value added services. That is all brand new high margin products that they've sort of invented in the last ten years or so that they're trying to sell to merchants. High margin product. There's no higher margin product than the core product. Right. Brand new also high margin products. Right. Merchants, banks, they're basically trying to sell products to people in the ecosystem, anti-fraud, analytics.

3:00:45 And it's working very well. They're making a lot of money on that and they view that as a high growth area in the future, too. But again, it's a little bit of like shifting things around in the same picture like look there's downward pressure on interchange and we can demonstrate to you that interchange is going down. Oh, but we have this great product that is helpful and basically necessary that you also should buy. And there's a lot of that going on. Mm-hmm.

3:01:08 Alright. Basically covers. the high level stats on the business today so that we can go into analysis and you can have a general shape. of the uh business we're talking about. But you know, eleventh largest company in the world, valued at half a trillion dollars, around thirty 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. Mind blowing.

3:01:31 They get to keep half of that after taxes at the end of the day. That's Wild. There's actual cash in the bank. Right. This is not EBITDA, this is net income. Crazy. All right, David.

3:01:41 Power. Does that sound good to you? Oh, let's talk power. All right, so listeners, this is where we talk through Hamilton Helmer's Seven Powers Framework. Which is

3:01:51 trying to figure out what is it about this particular business that enables it to achieve persistent differential returns and be more profitable than their closest competitor. and do so sustainably. It's an interesting one here. This is a lot like the Lockheed Martin episode where I'm actually not sure we can apply the formal definition where we say like

3:02:12 what enables them to be more profitable than Mastercard'cause Together they're like this government enabled duopoly. And the way that we did this in the Lockheed Martin episode was we said, let's look at the five defense contractors as one entity. And say. What

3:02:28 Enables. the five of them collectively to out compete new entrants. And I think that's the right thing to do here with Visa and MasterCard too. At the end of the day, Visa and MasterCard have basically no sustainable competitive advantage over each other. It's just operational excellence. who's slightly more clever on the bets they're willing to make for these value added services or next product lines.

3:02:50 So yeah. I think the one area where there is difference between them And it's probably less so today, but was quite strong through the nineties and two thousands with brand. I do think.

3:03:02 Visa made a genius move. positioning against American Express. Going Upmarket in perception and partnering with the Olympics. It's funny, even though it's a commodity, like them and MasterCard are a commodity, they somehow position themselves as more premium. Well, sugar water is a commodity too. That's why brand matters in these markets.

3:03:21 But you're literally never making I guess it's for the banks,'cause consumers are never making a buying decision on Whether it's Visa or Mastercard. That is not how you decide what card to get. Well The brand is like the Intel inside. It's an ingredient brand. So yes, the banks make the decision, but really the consumers make the decision because if consumers have a preference for Visa over MasterCard, they'll demand it from the banks. No.

3:03:43 they're just not differentiated enough to demand it. I just so don't see that any consumer ever has sway there. I got the Chase Sapphire Reser card five years ago because it was by far the best rewards card for the type of thing that I spend money on, as probably with half of our audience. And I think it's a visa infinite, which I'm sure is one of their high fee things, which is why they can pass on so many rewards. I think today that's true, but I do th Think.

3:04:08 based on the research and uh this may be too biased towards Visa, but I think Visa Did accelerate Pass Mastercard. And I think There was a strong brand element of that. I think it's more equal today. Yeah, it's interesting.

3:04:21 It's funny how it used to feel more like you were getting a Visa card that was somehow like powered by a bank. And now it feels more like you are getting a custom proprietary product that a bank invented for you that happens to either say Visa or MasterCard audit. Yes. Totally agree.

3:04:38 Or a merchant. I mean when you have the Alaska card you feel like you have the Alaska card. You're like, sorry, there's a bank behind this and like, oh, is it Visa or Master Card? I don't know. I don't care. It's the Alaska card. Yeah. I think there's totally also a story That's beyond the scope of this episode, but how

3:04:53 Banks and in particular Chase. Eight American Expresses. customer base over the last set of years. Yeah. I mean, in part that's just bad strategy on Amex's part that, you know, eventually

3:05:06 It was going to happen that they would not be the scale player. Being a closed loop network, you're just going to be a more niche player. And so how do you win as a niche player, you need to retain your highest value. customers and your highest margin customers. Well, they missed the generational transfer. I think they did retain their highest value, highest margin customers. I think those customers are just eighty years old now.

3:05:27 Yeah, it's true. I think there are less affluent people in our generation who have AMXs versus the premium products from banks or merchants. Yep. Okay, so Visa and MasterCard together. Which of the seven powers do they have today? And if you want to also do the analysis, which did they have Early days. And I will start. I think there's an easy no brainer.

3:05:49 that you have scale economies. Any investment that Visa or MasterCard make get amortized across sixteen thousand member banks. across four billion cards, across half the humans on the planet, or whatever it is. I mean, just good luck competing with any fixed cost investment that Visa is gonna make. It'll pay back.

3:06:11 Instantly, if it works, to the extent that they can roll it out to any tiny fraction of their customer base, it's just so huge that It fits the scale economies thing where You know, if Netflix goes and buys a piece of content, they can pay more for it'cause they can show it to more people. Visa is the exact same thing with all of their fixed R and D costs. Tell me if you think otherwise on this.

3:06:32 I think there's basically like a law of economic nature. That If your gross margins exceed Call it. Seventy five, eighty percent.

3:06:44 And you are of a certain revenue scale threshold. Like our gross margins exceed seventy five, eighty percent, but like we're a two person company with a you know de minimis amount of revenue in the global economy. But say you're, you know, in the billions of dollars of revenue scale. You must have scale economy power. Right. It's almost stupid to say this one'cause it's like, okay, yeah, but that's actually not what gives the business that's not what's so special about it. The network economies are what's so special about it. Yes, of course, of course.

3:07:12 Yeah. But yeah, you must, you simply must, if you have those margins at that revenue scale, have scale economies. Right. That's a great point. Okay. Explain to us the network economies.

3:07:23 Well, I mean this is even better than the classic two sided network effect. This is the classic five sided network effect. where you have an amplifier on each side because you have the banks going and using all of their scale to amplify your own go to market motion. Yep. I think this is also true. With network economies and network power. The more

3:07:44 Participants in a network. the greater complexity grows and the harder it is to actually pull off the network. There's plenty of single sided networks. Like Facebook is a single sided network. At least on the user based side. There's advertisers you could argue that's a second side, but Everybody's the same node in the network.

3:08:02 Then there's two sided networks like Airbnb is the classic one, you know, something like that. There are three sided networks out there, probably some four, and clearly this is an example of a five sided network. But as you add sides to the network The number of successful examples goes like way, way, way, way, way down'cause it's just so hard. Right,'cause they're way harder to pull off, but they're so locked in once they're in. Yes. And I think this whole story that we told of how incredibly freaking hard and unlikely it was that this happened.

3:08:31 means that you have a five sided network effect business and it's basically unbreakable. Yeah. Totally agree on network economies. I don't think there's much process power. I don't think there's really any switching costs. I mean In fact, that's probably a bear case to any card company today is that

3:08:49 Especially with digital payments. You don't even have to carry cards with you anymore. I should go get approved for fifty cards and write a script to make it so that whatever the most interesting card for that given transaction is pops the top of my wallet. I think there's almost no switching costs. Anywhere really because when any of these banks

3:09:06 have their contract up, they just go and talk to V Z and MasterCard and say, Who gives me a better deal? Because you guys are both the same. This is true after the first antitrust lawsuit when duality was introduced and banks could multi home. Before then, yes, after then zero. Well, yeah, I mean before then there's interesting analysis to do between Visa and MasterCard. Now there is none. Yep. Which is exactly what Dhaw predicted.

3:09:30 Yep. But yeah, is there switching costs between the Visa Mastercard Oligopoly and someone else? I suppose yes, there isn't another option. Yeah. Like if you were a bank that wanted to issue a bunch of cards that weren't Visa or Mastercard. I mean I guess there's discover.

3:09:46 No, that's a closed loop network too. Oh yeah, right. They are their own bank. Yeah. Pretty interesting. Counter positioning. The last one.

3:09:54 None now, I think. Right. Well you almost can't have it as an incumbent. Right. But there was Incredible. Counter positioning. back in the day with Bank of America, they were the only institution in America that could pull this off, that could absorb the losses that had minimum viable

3:10:10 Customer base on the consumer side and on the merchant side. That had the dynamics that they did within California that even though New York was still bigger as a state, the market was so fragmented there that none of the banks had enough power to pull this off. They were literally the only one who could do this. Yep.

3:10:28 That's absolutely right. Alright, I think that's it for power. Yeah. Playbook? Let's do it.

3:10:34 The first one is this business is a toll booth, and toll booths make for great businesses, especially when everyone has to drive on your road or the road next to yours, and both of them charge the same toll. Well put. I'm gonna do my best, Charlie Munger. I have nothing to add on that one. There you go.

3:10:53 The next one that I think is pretty interesting is Visa. I so I read their whole annual report. They have a narrative around these new things that they're launching, especially the value added services. being good for consumers. And Everything that is good for consumers, often for security and privacy,

3:11:12 is also good for Visa. That is sort of the playbook that Visa runs is they figure out What is something that we can sort of advertise as a benefit to you that also helps us either increase Number of transactions. margin or lock in.

3:11:26 And that is the way to analyze their entire product suite. You hear that something is launched, you're like, okay, why, which of those three needles is it moving for them? That's my main one. I've got more analysis to do in bare ball, but uh what do you have? The two that jump out to me are

3:11:43 One. Just like our NFL episode, just like our benchmark episodes. Communist capitalism. Yes. The best example.

3:11:51 Yes, A is the best example of communist capitalism. Certainly that we've ever studied. Probably in the world. Hard to imagine one better. And Two, it's like a special breed of communist capitalism. You're gonna laugh at this that I foreshadows

3:12:05 Democratic. Communist capitalism. The ultimate irony, right? It's this idea of like Yes, it's capitalism. It's competitors banding together to create more value than they could alone. But

3:12:17 This is at a massive scale. Like with Benchmark, it's five partners. With the NFL, it's thirty, thirty-two teams. Something like that. Yeah. This is our whole global financial infrastructure that has decided to do this together. Right.

3:12:32 This is Thousands of banks that have decided. It is its own. separate class of this, I think. Way, way, way harder to pull off than like

3:12:44 Yeah, Ben, you know, you and me together like acquired as communist capitalism for sure. If we were starting a venture capital firm with three of our friends, can we pull it off with five people? Sure. Could we pull this off with two hundred banks? No.

3:12:58 Right. Especially when you're not starting from scratch. I mean the two hundred banks that they pulled it off with they all had a agreement in place where they owned A franchise. And you had to go to them and say, You have to forfeit your franchise.

3:13:13 And instead sign this other agreement. It's like you're not starting from zero, you're starting from negative. And Bank of America. The franchise or D had to go to them and say Hey, you're gonna forfeit the whole asset. That's a great point. Totally.

3:13:26 So that's one. And then the other too, you know, I think it's the twin stories of innovation here, which You know, really hat tip to Dave Stearns for tipping us off on here. The socio technical Innovation, the organizational stuff, the communist capitalism, the democratic capitalism, everything we're talking about.

3:13:42 Incredible. Also the technology story here. Incredible. Neither of which Because of

3:13:51 this weird nature of who owned it and how it was set up. people really understood, but both of which are just World class incredible stories. Yeah. Super true.

3:14:01 And right here in Silicon Valley. Mm-hmm. Who would have thought? A success story out of Silicon Valley. They've gotten so beat up over the last few years, they really deserve this nice uh But that's what I find so funny.

3:14:13 Nobody knows that. This is a Silicon Valley company. Do you ever like run into visa people hanging out around San Francisco? Exceedingly rarely. Hm. Well, I take that back.

3:14:23 In The tech and venture capital world exceedingly rarely. In the corner of San Francisco. that very much exists, which is the old money Finance, you know.

3:14:35 The legacy of Bank of America. Absolutely in that world. And Jenny's in that world because those are the folks who are on the board of the ballet, who are the patrons, who are the donors. the

3:14:46 long time chairman of the board of the ballet was the CEO of Visa USA for many years. Like there are a lot of Visa people in that world here. Hm. It's funny though, that like you would think it would have bled more into The Silicon Valley world, but it really

3:15:02 hasn't. You would think. Every tech company would love to be Visa. The financial profile of Visa's business is more tech than any of the tech companies.

3:15:12 It is what they all wish they could have. Yes. Fascinating. All right, you wanna do value creation, value capture? Yes. So

3:15:21 Originally Interchange was supposed to cover the cost of operating the network. Creating a trusted system, preventing fraud. offering innovation every few years to improve the system. And

3:15:35 With the incredible profit margin that Visa makes today, not to mention whatever the card issuing banks make, it is very clear that the market has evolved such that these players can charge more in a transaction. than is necessary to cover their costs. And like I'm not sitting here demonizing anyone who doesn't use cost plus pricing. I am a capitalist. I fully embrace the idea that

3:15:57 A business can and should achieve pricing power if it can position itself to do so in a market. We're looking for high gross margins to invest in. Right, exactly. But it's interesting that because of the multi-layered network effect, David, that you brought up in the power section. It is not easy and potentially impossible for the free market to do its thing and have some new player that actually

3:16:22 applies. Margin pressure here. The free market is clearly not playing out and other than a big technology innovation that shifts the paradigm in a huge way. These entities

3:16:34 Have massively optimize their costs. And continued to scale in a huge way such that They just get to capture way more value than it costs them to create.

3:16:48 Yep. Seemingly indefinitely. There's a lot more to talk about in bare boulder. Yes. I mean, the worst place that this kind of shows up is the uh couple percent plus thirty cents that kind of feels small. Yeah.

3:17:01 The thirty cents is really pernicious. It's pernicious especially for uh small transaction items. So like coffee shops. There's an example of a piece that we'll link to in the episode sources of a uh coffee roaster and shop where their line item of what they had to pay in payment processing fees is actually larger than what they paid for means. Wow, that's crazy.

3:17:26 Even large retailers that run at pretty thin margins, it is often the case that their EBITDA is the same size as their card processing fees. I mean any time where your average transaction Value. Yeah, it's

3:17:40 Less than ten bucks, that thirty cents is a killer. That's where the 30 cents kills you. But any time that you are a low margin business, which many retailers are, if you're a discounter, if you're a Walmart, You're paying two three percent of the whole transaction. But

3:17:56 when you look at the margin profile, the way that that gets amplified is that you're paying 15% or more of your available gross margin. on that item. So the only place where this doesn't kill you is if you're a high gross margin high ticket item.

3:18:12 business. That's when you can be like eh. Card fees, whatever. But if you're selling too high priced of goods, then you often get into a scenario where, you know, you are doing less frequent transactions, more considered purchases, and you can go around the system. This is a bear case on Visa is.

3:18:29 Are they ever gonna participate in real estate or cars or no, not at these interchange rates. Why would anyone Ever buckle. To pay these sorts of things for things that cost a thousand dollars or more. Yep. Well, before we go into bear and ball where I know you and we have a lot to talk about. What could potentially disrupt Visa and MasterCard.

3:18:49 I think it is worth Just one minute on the value creation side of this, and I really think You hit the nail on the head a while back when you said E commerce. Yes, all that other stuff we were just talking about, the thirty cents, you know, everything, that is a lot of value capture. There's a lot of value capture that Visa is doing in MasterCard Two.

3:19:09 On the other hand. I Don't Think e-commerce really would have happened, you know, alone. There's plenty of other value creation out there, too. Lots and lots and lots, but let's just take e-commerce. I feel like this is Passover. Like, you know, that would have been enough. E commerce would have been enough. Cause I don't think it would have happened without credit cards.

3:19:29 Or at least it would have been many years behind because you needed to sort of invent some new mechanism to enable payments over the internet. Yep. And yeah, you know, PayPal and all that, but That would have been a long slog if PayPal had to Gain adoption for all payments on the internet to happen. Yeah, that's a good point. Which by the way, PayPal is on a shockingly large number of websites today. PayPal has a lot of market power because they They have penetrated America.

3:19:55 They are deep in terms of people's preferred payment method, which was something I've been kind of blind to. Really? Oh, I missed that in the research. That's quite surprising to me. Yeah. Well that leads us right into Baron Ball.

3:20:07 Yeah. Paypal's an especially interesting company right now because they're strategically pretty well positioned, but they're going through a leadership transition. And so you don't actually know what the new strategy is going to be yet. Yeah. Okay. Burn ball.

3:20:20 Let's do it. Well, Okay, bear. And before I actually go into it, a tongue in cheek joke is if they ever get to stop making the insane margins that they do on FX transactions, that's the ultimate bear case. It's something like a hundred times the margin that they make on domestic ones. Wow. If you look at how Visa breaks out segments, you're like, oh my God, the international transactions are ludicrously profitable whenever they have to do a currency conversion. So that's like worth knowing when you're trying to understand the shape of the business is the more international, the better for them.

3:20:52 But My real Spare case. Is that their business model has basically always been tied to the digitization of consumer payments ever since they rolled out the three key technologies you were talking about, David.

3:21:06 I mean, at this point in global history, which is kind of amazing, we're finally here. Over fifty percent of consumer payments to merchants. Go on cards now. It took forever to get here, forty years or something like that, fifty years. But

3:21:20 we will start decelerating because We've already shifted. more than half the payments to happen on cards. Right. We're on the back half of the adoption curve. Right. So that is this tailwind that has been with Visa forever. Like any time you could come up with any bear case.

3:21:36 It was always just trumped by the idea that well, more people are gonna do digital transactions, so They're just gonna outrun any headwinds in their way. that will start to slow. It's not like Visa's core business revenue is going to like flatline or decline or anything like that, but they will have less of the growth tailwind from this amazing secular thing that's been happening, which is people shifting payments to cards and digital methods. You know, as the years progress.

3:22:02 Yep. My next one is closed loop systems like Alipay and Ten Sense ecosystem. To the extent that super apps actually happened in the US the way that they did in China. We would be telling a very different story. I mean, the amount of volume that flows in the mobile ecosystem there that is not a part of the credit card ecosystem.

3:22:23 I actually don't know if it could have happened here, but the rise of that is super dangerous. And people often will cite like, well, the Starbucks app is a very good example of people using a digital wallet that's native to a retailer here. How many people do you know that reload their Starbucks app? With their direct

3:22:40 Checking account. routing an account number. Everyone actually loads it using a credit card. Totally. That is not bad for them at all. It only becomes bad for them if they actually get disintermediated where a bank and a merchant go direct to the merchant's consumer and manage to initiate a payment flow digitally that doesn't involve a card network. Yeah.

3:23:00 The two things I would want to investigate on the Could what happened in China happen here? One. Just the build out of infrastructure. happened more concurrently in China. Like payments infrastructure's already built out here. Technology infrastructure got built out afterwards. Whereas it all happened all together in China.

3:23:17 Hm. Two though, maybe more important is just the government influence, right. I doubt the Chinese government wanted visa uh You know, ostensibly American corporation. Powering their payments.

3:23:29 There's actually this really interesting weird deal that got cut between China Union Pay and Visa, where if you use a cup card in China, C U P it uses the C U P rails, but if you go internationally where like there is no China Union pay terminal at you know, my local coffee shop here in Seattle, if you were to travel here and swipe it, it runs on visa. But they sort of have the national security benefit and the economic benefit of four people in China transacting in China that runs on China owned payment rails. Yep. Which, you know, I mean I guess that is an associated bear case, right? China in and of itself.

3:24:04 And could other governments around the world start adopt similar postures? Yeah. The next one is similar but a little bit different. Real time payment networks are starting to become a thing. the instant bank transfers that these provide

3:24:19 Are not exactly a payment system. It lacks a lot of the features that you would need for payments, like the ability to refund the is a prominent one. Like when you just initiate a bank transfer. There's no sort of insurance around the chargeback or a refund or anything like that, but you could build payment type features on top of it. And real time payments are starting to become a thing in a lot of countries. So in the US, of course, we have Fed now, but the adoption of that is slow because there's not a Fed mandate for it to happen the way that it has happened in other countries. In Brazil, picks PIX has had very fast uptake. UPI in India is another one.

3:25:00 The UK has something call faster payments, and this can get especially scary for visa. when these start working across geographies, like Singapore and India have already linked theirs up. And so that is a method of transferring money between countries that has nothing to do with visa. And that's, I'm sure, something they're keeping a very close eye on and trying to figure out is there a way that we can become the real time payment system that governments decide that their country should adopt.

3:25:29 And you know, I mean, technology and infrastructure and ecosystem is getting built on this, obviously around the world and here too. And great friends of the show, Modern Treasury, like they are enabling a lot of this. Totally. Yeah. Apple. I just think is like a general bear case here, but here's my sort of specific implementation. Specifically Apple Pay, right?

3:25:48 Yeah. So on a Apple Pay Transaction. I'm pretty sure Apple makes about as much as Visa does. Because they stack an extra fifteen basis points on top. of the other three fees that we talked about, the one to go to the issuer, the one to go to the merchant's bank, and the one to go to Visa itself. And so if Apple

3:26:11 Has convinced merchants. that it's fine to lose another fifteen basis points on every transaction because It's so freaking convenient that users get to tap their phone or their watch. That is Just step one in an equation.

3:26:24 Here's the like really extreme Apple payment bull case. If Apple were to have payment terminals. then they could totally run all of those Apple Pay payments on their own network. As it happens right now.

3:26:38 You need to have a card issued by a bank that likely is issued on Visa or MasterCard or Amerx or Discover. And then it goes over those payment rails. Apple just puts a little charge on top of it. And then it's the same way any other transaction happens. But if I were to Apple Pay with my Apple card. at an Apple point of sale.

3:26:59 Why would that ever need to run on Visa's network? And so Apple doesn't make point of sale hardware today, but if they were to acquire Square Or if they were to do something way out of their DNA and go acquire like Veriphone or a legacy provider. they could create their own closed loop network.

3:27:18 Where they're actually the payment method And V merchants technology provider. Yeah.

3:27:25 I actually don't even think they'd need to do that. I mean, they're Apple, right? They just use iPads and they would As part of Apple Pay, they would have Apple Pay for merchant software that would be on the iPads. No, that's too hard. That adoption curve sucks. I think they would pay the what's Square's market cap or blocks like thirty billion or something right now. Apple could totally just go buy block and do this overnight and light up all the existing merchants. Yeah, true.

3:27:51 True. Like what else are you gonna do with two hundred and fifty billion of cash? Yep. I mean, maybe they would try, but Apple is not gonna be in the business of directly having a sales force to sign up all these merchants. I don't think. Agreed. I have a

3:28:06 Counterpoint to that, but I'll save it for the bowl side of the ledger here. Okay. I mean the other thing, the lighter weight thing on Apple is Even if they don't. Try to build their own closed loop thing.

3:28:16 Who really cares what's in your wallet? when your wallet is your phone. For consumers now If you're using your phone, in your head, your payment method is your phone. And it's like the card underneath it is not terribly important other than the fact that you need to remember to auto pay it and like ideally it has the one with the best rewards.

3:28:35 And that's not what most people are thinking'cause I think actually the majority of people don't have rewards based credit cards. But They loaded some card in there, they kind of forgot about it, and they pay. And Apple is actually

3:28:48 The means of payment, not the card. Even though it's flowing over their rails, consumers don't think of it that way. Yep. So I don't know exactly how that will manifest in chiseling away at Visa's value, but It certainly is fair to say that

3:29:03 the card network and the card issuer have less of a role in the consumer's mind than they used to. based on the fact that we now have mobile payments. Yep. And Apple Pay And Google Pay along with it. R I think

3:29:19 By like many, many, many orders of magnitude the most successful quasi alternative payment systems that have actually gotten install bases. Right.

3:29:32 Very popular too. Yeah, yeah, yeah. But like what else? I mean, there have been other alternative payment systems over the years and None of them match, at least domestically in the US. Apple and Google Pay. Yeah. So my TLDR on the

3:29:47 The core business matures so that tailwind lessens the uh debit networks get sort of chipped away at more rails emerge for each use case that sort of again has further chipping away at their available use cases, even if not the actual ones that they're using today, but the ones that they could go tackle in the future might get eaten by other people and they spend a bunch of wasted money trying to figure it out. But I don't know. Those are the best bare cases I can come up with. And the funniest thing is when I asked, we'll thank a bunch of people at the end of the show that we had conversations with, when we would ask people

3:30:19 Hey, what's your bear and bull on uh visa? Basically everyone just gave us a bear case'cause they're like the bull case is obvious. Yeah. Totally. And I think the obvious

3:30:30 This is just an incredibly powerful network effect that's fifty years in the making and is five sided and Lord knows I can't think of any other five sided network effects. writing a secular

3:30:42 Increasing market. Yeah. Riding a secular wave. And Nobody has ever broken it and Past performance is a strong indicator of future performance in this domain. Yep.

3:30:53 The corollary to that too is lots of people have had lots of similar bear cases that they've said five years ago, ten years ago, and like none of those things have come true. Visa has just continued to grow it. you know, low double digit percent growth every single year, or I guess to your calculation of seventeen percent over fifty one years. People in the past have said. many of these bear cases, but uh have never come true.

3:31:18 So that's kind of the most obvious. Here are the few that Are most evident to me that are sort of potentials on top of their core business because it is true that interchange is facing downward pressure. I mean, we talked about all the way from seven percent down to two and change.

3:31:34 And so They do these Interesting other things. One benefit to them of digital payments. We talked about the potential drawback with Apple being able to maybe disintermediate in some way that's not exactly clear yet.

3:31:47 is Tokenization. So the way that Apple Pay works is that your card doesn't actually get sent to the merchant, your card number, none of the identifying information on there. Goes. your card gets tokenized.

3:32:02 and a token representing your card does, which is, as Visa will tell you, amazing for security and privacy. What it also does is allows them to create more proprietary services. In the old card number system, there was a lot more flexibility in what a merchant and their payment processor could actually do with the literal information on the card. They could choose what network to run it on. There was sort of more optionality with it when you had the raw information. And now Visa's like, hey, we got your token. Do you want us to do any of the cool token based services that we have with it? And like those are high margin for us.

3:32:35 And so that's sort of the tokenization is good for them. They now have more digital tokens than card credentials. That's been growing really fast. It doubled last year. their sort of tokens on their network. So You know, Visa's quote on this is

3:32:50 this marks a huge milestone both for the transition to digital and in our work to secure the wider payments ecosystem. And you better bet that that's good for, you know, long term margins and layering products later on. Other bull cases. So this is like my favorite one from there. You remember the NVIDIA slide of the trillion dollar uh TAM? Yep. So Here's Visa's version. Payments.

3:33:13 All of payments. is about two hundred trillion dollars of volume. And cards are only twenty trillion dollars. So Here we've been playing in this tiny little fraction of the available market.

3:33:26 And there's a few things that they call out that they want to move into. That B to B payments. is about a hundred and twenty trillion if they can access it. B2B commerce is actually just much larger than B2C commerce if you think about the amount of money that flows over invoices. that are uh paid via A C H or Wire

3:33:43 Visa I think is intensely aware that they're not going to take two and a half percent interchange on a company invoicing another company for a million dollar services provided thing. But you know, there are elements of B2B that do have interchange. I mean, if you're issued a ramp or Brex card and you go swipe that that's a B2B transaction. So they're very excited about addressing B to B both in They're further pushing cards, but also developing B2B specific products that have more appropriate monetization models. And then they also

3:34:15 We've been talking a lot about consumer to business, like when I decide to pay for something. at a business. If you flip that business to consumer That is a$30 trillion TAM. Or a thirty trillion dollar volume addressable opportunity.

3:34:31 And you can think of that as like uh insurance company needs to like pay uh payout after a car insurance and they need to make that happen fast. Or uh refunds. Let's say you never bought anything, but a company still needs to send you some money, or like Uber needs to pay their drivers. This sort of thing is there's a whole business they've created called Visa Direct, which is the business to consumer push based payments. Which is a kind of a new foray for them.

3:34:56 And then the last one is just expansion of cross border payments. If they can do more international transactions, that is hugely, hugely profitable. So those are my uh that is me trying to faithfully represent the bull case that Visa pain for their shareholders. 'Cause David, these poll cases are so easy. You should read the annual report. The whole thing's bullcase. Yeah, right. One other additional I said I was gonna add on bulk case sort of as a response to the Apple and by Association Google.

3:35:22 You know, pretty much everybody we talk to. Pointed out as the number one most obvious bear case for Visa right now is Apple and Google and Yeah. Incredible.

3:35:32 progress and inroads that they have made into Rails and transactions. But As you say. All those transactions.

3:35:40 Are still just tokenized Visa Mastercard cards. Right. It's a bullcase today. Yeah, it's a bullcase today. You know, there may be nuance that I'm missing here, but If you play out how

3:35:52 Let's say Apple decides, okay, we want to go after Visa. I'm not sure how Apple could actually do. Do that. Really without becoming a bank. themselves.

3:36:03 You know. Yeah. MX is a closed loop system. It's a bank. Discover is closed sweep system, it's a bank. Does Apple wanna be a bank? Well they could become like a stripe.

3:36:14 Yeah, I guess so. Or like a square. They're the technology providers and they have Merchant acquirer banks behind them. Yeah. Sure, they could do that. Apples.

3:36:25 Finance and fintech. operations do not exist in a vacuum. Is Apple gonna take on the risk to the Apple franchise? Of all the regulation and scrutiny that comes from that. It depends. Apple will eventually saturate their market and they are looking for what the next frontier is and

3:36:44 Two hundred trillion dollars of volume moving around the global economy. I think yes, absolutely. And so I'm not saying this won't happen, but Tim Cook board level discussion on this, right?

3:36:57 Let's play out the Dehawk thought exercise. Apple succeeds. They do it. They eat visa. Visa's market cap is now added to Apple's market cap. Great. Apple's market cap just grew by twenty five percent. Well they I think they have to think that they can improve

3:37:13 something. They won't go into this unless they think they can improve both the user experience and create a better business out of it. Great point. Great point. And they will I mean the Vision Pro will come out and we'll have to see if that is the future or not. But post that, like They're gonna do a car or they're gonna go into payments. Right. They gotta keep going after bigger and bigger markets.

3:37:32 You're right. You're right. The cute apple that we know of years past is gone. And we just have to think about like what would a good capital allocator do with their strategic position. True. I'm not making the argument that they're still the cute apple. I'm just saying like I think actually entering this arena introduces a significant amount of risk to the whole franchise that they have to weigh in a way that some of these other markets don't. Yeah.

3:37:53 That's super true. Okay, I have one trivia thing for you before carve outs. You may already know this, but Did you know? That

3:38:01 You can get a bank Americard today. I did not Is it like a branded visa product from Bank of America? It is a branded product from Bank of America, available on Banco America dot com. There's no annual fee. Click on their website to apply now. And the

3:38:19 beautiful irony that will tie a bow on this whole episode. is the Bank Americard credit card by Bank of America. Runs on MasterCard Network. Well as users started to set that up, I was like I know where you're going with this. I know where you're going with this. Interbank for the win. We'll link to it in the show notes. Get yourself a bank Americard. And run your transactions over MasterCard's beautiful stellar network. Wow. Unbelievable. It is hilarious.

3:38:48 What a great place to leave the story. There can't be that many people that are applying for this thing, and you would think that Visa would try to go get this deal done just for nostalgia purposes. That's a crime against internet and business history. What a story, man. Uh truly. Okay. Carve outs. Carve outs.

3:39:04 Mine is Available on Netflix. It is a show called I Think You Should Leave. I have not laughed this hard in a long time. Each episode's like 15 minutes. It's like three comedy sketches with a guy named Tim Robinson as sort of the brains behind it and is in many of the episodes. Oh, we were talking about this at our drinks in New York.

3:39:23 Yes. If I were you listeners and you haven't watched this yet, I would go to season three, episode one. My favorite skit of them all starts approximately six minutes in. Actually the whole episode's good, but the skits two and three are the uh truly unbelievable ones, but It's just

3:39:41 He's so outlandish and so I don't know. It's like everything that sketch comedy should be in the absolute highest production value you could possibly imagine. shot very convincingly. I think using the same cinematographer, but using a completely different set of lenses, lighting, sets, post production, such that everything that they're trying to emulate, whether it's a game show or a dating show or a commercial, feels like the appropriate

3:40:07 thing that they're trying to emulate. It's just really good. Ah, it's amazing. Have to check it out. My carve out is a book. I think this is my first Fun.

3:40:17 fiction book in a while. Mistborn by Brandon Sanderson. It is a Awesome fantasy novel, the first in the series, but you can read it as a standalone too. It's been out for a long time and has many, many passionate fans out there. It was recommended to me By great friend of the show, Guy Pajarni, the founder of Sneak.

3:40:36 Last time we got together, which was super fun. Sneak is an amazing, very large cybersecurity company that I'm sure many of you know about. Focus on developers, right? Yeah. Developer Secure, you see their billboards all up and down one on one here in San Francisco. But yeah, he recommended it to me a while back. And it took me a while to get to it, you know.

3:40:53 Toddler parenting. But I read it. I thought it was awesome. Jenny read it. She loved she's of course now done the whole series'cause she's a voracious reader. the world building, the magical system.

3:41:04 All the core fantasy elements are really great. The political intrigue Highly recommend. Awesome. Well, we definitely have a few thank yous on this one. Uh huge thank you to Dave Stearns for spending the time with us and recanting his academic thesis, and it was just awesome reading the book. I have a personal thank you to a good friend of mine, Jason Pate of Plad, very helpful to get

3:41:26 Just general high level thoughts on payments industry. Thank you to Lisa Ellis from Moffitt Nathanson. Lisa did an amazing interview with Ben Thompson a few weeks back. If you are a Strat TechRe subscriber, that is totally worth reading and I prefer listening. So go listen to that. After I read that, I shot her an email and I was like, We're about to do Visa. I would love to talk to you about some of this. So uh huge thanks to her. Good friend of the show, Dimitri from Modern Treasury, for helping us quickly get up to speed.

3:41:52 On payments. And good friend of mine and David's both, Ben Eidelson, who is a former product person from Stripe. Sign up for emails to find out about the latest acquired episodes, to get in on our teasers of what the next episode is going to be, and hear the follow ups and corrections after we learn them from you. Should join the Slack, acquire dot FM slash Slack. You should check out ACQ two.

3:42:16 In particular, our next episode, it is not out yet, is going to be a follow-up to this episode on Visa. Our buddy Garov from Thrive Capital is joining us for a follow-up to analyze the payments landscape. And Garov has spent his entire career as a founder and investor in fintech companies. And he actually gave a talk on the history of credit cards that we used for research in this episode. So Check out ACQ2, search and subscribe in any podcast player. And then the next week, maybe two weeks. our uh interview with Gorov will come out and be sure to check it out. With that.

3:42:50 Check out the merch store, acquire.fm slash store, can sport some of this sweet uh I'm wearing the shirt right now, sweet swag around. Pay some interchange fees. That's right. And with that, listeners, we'll see you next time. We'll see you next time. Who got the truth? Is it you, is it you, is it you Who got the truth now?

3:43:12 Hm.

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