Visa 03:42:54

It's funny, when we picked this episode, I was like, oh, this is going to 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. Yep. There's always a story. Who got the truth? Is it you? Is it you? Is it you? Who got the truth now?

Welcome to Season 13, Episode 4 of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert. I'm David Rosenthal. And we are your hosts.

Today, we tell the story of an absolutely incredible system. You can show up anywhere in the entire world with a piece of plastic and transact for anything you want in any currency. The merchant doesn't need to know you or trust you, and you do not need to know or trust the merchant. And Visa, along with just one other competitor, MasterCard, has tirelessly spent decades stitching together all the banks, merchants, and the relationships with consumers to make this possible.

Now, this is just the rosy side of the story, and merchants may harbor far less rosy feelings about Visa given how much of their profits go to interchange fees, but the duality of the story is what makes it so interesting to understand.

Today, we will explore how the whole thing came to be and try to understand the value that the credit and debit card system creates compared with how much it captures and by whom in what situations. So here are some astonishing stats on Visa. It is the 11th most valuable company in the world. It is worth more than any bank in the world, including every bank involved in creating it.

Visa's brand is among the very most trusted in the world associated with reliability and security. But that said, if you asked most people what Visa does, they could not actually articulate it. Visa does not extend credit. They do not issue cards. They do not work directly with merchants. They do not work directly with consumers. They are not a bank or a financial institution. They don't ever bear any risk. They are merely a network connecting banks to

to other banks. David, it is insane. This is such an insane story. I can't believe we're all the way in season 13 and we haven't talked about this company yet. But as we will get into, it's always been overlooked and underrated. Well, perhaps not underrated the last decade or so.

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Now, without further ado, this show is not investment advice. David and I may have investments in the companies we discuss, and this show is for informational and entertainment purposes only. David Rosenthal, where are we starting today?

Well, we are starting actually with a big thank you to Dave Stearns, author of what is undeniably the very best book on Visa and its history, Electronic Value Exchange. And we owe a thank you to Dave both for writing the book and for talking to us as we researched and helping us sift through everything as we're preparing here. Fellow Seattleite, and the book, which is so wonderfully esoterically named, Electronic Value Exchange, was his, I think, PhD thesis that they sort of turned into a book. Correct. Correct.

All right, take us back in time. So D. Hawk, the founder of Visa, who we will talk a lot about as we go along here, he told this great story of how after his time at Visa in his kind of older age, he would start his speaking engagements with a little thought exercise for the audience. He would get up on stage, he'd hold up his Visa card, and he would ask, how many of you recognize this? And a

Of course, every single hand in the room would go up as I assume all of yours listening are going up now too. Then he would say, okay, now how many of you can tell me who owns this company?

And every single hand in the room would always go down. And they would say, how did this company start? No hands. Who runs it and who governs it? No hands. Where is it headquartered? No hands. It's just wild, as we were saying in the intro, how important this company is. And yet still to this day, I think, you know, maybe a few more people than in Dee's time know the answer to these questions, but not many.

Yeah, it's one of these things too. It's like one of the only essential pieces of financial infrastructure in the United States that is not run out of New York. So our task today is to tackle these questions. And we start where some of you I suspect know, but the vast majority of you I also suspect don't. We start in 1958 in Fresno, California with The Drop.

The Drop. This is the name of the title in this fantastic book, A Piece of the Action, How the Middle Class Joined the Money Class. And it's chapter one, The Drop, 1958. The Drop has become like, if you say The Drop to someone in the fintech industry, they're like, oh, September 1958, Fresno. Yep. And the rest of the world has no idea. Yep. All right. So what happened? Well,

The then largest bank in America, the San Francisco-based Bank of America, which formerly was called the Bank of Italy, both of which were total misnomers because it was actually more accurately the Bank of California. It was illegal to operate banks across multiple states back then, as we will discuss.

And the reason it was named Bank of Italy was it was started by an Italian immigrant who wanted to create something for the underbanked Italians in his California community. Yeah, mostly farmers and merchants in San Francisco. It really started as like the Bank of the Little Guy.

So Bank of America decides that they are going to mail out little rectangular pieces of plastic to every single one of their 65,000 customers.

customers 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 200, 250,000 people. So like a huge portion of the city of Fresno banked with Bank of America. And that was true for all of California at the time. Two, they just send these things out. Obviously, these are credit cards. People don't know what they are. They have no idea what to use them. Mass chaos ensues.

Well, and certainly nobody asked for them. There's this great quote, again, from a piece of the action that describes it and says, there had been no outward yearning among the residents of Fresno for such a device, nor even the dimmest awareness that such a thing was in the works. It simply arrived one day with no advance warning as if it had dropped out of the sky. All right.

All right. So to explain how we got here, we need to spend a few more minutes on Bank of America's history and the history of banking and payment industries in the U.S. more broadly. So like we said, B of A was the biggest bank in America in the 1950s, but it was not like all the other big banks at the time. It was a consumer bank.

The other large and influential banks in America back then were like the JP Morgans. They were white shoe corporate banks based in New York. We talked about this a lot in the Nike episode. It was illegal for banks to operate across state lines until much, much later in history.

So for banks back then, the only way that you could actually get big for just about everybody else in the industry was to go the corporate route and to go the investment banking route, because you could service very large corporations that obviously were large themselves, would generate lots of deposits, lots of lending activity. The investment banking activities around that were obviously very lucrative. That's how the JP Morgans, the Morgan Stanleys, et cetera, the world came to be.

For the most part, consumer banks were kind of backwater, small. There was no way to aggregate enough customers that you could get big enough. Well, and in most states, they would have restrictions on the number of branches that banks could actually have. In some states, I think Texas was one of them, you literally could only have one branch. Other states would limit them as something like three. Other states would limit them and say none outside the city. So you were sort of a bank of a city.

You could almost think about these more as credit unions than these sort of big banks that we think about today. California happened to be unique in that you could actually have branches all over the state, and California happened to have quite a large population. So it was kind of the only place you could pull off a large population.

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, you know, the business of banking is, well, banking. You take deposits, you make loans, you make your money on the loans.

B of A was doing tons and tons and tons of small, little, and disparate consumer loans and lending. So obviously mortgages and car loans, like those still exist today. But they were doing like washing machine loans.

They were doing like buy now, pay later. But instead of on the website, you would go to your local bank branch, you would schedule time, you would sit down with the bank manager, and he would authorize you to go spend $150 at some merchant and make you a loan that you would come pay back over the next few months in installments. And every single time that you wanted to buy something now and pay for it later, you would repeat this very physical one-off manual process. Yeah. And for specific items to like go buy a refrigerator. Yeah.

Wild. It was just wild to imagine today. So you can see why for a bank like Bank of America that is doing this at such large scale...

The idea of a consumer credit card, well, it's pretty awesome because you can take all of these disparate lending programs, consolidate it into just one card, cut out a ton of overhead fees and make it way more efficient. So this is what they are launching first in Fresno as the pilot market. And they call it the Bank America card. Beautiful name. Beautiful name. And it would survive for quite a long time.

Now, this wasn't exactly a new idea on the part of Bank of America. Charge cards and credit cards have been around for decades. What was new was this was the first time that a bank had entered this market at scale. So let's talk about the history. Historically in the U.S., transferring money was actually not that easy. You had two options. You could use cash or you could use checks. And checks worked, but...

They also had a bunch of problems. One, until the creation of the Federal Reserve in the 1910s, the parties cashing the check, receiving the check, didn't actually receive the full face value of the check because there was a bunch of work and like mailing stuff around, traveling around the country that had to be done. And that was taken as a discount out of the check.

And this is super important. This thing that we have today, interchange rates on credit cards, that was happening with checks too. There was really a lot of expense and risk in processing checks when they first got started. And like, of course you would take a discount out of the fact that you're taking risk and you're spending money to go and make sure that this check that someone handed you eventually turned into dollars that you could have in your possession.

Totally. So problem number one, you didn't get all the money. Right. Problem number two, also a big problem. It took a really long time. Imagine, you know, we're talking like the 1800s, early 1900s. This stuff was on the Pony Express, you know, pieces of paper going around a really, really big country. Not ideal.

Yeah. And until ACH, where the banks would sort of all meet once a day and decide, okay, how much do I owe you? How much do you owe me? In aggregate, okay, let's just settle one transaction and then we'll figure out all of our internal accounting ourselves. They were literally like

check by check and saying, okay, I have this check. So you owe me $6.08. Okay, next check. Oh, I owe you $4.20. And it was this crazy system of individual couriers bringing checks from the person who gave it to the merchant for the merchant to go and track down the money and bring the money back. Totally. And

Spoiler alert, ACH doesn't get developed in the U.S. until the 1970s. Wow. Humans, though, are quite ingenious creatures at solving their problems, particularly when motivated by money. So there is sort of an obvious solution to this for merchants and their sort of usual regular customers, and that is credit accounts, charge accounts, rafflecalls.

rather than giving me money or a check, let me just keep tabs on a ledger of what you bought, what the value is. I'll tab it all up. And then at the end of the month, you'll come give me a check or cash for it. I remember even me growing up in the 1980s, we had this at our local gas station near our house. Really? We had a credit account and it was just like whenever...

Any of our family would go to this gas station, we would get the gas, and then we'd go inside and be like, oh, we have an account here. And they'd just write down what it was. And then at the end of the month, I assume my dad would go give them some money. Which saves on operations for everyone. It's, oh, great, now we only need to move money once, we move it at the end of the month, and I trust you because I've seen you lots.

So from charge accounts at individual gas stations or individual branches of a grocery store chain or something like that, it's not a leap to think the next stage of evolution would be, oh, a card or account that would work at all the branches of a given brand. So like the gas stations get into this in a big way. Standard oil gets into this in a big way. Lots of standard stations across the country.

you can have an account that works at all standard stations. Yep. In 1939, Standard Oil of Indiana sent 250,000 unsolicited cards directly to all of their customers. Yeah, making the Fresno drop look like a drop in the bucket, shall we say? Well, and interestingly, this is 20 years before. But again, this is not a bank. This is a single merchant mailing it out to all of their customers exclusively for use at their facility. Yep.

So there was that phase. Then pretty quickly in a given local area, some of the retailers would get together and be like, you know, we compete with each other, but it sucks running these charge account programs on our own. We could collaborate and have a standardized charge account system that we could share and

And just literally to simplify the back office as the first value proposition here. Yep. And for consumers, that's also pretty awesome because do you really want to carry around 57 different charge cards in your wallet? Or would you rather have one that would be like, you know, your visa to everywhere you want to be? Yes.

And not to mention on top of this, there is the huge benefit of a shared credit history. Now, all these merchants who were losing money on people coming and getting a loan from them in the form of I'm going to buy some goods, I'll pay you back later. But it turns out they had run up a tab all over town and weren't paying their bills anywhere. Now, with this idea of a shared card, you actually can have a shared notion of who a consumer is across locations.

and across different retailers. Yep. So this comes to be kind of post-depression in the 1930s, 1940s in the U.S. And this really is starting to sound a lot like Visa, except as you point out, Ben, there is a problem here.

As the size of any given network of retailers that are collaborating on this grows, so does the intensity of competition within that network. So once you get to a certain scale, nobody's really incentivized to keep making this work. A, because now you're enabling people to shop all your competitors.

But also, B, once you get past, I don't know, a couple hundred, a thousand participants here, like, 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 there could be an independent network.

third-party for-profit network that does this. And this is when Diners Club and American Express arrive on the scene. So Diners Club was first, and people might know and have heard of Diners Club. It still exists today. It's like a sub-brand of Discover. Totally. There's a very famous legendary origin story behind Diners Club, and it goes like this.

In 1949, you know, post-World War II, economic prosperity, beginning of the Mad Men years in New York and Manhattan, a New York businessman named Frank McNamara is hosting a lavish business dinner in downtown. Halfway through the dinner, he realizes...

that he forgot his wallet at home. He does not have cash to pay for the dinner. So he excuses himself. He goes to the payphone. He calls his wife at home on Long Island. She speeds into the city with enough cash in time to pay the bill for the dinner. And, you know, face is saved. His reputation as a erudite businessman is preserved. And then afterwards, he's talking to his wife. He's like, oh, there's got to be a better way to do this.

There really should be a business person focused charge card network that would work at all the restaurants in Manhattan where business people host dinners. So nobody ever needs to bring their cash. And, you know, you could just imagine that like we're all in this club of diners where anywhere we dine, we can stand up, we can authorize the bill, we can leave, we can pay no dollars out of our pocket that moment. And we get one nice statement at the end of the month that importantly, we do need to

pay in full. We cannot roll it over into a loan. We must pay it. But that's nice because all of my business transactions are on one single statement. It's easy for my expense reports. It's easy for me to not have to carry a wallet around. And of course, I get to look super awesome in front of all of my colleagues. I think there are two really important points here. One, you said, I pay it. I don't pay it. My company pays it. I don't care. I

Two, the most important point, I get to look super awesome in front of all my colleagues and customers and people that I'm trying to impress. I don't need to bring cash. They know me here. I'm good for it. And just to start tracking a certain number here, when we were talking about checks earlier that were getting a discount, and even in this era of early Diners Club, early American Express, we're talking about a 5% to 7% discount of what actually got remitted to

ultimately to the restaurant or the retailer versus what the bill was originally that the consumer authorized. So all that's a very nice story, except it's completely fabricated. None of that actually happened. Although stories like that did play out, I'm sure, on a nightly basis in Manhattan. The reality is Frank just thought this would be a good business idea.

And he was right. You know, you see this all the time with networks, network effect businesses. This was the right little node of the network to start with. This was like Harvard and Facebook because restaurants in Manhattan are

They're competitive with one another, but it's not exclusive competition. This isn't JCPenney's versus Macy's. No restaurateur in Manhattan, no matter how good they are, really honestly believes that a majority of their customers are only going to dine at their restaurant. Great point. So there's some incentivized sharing. It's almost like the reason to...

enter into a bundle. For your most extreme fans, which are only going to be like the top 5% of your customers, sure, you want some kind of exclusive relationship and you want to maximize the dollar value you can get out of them. But for your casual fans who like your business but aren't necessarily exclusively going to use your business, you should figure out some kind of

bundling system that makes you work with complements of yours so that people can shop you and everything like you with the easiest way possible and you can still make some money on everybody.

You're enabling people to spend money in your restaurant easier and more frequently. And you don't really care that they also go to other restaurants because they're going to do that anyway. 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.

7% of the gross bill. You know, merchants complain about 3% today, 7%. And these are restaurants. Like that's crazy. Eventually they have so much power in what they're doing. This product is so good. They also add a fee for the cardholders 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.

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

a necessity. The cost of running these networks in a previous technology generation was super high, and it was not at full scale yet. So it's just operating with a bunch of restaurants and retailers in New York City. So you actually need a lot of people, both because there's not a lot of technology, but you need a lot of people even though there aren't actually a lot of merchants. And so it turns out there's just a lot of cost in the system to run it. And...

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, it's still a brand today. But it's basically impossible to create a independent from the ground up network of this at the time because you were just talking about the operational cost of running this thing.

Think about the merchant and customer acquisition costs. Nobody knew what Diners Club was. They have to now go canvass the entire island of Manhattan and ultimately, you know, the whole country and world and sign up all of these merchants.

and go sign up all of these companies to get their employees to use it, that is a very expensive sales proposition. Whereas from this point on, basically everybody else that comes into the industry already has established relationship sales channels into one or both sides of the market. Which, of course, brings us to the brand you're all probably thinking about here, American Express.

Which is the diners club of today. It's the favored card by businesses. It is the card that is most used for travel and entertainment and meals. Yep. And so, as you might remember from our Berkshire Hathaway series a couple years ago, Amex at this point in time was primarily a traveler's checks business. That's how they started, right? Well.

Well, actually, no. They started in 1850. This is amazing. Do you know who started American Express? This is a version of DeHawk holding up the Visa card. Ooh. No, I don't. I did not either until doing research for this episode. It was started by a group of people, two of the most prominent among whom were... Oh! Wells and Fargo. Henry Wells and William Fargo. Amazing. Totally amazing. Man. 1850. Yeah.

The Wild West. Different time. It was something like they started American Express, but then had a conflict. And so they left and they started Wells Fargo after that. Yeah, something like that. The infrastructure of America was getting built out. So American Express, called American Express, it was an express mail company. It was like the Pony Express. That was how they moved stuff around. And I think Wells and Fargo were doing banking. And so obviously banks, as we're talking about, you need to move stuff around the country. It was like a related business.

It's amazing. I think it's fascinating that Wells Fargo came after Amex. Like you think Wells Fargo as this old timey foundation of America. American Express is even older than that. So Amex by this point in time had become a traveler's checks primarily. That was their primary business. As we talked about on the Berkshire episode, that was a freaking awesome business.

partially because traveler's checks, you know, they made good money. You would buy a hundred dollar traveler's check and pay Amex a little fee or whatever, but the float and the breakage, like there's traveler's checks out there today that are 50, a hundred years old that have never been cashed. And Amex has just been sitting on that cash for decades, investing it. What an amazing business.

Okay, so Amex observes Diners Club and says, hey, we need to get into this and we actually have an ability to get into this fast. And they actually try to buy Diners Club, but they can't get their own price. And so they're like, well, we don't need to pay you a lot of money.

Because we can just do this too. And like I was just saying, not only can we do it too, we can do it better than you because we're American Express. We have relationships with companies. We have relationships with restaurants. We have relationships with hotels. We don't need you, Diners Club. So just within like a year or maybe even two from when Amex launches their

charge card, you know, business traveler program, they sign up 700,000 members, which is almost as much as Diners Club had signed up, you know, many years of working on it. And importantly here, the thing you're seeing is

This is the first time a real financial company is coming into the industry. All of the we-know-you're-good-for-it-ness was happening directly from retailers before or by organizations that represented retailers and restaurants. And so now you sort of have not a bank, but a bank-like entity that is starting to say, oh, this could be an interesting business. So this brings us right back to Fresno.

in 1958 because the timelines match up exactly. This is crazy. Amex launched their charge card program in 1958. B of A sees what's happening. They, of course, had seen everything else going on in the industry before. They understand the transformative power that this can have for their scaled consumer banking business in California. And they're like, OK, the time is right. Let's do credit cards. Let's go to Fresno. But hopefully, as we painted the picture,

Their motivation and Diners Club and Amex and even the merchants and retailers motivations are very different. B of A wants two things out of this. One, like we were saying earlier, they want to streamline and simplify all their wildly diverse lending programs. This is going to be huge operational savings for the bank if they can pull this off. Two, though,

The bigger opportunity for B of A is what can this do for our banking business itself? Because remember, how do banks make money? They make money on loans. And this is going to enable so much more effective loan volume to flow through our system that we can make money on.

So this is where B of A, informed by their previous business model of lending to consumers, really paves the path of what credit cards would become today. Often in the past, before the Bank of America card, what would happen is you'd have this charge card, not a credit card, and the bill would arrive at the end of the month and then you would pay it.

The innovation baked into the Bank AmeriCard is they say, well, after the 30 days, you can get your statement, you can pay it in full, or you can roll it into a loan. And we love loans. We would be happy to extend loans to our customers. We can learn a lot about them. We can make a good amount of money on that interest. And so the modern credit card is born. And it was already happening at B of A. They were doing these loans. This wasn't actually like new behavior. It was just...

a way easier, way more streamlined on-ramp into this consumer lending that turbocharged it.

This product is the combination of three things. The charge card that had been happening over in Diners Club, Amex, the gas stations, the retailer land. Then the second pillar is this consumer lending. And the third thing is it is now from a real and proper bank that you already have your primary financial relationship with, not from some industry association or hodgepodge of retailers, but now this is issued by your bank.

The big takeaway for Bank AmeriCard is it really bundled two different things together. One was convenience and the other is credit. And there's one more really, really important sub point here to what this loan is. And it relates to the banks and why this is so powerful for B of A and for all banks. Think back to the old way that B of A was doing this.

A California homeowner wants to go buy a new refrigerator. They walk into a B of A, talk about it with the lending officer, blah, blah, blah, a bunch of operational costs. Who cares about that? At the end of the process, B of A gives them the money. The money is now out of B of A's hands. It's out the door. The consumer then goes to the merchant and gives the merchant the money and buys the refrigerator. What's happening now with credit cards is actually a little different.

The consumer goes to the store. The consumer buys the refrigerator with the credit card. No money has left B of A's hands yet. They get to keep the money. Right. A transaction has been authorized, but yes, they get to keep the money. And because we're talking about California here, there is a very high likelihood chance. And I think at the beginning, I suspect a 100% chance that the merchant also banks with B of A.

So that money is never leaving Bank of America's hands, which frees up more capital, which frees up float, which is just like the B of A management must have been besides themselves with glee about this. Well, in theory, if they managed to put any sort of financial controls or proper risk underwriting on this whole thing, but it turns out, David, as I'm sure you are about to tell us. That's exactly where we're going. When you mail 65,000 cards indiscriminately with the same credit limit to every single customer,

and say, have at it, guys, and this is a brand new consumer behavior that they've heard about and they might have witnessed in one form or another, but now they have a bona fide charge plus credit card sitting in their hands, you're going to lose a lot of money at first. Yeah, because

Because there's another more pernicious way that this type of lending is different than the previous type of lending that B of A was doing. It's unsecured. If you give a customer a loan to go buy the refrigerator, you don't want to go repossess the refrigerator. But push comes to shove, you can go repossess the refrigerator. This whole consumer credit card land is unsecured lending.

So you probably shouldn't apply the assumptions about your loss ratios from secured lending to unsecured lending. But that is exactly what happened. And this all comes back to why it really had to be Bank of America to start this program, because they do this. They do the drop in Fresno. Sixty five thousand unsolicited cards go out to unsuspecting consumers.

Fraud is out of control. $20 million of fraud within the first pilot program. 22% of the credit that they issued to that initial Fresno cohort ends up being default or delinquent, which I think is like five or six times what 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 2023, some of these kind of

sound like bad words. And frankly, it's because of the situation that the society has sort of like pushed 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.

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 an apartment store or a loan shark, for that matter. There isn't another Western country that has relied so heavily on consumer credit. Between 1958 and 1990, there was never a year where the amount of outstanding consumer debt wasn't higher than the year before.

Years later, a Bank of America executive could look back on his lifetime in the credit card industry and say proudly, consumer credit built this country. Whatever one's feelings about personal debt, it is difficult to disagree with this assertion. So, if you're a bank of America,

Interestingly, what's basically happening here is people are using debt not because of this bleak, horrible time that they're in. It's actually because of their optimism. They believe that the future is brighter than the present, and so they're fine taking on debt. And that is sort of

what has sort of led us to today, where because the growth of the American economy and the global economy has been so strong, people have always generally been fine, or at least we exist in a system that teaches you you should kind of be fine betting that the future is going to be better than today. Such a good point. As long as growth is happening in an economy, a society, industry, whatever, you should absolutely use capital to fuel into that growth.

Yep. And that may not be true on an individual basis, but it is absolutely true on a societal basis. Yep. So back to what I was saying about why B of A is so important. B of A can absorb this loss. No other consumer bank at the time, if they had seen $20 million of losses in like a set of months, they would have pulled the ripcord immediately.

B of A though, they can absorb this loss no problem. And they know if we can make this work, this is going to transform our business. So rather than pulling the ripcord...

They expand. They roll it out quickly across the whole rest of California over the next year. All within the first year, they sign up 20,000 merchants in California and get this. Do you know how many cardholders they sign up in that first year? No. Two million California cardholders.

cardholders signed up using the card in the first year. It took Diners Club years to get to a million. Amex was so proud in the first year or two, they get to 700,000. B of A instantly at scale is the largest charge card credit card program, certainly in America, I suspect in the world. And that's one year and one state.

This is like meta launching threads or Microsoft launching teams. You can sort of sit back for a while and watch the innovation and figure out what the very best product is that people want. And then you can go ram it through your distribution channels when you invent one of your own. Yep. And it's even more than that. As we said, this really was a big innovation. Like it wasn't just that they copied Amex and Diners Club or anything else. Like they were adding credit to this. This was a huge innovation. Yep.

So by 1961, year three of the program, they're able to get fraud under control enough that the whole program is profitable. But they keep that under their hats. Yes, yes. They don't want anybody else to know about this. So...

There's been all these newspaper articles about all this money that B of A is losing. So many banks that had been thinking about launching a similar program abandoned it because they were like, oh man, we thought this was going to work, but clearly it's not working for B of A. So people were shutting down their efforts. There was rumors that another bank was going to launch in 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 1960 to 1966, so this whole era is actually a profitable era for B of A, but no one else knows it. There were only 10 new credit cards introduced in the entire United States because they did such a good job keeping what became a cash gusher for them quiet.

But Secret comes out in 1966, and from 1966 to 1968, just two years, approximately 440 credit cards were introduced by banks large and small throughout the country. Yes, and it is specifically 1966 when The Secret gets out because phase two of Bank of America's grandmaster plan here gets unveiled, which is maybe worth a quick setup.

As we said, this was transformative for their business in California. But they're the biggest bank in 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 to Bank of America? It's not because they wanted to be the Bank of California. So they're like, maybe this is our path. And California is only like 10% of the U.S. population.

In 1966, they create the Bank AmeriCard Service Organization with

The express purpose of licensing out the Bank AmeriCard program and network to banks across the country, across all 50 states. And this is the seed of Visa. But listeners, before we talk about how the Bank AmeriCard Licensing Association morphs into Visa, now is the perfect time to tell you about one of our favorite companies, Blinkist, and their new parent company, GoOne, where David and I are proud angel investors.

Yes. Blinkist, as you know, takes books and condenses them into the most important points so you can read or listen to the summaries. It's great if your job, unlike ours, isn't just to sit around and read books all day, but you still want the amazing insights. So as Blinkist has been doing throughout the season, they are creating blinks of our research books for each episode and making them available to you all for free. You can find our material for this episode, including Dave's awesome book and D. Hawk's memoir, One for Many, and

at Blinkist.com slash Visa. Yep. And they have also created something very cool that I never thought anyone would ask for from us. They created a page that represents David and my bookshelves. So if you want to read our favorite books broadly, having nothing to do with this episode, but like literally what's behind me on that bookshelf that I feel are kind of our trophies from all the episodes that we have researched, you can go to Blinkist.com slash acquired and look at

Ben and David's Bookshelf, and you can get those for free. So beyond that, Blinkist is always giving acquired listeners an exclusive 50% discount on all their premium content, which is really great stuff. All these summaries and especially the audio summaries of really important books. Yeah. So many of you may be wondering, why is Blinkist giving such an awesome deal to the acquired community? I don't say that tongue in cheek. It really is.

The reason is that Go1, where we're investors and which acquired them this year, is an amazing corporate learning and development content platform that if you're a L&D manager, a team lead or a founder, which obviously many of you are, you should absolutely go check out. Go1 is the one subscription, one billing, one stop shop to get literally all of the content that you need for your workforce at companies. So this is HR trainings,

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Okay, David, so how do we get to Visa? You have been telling me about the Bank of America card from Bank of America. And I opened this show saying Visa is not a bank and Visa doesn't have direct relationships. This is big indirect thing where they work with other banks. This is a big mismatch. This story is so wild because this first chapter that we just told, there's only one entity in the world that could have done this, Bank of America.

In this second chapter, there is also only one person in the world that could have taken Bank AmeriCard and turned it into Visa, and that is D. Hawk. So here we are in 1966. B of A now starts going around to all the other countries.

consumer banks in other states and selling them on joining the network as Bank of America card licensees. And the deal is that you pay B of A a $25,000 franchise fee to get your franchise of the Bank of America. This is like a Wendy's or something. Plus, then you pay them a percentage of the gross transaction revenues. It literally is like a McDonald's. This is wild. I mean, I get the executives must have just been

throw in party after party because a this whole thing turbocharged their own business and

B, now they're like, oh, we're going to make all the other consumer banks in the country essentially into like serfs on our kingdom here. Right. And one of the assumptions they made was correct. And the other one was too hubris. The first assumption is a good business model decision, which is, OK, we've now created this distributed asset, which is all these customers with our card that want to use our card at lots of merchants.

people still weren't using credit cards the way we do today, just treating it like cash and using it for coffees and little things here and there. It was still sort of treated as this is the card for big purchases, some of which I may want to finance and decide later. It was also an intensely like

private thing, kind of taboo thing, right? Because when you were using a credit card in these days, you were implicitly saying, I'm using debt to buy this transaction. And so you didn't want other people to necessarily know that. Right. It's a bit odd, but consumers...

clearly did want to use this thing for some subset of the purposes that they did today. And so Bank of America is kind of leaning into it and saying, we've got this asset. Surely we can leverage that for great gain. But the specific implementation of it was a bad assumption where they said the way that we can take advantage of the fact that now all these consumers have the card and all these merchants out there and accept the card is this weird franchising thing. Well, the bad assumption was that

Other banks would consent to basically being serfs in their kingdom. Yes. But at the outset, these other banks see the power. And now that B of A is telling them of what this has done for B of A and they're like, wow, this is already the biggest charge card credit network ever.

in America, if not the world, we can now bring this to our state. And I think B of A offers exclusivity to banks in geographic areas too, to start that eventually of course gets dropped, but it does tempt a lot of people. So within two years, by 1968, a couple hundred banks have signed up. There are 6 million cardholders across the country and beyond the country. Actually Barclays bank in the UK had signed up to be a franchisee of bank America card back in the day.

Whoa. What year is this? This is like in the mid-60s. Whoa, that's way earlier than I realized for international expansion. Yeah, it was already out of the US. Because the system is a great system, but...

As this expands beyond B of A, it becomes clear that a bunch of stuff that were either just assumptions or ways of business within B of A or things they didn't have to worry about ain't going to scale to hundreds of banks, all 50 states, multiple countries around the world. One of the examples, I alluded to this earlier, in California, in the Bank of America owned and operated Bank AmeriCard system,

Usually all parties in the transaction were Bank of America customers. So like there wasn't really any difference between the bank of the consumer, the cardholder and the bank of the merchant. And B of A controlled both sides. Once they expand the network and let other banks in, all of a sudden that's almost never the case.

Right. 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.

So B of A has no distinction between what ultimately now in the Visa network and MasterCard and others is called issuing banks. These are the banks that give the cards to the customers and merchant banks that are the banks of the merchants. It's all just one for B of A.

Yes. And these merchant banks, we'll come back to some of this terminology later, has gone on to become the acquiring bank because this is the bank that acquires the merchant relationship as a customer. So now in this new world where there's different banks on each side of the transaction, this creates the need for...

a network and operational services to settle those transactions, this comes to be known as interchange. And interchange fees are obviously what Visa does today. Yeah. And this is the first moment that we start to see a departure from what American Express was doing. The original Bank of America card was very similar to American Express and Diners Club, where they were closed loop systems. It was a bank that issued a card to

to be used at a payment terminal that all stayed within the bank's closed loop network. And now with this new Bank of America card 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 cardholder, and one bank on another side. And we're going to enable those systems to talk to each other, but they're not the same party. This is open loop now. So this interchange thing...

All of the other banks that are now signing up to become B of A franchisees for the Bank of America card system,

They come to B of A and they're like, hey, this whole thing is a problem. Bank of America isn't providing any service to do this. There are also all these costs that these other banks are incurring because they need to figure out this interchange thing. Oh, so the problem they're experiencing is like, hey, Bank of America, how did you build all the technology to do this? And Bank of America's response is like, we didn't have that problem because in our corner of the world, we're the bank on both sides. Right. We're closed loop. So...

I don't know. You guys figure it out. This sounds like a you problem, not a me problem. I see. So when these banks are coming to Bank of America, they're not actually complaining about price in any way. They're literally just saying, how do you solve this problem? No, I don't think price was an issue. I think it was this and like a set of other things along these lines where the franchisees were like, hey, we signed up for a franchise.

You operate the whole system, right? And Bank of America was like, no, no, no. We sold you a marketing system. I see. So it's like, you know, you buy 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, the Golden Arches are worth a lot because

The Bank of America card, three colored bands, the blue, white, and gold, are also worth an incredible amount here. And of course, the ability to actually be on the network that sends those payments, right? Yes, of course. The network has incredible value. But back to the brand and the marketing. So as all these other banks are considering whether to become franchisees of Bank of America card and...

Some of them are like, no, I'm not going to do that. Some of the ones who do become franchisees, well, really all the ones who do become franchisees become very frustrated because

of course, people are going to start competing systems. And right in this time, over this kind of year or two period, a bunch of local geographical competing credit card systems by various bank consortiums come together. Those pretty quickly all merge into a national association called Interbank, which, spoiler alert, Interbank is MasterCard.

But at this point in time, Interbank is a Franken network. There's no common brand mark visual identity for all of these cards. So now you're trying to make this payments network operate. How do you as a consumer know that my card that I got from XYZ, I don't know, Bank of Illinois, that's part of the Interbank network, supposedly. 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 going to work, even though it actually might work because it's part of the MasterCard interbank network. I see. It's like when I'm trying to figure out, like, I have to keep pulling up Alaska Airlines partner network to figure out what international airline I should fly since I pay no attention to anything other than, well, it's Alaska. You know, is it One World? I don't I still don't even know what the One World. Yeah. Yeah. And, you know,

That's today with the internet. You can do that. Back in the 1960s, there's literally no way for a prospective customer of a merchant to know by looking at their card and looking at the sign on the door if that card is going to be accepted, unless they all have the same brand and mark.

It's so funny. This is the original problem of Diners Club, too, because Diners Club, they I think it was Diners Club that originally shipped a little folded thing that fit in your wallet with the card. That was a little booklet that was a list of all the merchants. So you could literally know if the card would be accepted at the restaurant you're at. That's right. But now, like the scale that these networks are starting to be like, obviously, that's not tenable. So back to the mark.

What these franchisees are buying from Bank of America and what Bank of America is like, hey, this is what we're selling you. It has value. It's access to the network. But the network is homogenous. It all is the Bank of America name, brand and importantly, mark. So what are the colors of Visa? I'm sure everybody listening probably around the world knows this. It's blue, white and gold.

Which is the hills of California, right? There's this amazing origin story to this. It's super reminiscent to the Windows XP Bliss wallpaper, you know, that is the most viewed photo in the world. You know, the hills. It's actually in Sonoma, California.

Huh. So the story is the B of A team, when they were first rolling out the program, the guy tasked with card design, he lived in Pleasanton, California, in the East Bay of the San Francisco Bay Area, where, you know, it's pleasant. And one fine spring morning, he looks out his back door at the local hillside. The sky is this beautiful blue with white puffy clouds, very much like the Windows XP Bliss background. And the hill is covered with beautiful

beautiful, golden-colored California poppies in bloom. He rushes back inside. He paints an abstracted version of his beautiful hillside. Voila, the three bands, blue, white, gold, Bank of America card, Visa. And this would go on to be incredibly valuable to plaster on your storefront and say, we accept Bank of America card here and that's

That just means your sales are going to go up. Friction to purchase goods goes down. Customers are excited to spend with you because their shiny, cool thing that they like spending money on works there. And it's good for your business to be able to accept it. It's so wild that today, you know, we would think, oh, what's a moat? What's a competitive advantage? What's durable? You know, you need technology advantage. You know, even how we think of brand, all the companies we've covered on the show, it's so much more than this. But it was so simple back in the day. It was just...

Could you create a two-sided network where there was a common signal of acceptance? Yep. So from B of A's perspective, they're like, yeah, we did all the work. We created this. This is what you are franchising from us. Take it or leave it.

From the franchisees perspective, as we were talking about, they're like, you gave us a marketing program. How do we run this damn thing? Okay, so they got this marketing program. How did it literally work? Because this is pre-magnetic stripe. Yeah, there's no technology here. I mean, this is literally like, cool, I've become a Bank of America licensee. What transactions does that let me do? And how does that happen? So the banks, they have to resort all the way back to how checks worked back in like the, you know,

1800s, early 1900s in the U.S., where it was all decentralized. The bank would go sign up a merchant in their local town. Yep. And the banks would take the sales drafts from their merchants that the merchants had brought to them.

And then they would go kind of individually decentralized mail around the country to the issuing banks, the cardholder banks, to get the money. And they just... The way they financed all this was a discount fee, just like checks back in the day. Like, oh, hey, this sales draft is for $100. This is all really hard to figure out. So, like...

Okay, you give me $97 instead or you give me $90 instead. And there was no standardization. It wasn't like a set discount fee. It was just whatever they negotiated with one another.

So the sales drafts get handed to the licensee. So you've got, let's say you're running a department store and keep going with the Illinois example that you said. So you're running a Chicago department store. After a whole day of sales, you've got a bunch of sales drafts where you say, all these customers came in with Bank AmeriCard. They said they're good for the money. So I gave them the goods.

And now I'm holding the sales drafts. I actually have no idea if they were good for the money, but the fact that I have a sales draft and the fact that I, the merchant, have a contract with a bank, and that bank has a contract with Bank of America, means that I feel very good that I'm going to get my, you know, 93 cents on the dollar or whatever. So...

Then the bank is responsible, probably. Yeah, so the merchant bank, that acquiring bank. Mails all those, effectively, invoices to all the other banks. That the people who bought the goods there to their banks with their cards-

And there was no standardized discount. This is ludicrously expensive. Totally. I mean, it's chaos. People are so pissed. And again, B of A is like, yeah, whatever. Yeah, whatever. For us, we just moved a few numbers internally. We actually didn't have to do any of this. And you all are paying us now money. So like our empire dreams are coming true. Wow. This is maybe painting Bank of America into poor light. You know, like I said, nobody knew. This is the first time that a banking company

charge card credit card system is operating at scale in the country. And even though Bank of America had been operating for a couple of years internally to be a way in California, now it's going across state lines. This had never been a problem before, you know, the merchant banks versus the consumer banks, the issuing banks, et cetera. Right.

So all of these tensions come to a head in October 1968, when the licensees, all the franchisees of Bank of America, all these other banks across the country, they demand a summit. They need to air their grievances with, you know, the parent with Bank of America. This is untenable. We can't operate like this. We got to fix this. B of A says, okay, fine. We'll all get together.

In Columbus, Ohio. Really? No way. In the middle of the country. You didn't know this? No. Oh, I thought you knew this. Yeah. Columbus, Ohio. Ohio State. Oh, wow. Amazing. This is where the birth of Visa happens.

So the summit gets organized. And for the franchisee banks, this is sort of becoming existential for their businesses. They're racking up such huge losses. This is such chaos. They're sending senior representatives from the banks, everybody running their card programs, everybody's converging in Columbus.

B of A sends two mid-level marketing managers to go face the angry mob. None of the senior executives from B of A could be bothered enough to go deal with this. Wow. Which just says everything. And these poor guys who show up, I mean, they are literally facing pitchforks. The franchisees are incensed. And they're incensed both because the situation sucks and they're like,

God damn it, B of A, take us seriously. You have meddled in our entire businesses. This is in chaos. Like, we got to fix this.

So what do these two poor B of A guys do? Right before lunch on the second day, they're like, yo, we got to save our skins. We got to get out of here. Let's do the smart thing to make sure that everybody gets placated, but nothing actually happens because they don't have any authorization from Bank of America to do anything. They're just people sent to face the mob.

Let's appoint a committee of licensees to, quote unquote, investigate all of the operating problems and report back to us. You know, they can come out to San Francisco. They can meet us at B of A headquarters and we'll listen to their problems. Wow. But.

Unfortunately for their goals, their very narrow goals that particular morning, but very, very fortunately for all involved, the franchisees, the world, consumers. In the long term, at least. In the long term, and also Bank of America in the long term.

One of the people that gets put on that committee is the Bank of America franchisee program manager from a small bank in Seattle, the Seattle National Bank of Commerce, which would go on to become Rainier Bank. And then, ironically, do you know what happened to Rainier Bank? You can't make this stuff up. No, I don't. But I can guess where this is going. Yep. Once interstate banking regulations get loosened up, they get acquired by...

Bank of America, of course, in the 1990s. But for the moment, the person running their Bank of America card franchisee program is one D. Hawk. And I think you could really say on this day, the founder of Visa.

And one of the most interesting characters in anything we've ever studied, because he's not a tycoon the way that most of these people are. No. And we're going to talk much more about D in a minute. But just to keep the story going so we don't leave you all in suspense on this day. During the lunch break, D has gotten put on this committee. He goes up to the two B of A guys and he's like, hey.

Rather than us just putting together a list of grievances and reporting back to you at B of A, what if instead we do examine all the problems in this system? But what if we ourselves, this committee, we design and propose a new way of operating the whole thing? And after some convincing, the B of A guys are like, yeah, sure. I mean, they're not agreeing to anything.

Their goal is just to escape the mob anyway. They're like, whatever. If this makes you happy, if this lets us escape back to California, sure. And probably, almost assuredly, I mean, this is a committee we're talking about. Nothing is going to come of this. Yep.

So the whole summit reconvenes after lunch and D gets up on stage, not the Bank of America guys. And he proposes this idea to the group. Hey, we've got this committee rather than us taking a list of grievances back to B of A. What if we try and design a new way that the system could operate and operate better for everyone?

They take a vote on it. Everybody agrees. Mostly, I think, just because they wanted to get out of there, go back home and away from this disaster of a meeting. They all get on planes. They all leave. Most of them probably thinking that nothing is ever going to come of this. Certainly the B of A guys thinking nothing is ever going to come of this. But D...

Kind of thinks he just got authorization to go create Visa. Whole new system. And he has no power at this point, but he kind of thinks he does.

And listeners, now is a great time to tell you about our next favorite company, Crusoe. Yes, Crusoe, as you know by now, is a cloud provider specifically built for AI workloads powered by clean energy. Today, right in theme with Visa, we are talking about reliability and some of those details of Crusoe's infrastructure. So by this point, you know that their cloud is run on wasted, stranded, or clean energy, and they can provide significantly better performance for your dollar than traditional cloud providers.

So how do they do it? It is a little bit more than just saying they put data centers next to natural gas flares or stranded energy from wind turbines. I mean, that insight alone has value, but this is insanely difficult to pull off, to build this multi-tenant architecture at scale and implement things like InfiniBand with rail optimization. So here are some of the things that Crusoe's team has had to do and why it required...

people with backgrounds and data centers, oil fields, utilities, networking software, and manufacturing all working together to do it. So one, they have to trench high bandwidth fiber themselves. And as you might imagine, putting a data center in a remote location, that is not just

magically next to an ISP that you get to plug it into and have redundancy. Two, rugged infrastructure. Not only do they need to custom design the data center architecture to let customers eke out every ounce of performance, it also needs to work in these locations. They initially worked with external vendors, but they've now started something called Crusoe Industries, which manufactures a majority of their mobile and modular data centers and electrical equipment themselves.

And three is operations. Things go wrong out in the field, especially in remote locations, and Crusoe has a fault-tolerant organization that is able to plan for the maintenance and repairs and manage the failures when they do inevitably happen. So the team has deep data center operations expertise to ensure that customer AI workloads operate seamlessly when minimal disruption, and they really do plan for these things to happen and have great redundancy in place.

It's so cool. I mean, ultimately, this results in a huge win-win. They take what is otherwise a huge amount of energy waste and environmental harm, and they use it to power massive AI workloads. How could you do any better? If you, your company, or your portfolio companies could use lower-cost, more performant infrastructure for your AI workloads, go to crusocloud.com slash acquired, C-R-U-S-O-E cloud.com slash acquired, or click the link in the show notes.

Okay, so David, DeHawk thinks he's got a mandate to go change things up in a big way and create some big, crazy new proposal. Yeah, and he's not wrong. Fortune favors the bold, you know, might you say? Yes. So to say a few more words about why this is so hard to organize this group of now competing banks to collaborate with one another.

You've got multiple banks in the same state that are part of this system. Let's take Illinois again to stick with this. You've got a bunch of banks in Illinois that are now all part of the Bank of America payment network, which is intimately linked with their banking operations.

If I'm any one of those banks, I would want to say like, hey, no, I want to be the only bank in Illinois doing this. And OK, maybe there are a few others here with me, but I sure as hell want to shut the door to anybody else coming in and being part of this network. Whereas when you think about growing the value and power of the network, you want as many merchants and cardholders in the system as possible. And the merchants obviously want as many cardholders as possible. And the cardholders obviously want as many merchants as possible.

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

And you basically want it to happen as fast as possible. So maybe if you only allow, you know, 20% of the banks in America or 20% of the banks in a state to be members of this thing, eventually they could sort of bootstrap the whole network. But it takes a lot of time to go door to door to door to door. And maybe that particular merchant doesn't want to take on a second banking relationship. They already have one. They're good.

Totally. This is a classic two-sided network. You want to race to get ubiquity as fast as possible on both sides of the network. Yep. So as Dee goes off and reflects on all this, he realizes that the fundamental problem is you've got this huge and diverse set of banks that both directly compete with one another, but

But also, if they're going to make this thing actually work, they need to collaborate and work together. And that sounds like a really, really, really difficult problem to solve. Even if you could do that, how are you going to get the DOJ to let you do that? Antitrust is going to be an issue here for sure. But, you know, and this is D, he's like, OK, if though, if we could do this, what is the opportunity?

Well, we've seen what the opportunity is for Bank of America. That is the shining case study. So at a minimum, this could do for all the other banks in the world what it has done for Bank of America. But even more than that, though, Bank of America was trying to stretch here. They got greedy to a certain extent in franchising this out to other banks.

But other banks signed up for this, and they were willing to pay both a franchise fee and a percentage of transaction volume to Bank of America because the siren song, the reward of doing this was so great to them. And frankly, all powered by the fact that this is what consumers want. Yes, absolutely. So in a certain way, this is sort of, I don't want to say inevitable because this is definitely not inevitable. But again, in the thought exercise of could you do this?

the actual organization itself, like the network, would have so much value. If you could get every bank in America and then every bank in the world, and Dee is thinking big from the beginning, to be part of this, and you could power this global payments and credit network, and you were allowed to take a fee on the transaction volume for doing that, the value that you would unlock and generate

It beggars the imagination to think about what this could be. And if we could grow the pie enough, would B.F.A. be comfortable not owning the whole thing? That's the bottom line here. So there's this great passage from him in his book, One for Many. He says...

Any organization that could guarantee, transport, and settle transactions in the form of arranged electronic particles, that's what he calls digital information. Amazing. 24 hours a day, seven days a week around the globe would have a market

Every exchange of value in the world that beggared the imagination. The necessary technology had been discovered and would be available in geometrically increasing abundance at geometrically diminishing costs. But there was a problem. No bank could do it. No hierarchical stock corporation could do it. No nation state could do it. In fact, no existing form of organization we could think of could do it.

This is the opportunity, and this is what he essentially takes to

to Bank of America. And now we got to say a few words about Dee, because this situation is nuts. Dee is a banker. He is running the Bank of America franchise program at what would become Rainier Bank in Seattle. But he's an outsider. He

He's kind of a nobody. He's not senior in a small bank in Seattle. He was raised in rural Utah, basically in poverty during the depression. He didn't go to a four-year college. He only has an associate's degree. He bounced around in a bunch of random consumer finance jobs on the West Coast

all of which he got fired from because he's too insubordinate. He now walking into the boardroom in Bank of America, which is what he's going to do, and standing toe to toe with the vice chairman of Bank of America and saying, I think you should give me

the Bank of America card program because it is in your self-interest to do so, which almost literally are the words that come out of his mouth in that boardroom, is just absolutely wild.

Fortune favors the bold. Fortune favors the bold. Importantly, though, fortune favors the bold who have done the work to figure out how to align incentives such that a logical person will think through and come to the same conclusion he has. And this is the thing. Dee 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 his little 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. And so he uses all of the techniques that he learned from competitive debate and persuasion. He has this amazing quote. He says, "...during my years of college debate, I held fast to the notion that until someone has repeatedly said no and adamantly refuses another word on the subject,

They are in the process of saying yes and don't know it. I mean, Dee basically is the prototypical Silicon Valley founder. He's just a generation too early and in the wrong industry. I once had a Silicon Valley founder give a talk at a startup weekend I ran 10, 12 years ago who said, until your company shuts down, you are just in the act of succeeding. Totally. I mean, cut from the same cloth right down to every single stitch.

There's one other important aspect to Dee that I think we should highlight here that enables him and all of Visa to succeed. And that's that he's about as far from the man and image of J.P. Morgan as you could imagine. That

is what enables this. Because if he were the CEO of another bank or a senior executive or some well-respected person marching into the Bank of America boardroom and standing toe to toe with their board and saying, I want you to give me your very precious crown jewel,

There's no way it would work. Of course, Bank of America would say, what's in it for you? I don't trust you. I don't believe you. Even if they did trust and believe this person, they would lose all of their face and reputation if they were subordinating themselves to somebody who could conceivably be their equal.

So Dee's just gone into B of A with this grand vision of like, you should give me this incredible asset because the value that it will create outside of your hands and your fractional ownership thereof will be so much greater than what it could be on its own.

And miraculously, that works. 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 100% of, you know, Bank of America cards? Yep. Totally incredible that Dee actually convinces Bank of America to do this. Nobody in the world would have thought that this could happen.

But now the work is sort of just beginning because there's two things now that he needs to do. One, he hasn't actually figured out how to architect this thing such that it works. So he's got to go do that. Two, though, then now he has to go back to all of the soon to be former franchisee banks and convince them why they should do this. And this is a different argument from what he made to B of A. B of A, he's trying to get them to give him the asset.

With the other banks, he actually needs to get them to change their behavior. He needs to be able to go to, say, the couple banks in Illinois that are existing franchisees of the Bank of America card system and say, hey, the new regulations, the new operating laws for this organization are going to be all

all the banks in Illinois can join. And we actively want to go convince all of your competitors to come join this system. I see. So he's basically coming to them with a waiver and saying, I want you to waive your exclusivity to some territory because in our new construct here where we're all working together, you and everyone else is agreeing that it's good for the value of us all if we waive our exclusivity. You know what this is like?

This is like back in our NFL episode. Yes, 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 because they were like, if I'm the Jets, I'm making more money in my New York metro area doing my own TV deals than I'm going to get as a share from you, the NFL, of a national deal.

But in the long run, it was absolutely the right decision and value accretive to everybody, including the Jets, that the NFL centralized this. You'd rather be the Jets with their proportional share of the $14 billion a year TV deal that the NFL has today than whatever their very fat contract was alone in, what, the 60s, 70s. Totally. It is exactly the same thing here. Okay, so how's this whole thing going to work?

Dee and a few of his other fellow committee members, they go to Sausalito, California, just north of San Francisco, just across the Golden Gate Bridge, and they do an offsite for a couple days at a hotel in Sausalito. And there they come up with a number of operating regulations, guidelines for this hypothetical new entity, four of which we're going to talk about here that are super critical.

One, ownership of this new organization that's going to be called National Bank of America Inc., the new owner of the Bank of America program, is going to be in the form of irrevocable, non-transferable rights of participation. So you're not going to own stock in this thing. There's no equity. The way that you have ownership and the percentage ownership that you have in the network is

is by participating in it and the amount of volume that you are contributing to the network. Oh, interesting. So this means a couple things. One, it's sort of like a representation and ownership according to value contributed. Two...

It's non-transferable, so you can't sell it. Any individual bank, if they were to say like, oh, this is valuable now, I'm going to go sell it. And then I no longer have any incentive to participate in the network. If that starts happening, then it'll lead to a cascade for the exits and the network will lose value. So there's no way to do that.

So it's basically designed for you to kind of break even on it. If you're putting in 17% of the transactions on the whole network and you're paying in fees on 17% of the transaction, well, good news. For all of the leftover profits from running the network, 17% of them go back to you. You're making the assumption that this is a cost-only organization.

Forgetting the fact that it is one of the greatest business models and revenue generators of all time. You are contributing 17% of the volume to this. You are entitled to 17% of the profits. I see. That we are extracting from the merchants and the cardholders. Yep.

Because this is the natural business model of interchange to do the exact same things that was being done with the sales drafts, where you sort of give a discount to the retailer. And when I say discount, I don't mean a beneficial one. I mean, I'm discounting the amount of money that I am giving you off of the 100% that you would have received by the customer. Basically taking that old check courier business model and carrying it into sort of a network form. Yep.

Exactly. So the actual legal structure that Dee and his fellow committee members land on for this is a for-profit non-stock membership corporation. That is a mouthful. It is. There's a myth out there that Visa was originally a non-profit and then was converted to a for-profit before the IPO in 2008.

That's not true. It was always for-profit. It was just a non-stock membership corporation. And that was to get around banks selling their interest. So you don't participate in it, you don't own it. So say it one more time. It is a for-profit. A for-profit non-stock membership corporation. Your ownership is your membership.

It's like a co-op. It's like REI or something like that. Yeah, yeah. The way that Dee describes it to all the other banks is it is a reverse holding company. The parent entity is owned by the subordinate members as opposed to the top level holding company owning all the subordinates. There's actually another NFL analogy here. The NFL doesn't own the teams. The team owners own the NFL. Yes, but the NFL sets all the regulations for how the game is played and all the teams submit to it.

That's actually probably the best analogy for Visa as the NFL league organization. I think it totally is. Okay, so that's point number one, maybe the most important one. Point number two, it is a self-organizing body with irrevocable governance rights for each member. And this is, well, I guess also how it's like the NFL. Basically, this means this is a democracy where

Every member has a vote in determining how this organization runs. Anything that you could conceivably have a vote on, changing our regulations, setting them in the first place, budgets, fees, all this stuff, every single member bank will have a vote.

And importantly, every single member bank can call a vote at any time. I mean, it's literally like a pure democracy. Wow. You could imagine nothing happening if everybody has the right to do that. Well, they set the threshold at 80% for anything to happen. I see. So there's a strong incentive not to call a vote and waste everybody's time unless you really think you can round up 80% of the votes. Fascinating. Which, in practice...

Just gives D all of the control and power of the company because everybody's going to listen to him as the CEO. Point three, we've basically already discussed, and that is that the mission of this organization is to facilitate cooperation and trust among competing institutions to grow the Bank of America payment network larger than any one institution could on its own.

which is the pitch he gave to Bank of America leadership. Also, though, this is a implicit kind of forbidding of banks in the network from going off and also forming or participating in competing networks. So to borrow like a crypto phrase here, like no side chains allowed. Everything happens on the main network. I see. So none of these banks are competing

members of Interbank at this point. These banks are exclusively members of whatever the heck Visa's predecessor name is. National Bank of America Inc. National Bank of America Inc. Yes. At this point in time, a antitrust lawsuit would change that very shortly. I see. But at this point in time, it's like, nope, you are part of MBI exclusively.

You don't go join Interbank MasterCard, and you also don't go start your own networks or peel off parts of the network. Everything that you are doing in payment card operations needs to route into this network. That's a big contract to sign. Totally. Again, this is why Dee needed to paint the picture both to Bank of America and all the other banks. The prize is worth it. Yep. And then finally, point four,

there will be a singular universal set of operating and governing procedures that, much like the US Constitution, is infinitely modifiable by a threshold vote of all members. This is the 80% I talked about.

And two, also like the U.S. Constitution to its citizens, all members agree to be bound by its law both now and as it is so then modified in the future. So like if you're signing up for this, you are signing up for the regulations and operating procedures as they exist today.

And for any future changes that come, of which you will have a vote in, this is a democracy, but you can't go leave the democracy. Right. You're signing up for something that might change in the future, and you don't get to know today if it's going to change in the future, but at least you have some say in it. That is exactly the pitch. And amazingly, even describing this now, having done all the research, read all the books, written the script that we're talking about here, I still can't believe this actually happens.

Dee goes on like a tour across the country. He goes and meets with all the banks. Bank of America helps him out. They bring senior executives, too, to help convene, you know, meetings with all the banks to persuade them.

Every single member bank of the previous Bank of America franchisee organization, every single one of them signs up for the new organization led by Dee. Not a single person jumps ship. How many banks were it at this point? Over 200. Wow. Isn't that wild? I mean, once you get to like 70 or something, then it kind of seems likely that everyone's going to tip. But in those first 20, the fact that nobody was out is crazy. Yeah.

Totally. And Dee writes about this too. Bank of America helped him out. They identified the 13 most influential banks and they convened the first summits with them of like, hey, what do we got to do to horse trade to get you guys involved? And then you kind of spiral out from there. But yeah, every single one, nobody jumped ship. And when is this, like 1970-ish? The process starts in 1968. It all wraps up in either 1970 or 1971. Okay.

importantly, we've talked about antitrust and DOJ a bunch here. You would think that this would be setting off massive alarm bells in Washington and with the Department of Justice. They get ahead of this. So D goes to see them and he gives the same pitch to the government. He says like, look, obviously this is the whole industry, all the competitors in the industry colluding to work together. That's the whole premise of the organization.

But what we can create by doing this would not be possible otherwise. And it will be so profoundly useful and important to the American consumer and American businesses that it is worth you letting us do this. So they actually get a letter from the DOJ saying like,

Hall pass. You're good on this one. Wow. Yeah. It's just like the presidential exceptions for the NFL, like an antitrust exemption where, yeah, we're amenable to the fact that you're collaborating, potentially colluding, but it is actually one of the things that we believe will make the country better. So go for it. America wants both its football and its credit cards.

Amazing. And that was a key point in then going and convincing all the other banks to sign up for this, because that was one of the first questions they asked. Hey, if we do this, aren't we inviting the DOJ on our backs? And Dee is able to say like, nope, got the letter right here. We're good. Wow. Amazing. So very shortly after this, after the creation of NBI, National Bank of America, Inc.,

D, in 1972, he's thinking globally from the get-go. He goes and creates a parallel, similar organization of international banks using the Bank of America card system. Visa was global from basically day one. And it wasn't just Barclays in the UK. It was Sumitomo Bank in Japan. It was other banks throughout Europe. It was Canada. It was Latin America.

We won't go into all the detail here, except one amazing story we're going to tell. This was actually harder to pull off, if you can imagine that, than forming NBI, because it really is not clear for some of these international banks that it is better for them to be part of the global network than if they could run the table on their entire country. Say you're, I don't know, I'll pick Sumitomo Bank in Japan.

You have to decide, do I want to buy Dee's pitch of it's worth it to me to be a proportional owner of Visa?

or I could be the singular dominant credit card network in my own country, which is more valuable. And for many of them, they'd be right in saying it actually would be better to be singular and dominant. Like you look at China UnionPay. I mean, that is the dominant way of payments flowing in China. That was for them the right move. Totally. So once again, you

in Sausalito. This all comes to a head. Dee knows that probably not all of the international banks are going to agree to this, and some of them are going to go their own way. So he calls a final summit in Sausalito. They're going to vote the next morning, final vote on who's going to join the soon-to-be Visa network and who's going to go it on their own. And Dee is

gives this nostalgic speech at the end of dinner saying like, "Here in Sausalito, looking out at the bay, this is where me and my colleagues, we dreamed up the original vision for what this could be." And it's sad that this won't be extended to the whole world and a true global payment monetary system. But we're all gathered here. We should celebrate

having accomplished so much and had a chance at this dream. Just having the chance is worth it. He's really good with his debate skills. And then he's like, so before we meet one more time tomorrow to obviously disband this whole venture and have the dream just be a memory, we have one more thing for you. One more thing. He's like Steve Jobs.

A small gift of appreciation for you giving your valuable time and effort as part of this global undertaking. Please take this little box out from under your seats, everybody.

takes a little box out from under their seat, they unwrap it, and inside are a pair of pure gold cufflinks that on each of the two cufflinks, there is one half of the globe. And under one side, it says in Latin, Studium ad Prosperidum, which translates as the will to succeed,

And the other side says, Apologies to Latin speakers out there that I'm butchering that. Translates as the grace to compromise.

And he explains this all. And somebody from the crowd yells out, D, you miserable bastard. Because he just pulled on everybody's heartstrings. And like he gets the votes. And the next morning, all the holdouts reverse course. They all join. What? You can't make this stuff up. It literally happens. The cufflinks are out there. You can Google him. He did this.

So he's basically saying, hey, whether you voted for this or not, you're getting to leave with...

Something saying, I'm so great, I had the will to compromise, even if you didn't and you were the reason that you killed it. Dee is just such a character. So the other thing along these lines that he does, which is just hilarious. Once this is all set up, this, the international part of Visa becomes first IBANCO, I-B-A-N-C-O. Shortly after this, they rebrand the whole thing into Visa, which we'll talk about in a minute.

For the board, the board is huge because it's like all the representatives from every region, from every country. There's like 25 people on the board. Dee holds board meetings all around the world, you know, different city all the time. It's a global organization, whatnot.

He invites the spouses of all the board members to come to each location. He's like, oh, it's a family trip, you know, et cetera. And then he gets the idea. He invites the spouses into the board meeting itself. Oh, what a nightmare. So 25 board members plus their spouses in his board meeting. This means two things. One, nothing is going to get done. There are 50 people in the room. Two,

Two, though, he needs all these people to behave well together and, you know, be generous and gallant. What better way to make sure they're on their best behavior than to have their spouse sitting behind them? Wow. So like, are you really going to act like an asshole in front of not only your spouse, but the spouses of all these other global bank heads? That's so funny. I'm going to 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 way. Okay. So how does the name Visa come about? How does the sort of joining of the international and the domestic? Okay. Visa is so important. It's not just a rebrand. It has to happen once this international organization is set up. Yeah. America can't be in the name. Bank of America ain't going to work.

And importantly, as we'll get into in a little bit, this is a huge problem for American Express too. The soon-to-be Visa knows if we're really gonna realize this global vision, we need a truly global brand and mark. Remember back to the blue, white, and gold three stripes. That's iconic. It works internationally. Obviously, the name does not. So...

Dee holds a contest internally within NBI slash iBanko to generate a new name. And he offers a $50 prize for the winning entry that is chosen. And as legend goes, there are so many submissions of the name Visa that when they finally unveil it, Dee makes a big deal and writes out a $50 check. Check. Why are they using a check? Made out to everyone in the company, which is funny. But then they changed the name to Visa.

Visa, it's the most incredible name ever created. I mean, Nike was so great. This is like even better. You cannot have a better name for what this is.

It's interesting it's in English. I mean, I guess it makes sense it's the most spoken language, but... Well, no, it's not just in English. The name visa in every, if not almost every language on earth... When you're traveling and you need a visa for a country, they call it a visa in other languages too. That's what it is. But when you are traveling internationally, when you're going through customs in any country, it is identified as a visa. That is the name. Yeah, the universality, it's sort of a presumptive close. Because at this point, you know, they've got, what, three, four, five hundred banks? Yeah.

You know, and they have 16,000 today. It's quite the presumptive close that it will be universally accepted everywhere the way that a visa would imply. Just every dimension, the presumptive close, the implication that this is a global network, that you can bring your visa with you when you're traveling to other countries and it'll work.

The actual definition of the word Visa, that 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. Yeah. So the Visa name, brand, everything, there's two more levels at which it becomes really important. They do something really, really, really smart.

So we talked about the need for the universality of a mark and why early interbank, that was a problem until they standardized on MasterCard. They've got the three bands, the blue, white, and gold, and now they have a global name. But all the individual banks, the hundreds, soon to be thousands of banks, they all want their own branding on the card too. So Visa says, okay, here's the operating regulations. Every card has to have the blue, white, and gold.

In the middle white band, Visa logo goes there. Nothing but the Visa logo. On the top blue band, you can put whatever you want. You can put your own bank logo. You banks get creative. You can do literally whatever you want.

Banks start going around. They do affinity card programs with NFL teams, with merchants. This is how you get the Southwest card. This is how you get the San Francisco 49ers card. This is how you get the XYZ everything that they're a bazillion of now. So in the blue stripe on the top of the top third of the card, the banks start co-branding with the name of their bank and some affinity. Yep. And this is kind of the brilliance of the Visa model.

They were like, it's open. You can do whatever you want up there. Right. That seems good for us. We're happy with that. Of course, it's great. The whole goal is just get more consumers and more merchants on the network. So anything that's going to do that, great. While maintaining the universality of Visa, great. We got the middle. You got the top. Go wild. Do whatever you want.

Wow. And that's how I end up with BB-8 on my card today. Amazing. Maybe the most important thing, though, for Visa really pulling away and becoming, at least for many decades, the dominant global payment card network, the name change ends up becoming this incredible growth hack. Because what happens is,

They're the new operating regulations now that mandate that all cards out there, all the previous Bank of America cards, need to be migrated to Visa cards. I think within like two years of this being declared or something like that. Some banks start to see this as an opportunity to go poach cardholders from other banks. So the competition within the network, obviously this still exists,

Because consumers now, they know when Visa runs a national advertising campaign, hey, your Bank of America card is going to switch to Visa. So some banks, in a version of the Fresno drop, they start sending unsolicited letters to consumers who are already Visa Bank of America card 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 100 million cards got dropped in the United States before the government made it illegal to just start randomly issuing credit to people without their awareness or asking for it. Totally wild. But because of this, a whole bunch of consumers start

sort of unconsciously switching the bank that issues their visa card. And then once this starts happening, this kicks off a total arms race where all the banks in the network are now like, shoot, we got to blanket the whole country and preserve our domain and see what we can capture from others.

In the one year between when the visa name change first comes online and takes effect, which is in 1977, and the next year in 1978, the number of banks participating in the visa system grows by 20%. Because everybody who's not in the system now is like, I got to get in the visa system.

By the way, this is the thing that pushes Visa ahead of what was, I believe, then called MasterCharge. Yes. The interbank had changed to MasterCharge. They hadn't yet turned it to MasterCard. But in 1976, MasterCharge was actually bigger. They had 7,400 banks. And at this point in history, Visa had about 7,000 banks.

Master Charge also had more cardholders, 37 million versus Bank of America cards, 31 million before they changed to Visa. So this, despite all the deck chair rearranging between the member banks, it was great for Visa to leap ahead of MasterCard. Totally. So that was number of member banks grows by 20%. The number of active cardholders in the Visa network in this one year grows by 45%. Wow. Isn't that wild?

So as you say, they blow way past 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 on the path to becoming the dominant global network that they are today. Yeah. And it's worth a moment on Amex here because I would have thought just like Facebook or WhatsApp or Google, when you have this

sort of winner-take-all massive network effect business that the single centralized player network effect would win. Why wouldn't Amex win with their closed-loop system where they own the whole thing end-to-end and can provide the most incredibly custom experience for everyone on their platform, on the merchant side and on the consumer side? And one of the answers of why this open-loop system beat the closed-loop system is that

Visa adopts this strategy of the network of networks. They go sign up one bank, that bank can go sign up

100 million customers or 2 million merchants. They get so much scale leverage on signing up just one bank that this strategy makes it so that they have far more scalability than something like Amex. Amex also is a bank themselves, so is highly regulated. And they're a bank by this point in history, I believe, on both sides of the transaction. So they're both a card issuing bank and they are a merchant acquiring bank.

And so in terms of scaling internationally, you mentioned their name holds them back. Also, they have to become a bank in another country in order to expand to that country, whereas Visa just needs to go tap a few banks and say, why don't you go figure out how to grow for us there? So this network of networks thing, the open loop system, well, it creates a little bit more of a kludgy user experience because they're sort of the lowest common denominator of data getting passed through the network.

It's sort of open source versus something that's wholly owned and operated by a company or a protocol versus fully owned application. Anytime that you have something that's more distributed, you're going to be compromising a little bit on the user experience because you can't sort of rule by fiat when you want to make a change. But it does potentially come with much better scalability, which is the reason why these and 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 DOJ eventually came after both Visa and MasterCard and prevented them from being exclusive systems. That does happen in 1975. And so this concept of duality takes hold for the banks, duality meaning they can multi-home on both Visa and MasterCard.

In all the testimony and case with the DOJ, Dee is obviously 100% against this happening. He doesn't want his banks to be able to join MasterCard 2. But he also makes the surprisingly correct argument. He's like, look, this would be a huge mistake because U.S. government, if you do this, you are going to freeze the payment networks in the U.S. Nobody is ever going to develop a new competing open loop payment network.

Because now there's no more competitive vector between Visa and MasterCard. We'll all have the same features. Banks will be members of both. They're kind of going to operate in lockstep. The prices should be identical for both. All this stuff. And the DOJ is like, no, no, no, no, we're going to do it anyway. Irony of ironies, later in 1988, the DOJ again sues Visa and MasterCard for being a duopoly and not competitive enough.

So Dee was right. Dee was right. And to this day, Dee has been right. There have been many attempts that we'll talk about toward the end of this episode of displacing Visa and MasterCard or inventing new payment systems. And like, they never work or they haven't worked yet. Great point. They're in the process of working. So great.

It's probably actually worth sharing the Amex thing. So Amex tried this crazy strategy in the 80s, and I'm flashing forward 10 years here, but they would basically cut their interchange, the discount rate that they were charging merchants, massively if those merchants would go exclusive to Amex. And this actually...

continued until 1991 for many of their merchants and for Costco went all the way to 2016 where they had the exclusive agreement with Amex and if you were going to use a credit card at Costco it had to be Amex

But interestingly, Visa and MasterCard cried foul when all of their banks were multi-homing and Amex, with their virtue of a slightly different business model, was allowed to go and try to lock up merchants to be exclusive to them. So eventually, the whole thing kind of stopped. And flash forward to today, all cards are accepted at basically all locations. Yep. So this basically concludes the full Visa story. Like, how did...

this incredible thing happen. You know, we've answered these questions. Who owns this? Who runs it? How did it start? We could end the episode here, but we've actually really only told you half the story. What we've told you is all the incredible business, organizational, social, human behavior innovations that BZendee 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,

is it's also a technology company. And there is a whole technology story in parallel with this too that enabled the Visa we know today to Dee's question of where is Visa headquartered and nobody knowing that.

It's headquartered in the Bay Area. It's a Silicon Valley company. It was started in the same place and time as Intel, Atari, Apple. The only thing that is different about it versus those other companies is it wasn't funded by venture capital, and it thus didn't make anybody rich except the banks who owned it and thus were already rich. But there's an incredible technology story. Yeah, great point. All right. So what is it?

Well, that's a great question, Ben. And before we get into it, this is actually the perfect time to talk about another great technology company and leader. One of our favorite ones, in fact, Stats Inc.

who has also built a tremendously powerful piece of infrastructure focused, just like Visa, on reliability. As we will talk about later this episode, Visa never goes down, or basically never goes down. And that was a super important part of their strategy. But it is extremely hard for most companies to achieve this level of reliability in their technical infrastructure. Yep. Building reliable infrastructure is a very broad topic, obviously. But one easy way to improve reliability is staged rollbacks.

rollouts. So a lot of times what leads to downtime is unexpected interactions from new releases, which crash a component of your app or service. By rolling out a new feature in stages, first to employees, then to an increasingly broad set of users, you can test for bugs in a production environment before you actually launch the feature.

Most companies don't do this, however, largely because unlike, say, Facebook, they don't have the right tools. Yep. Thanks to Statsig, though, it is now super easy to do this the right way. If you're building software products, Statsig is the one-stop platform you need for feature flagging, product experimentation, and analytics. The product just works. It makes it super easy to roll out features in stages and provides data on the impact at every stage of the rollout.

Static is a critical part of how companies, including financial ones like Brex and also like Notion, launch their features to hundreds of millions of users without causing outages or hurting core metrics. Yeah, it's super impressive.

So if you're a startup, they have a generous free tier and a special program for venture-backed companies. And if you're a large enterprise like those companies Ben just mentioned, they have transparent and non-seat-based pricing. Acquired community members can take advantage of a special offer, including 5 million free events a month and white glove onboarding support. Just go visit statsig.com slash acquired. That's S-T-A-T-S-I-G dot com slash acquired to get started on your data-driven journey.

Okay, so David, what is Visa's technical infrastructure look like and how did this come to be? So everything we just described up until now, amazing, incredible, unlikely, one in a million. But all it really bought, D and Visa, was

was the opportunity. Yes. To actually realize what he sold to Bank of America and the other banks of a instant global payment network that a large percentage of global commerce runs on, you had to build a lot of technology to make that happen.

And if you asked the question of Dee back in 1968, OK, let's assume we do this and we put one of these soon to be Visa cards in the hand of every consumer on the planet. Do they actually want to use them instead of cash and checks?

And the answer to that was probably not. Fascinating. Now, they wanted to use them in specific use cases, like Ben, you pointed out, when you want to make a credit purchase, when you want to essentially do what installment financing was before, when you have any number of 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. But it wasn't like it

It is today where obviously you're going to use your credit card, which is probably a Visa and maybe a MasterCard to pay for everything that you do everywhere instantly. Yes. And to illustrate, we will link this in the show notes, but there is an old TV segment from 1993. Not that old. Pretty recent. Ben, I have really sad news.

1993 was 30 years ago. We remember it, but it's old now. 1993 to today is like the 1950s were to us when we were kids. Not good. Not good, David. Not good. This 1993 TV segment, the news is that Burger King has just rolled out credit cards.

That should tell you a lot. Burger King, prior to 1993, did not accept credit cards, or at least this commercial makes it seem that way. And they interviewed this woman, and she says, I think it's pretty sad when you have to use a credit card when you go to a fast food restaurant.

That was a view of someone just sitting in a Burger King in 1993. And a second guy is interviewed and says something to the effect of, I just hope it doesn't slow things down because, you know, they'll have to call New York and then they'll have to do the thing. And I just hope it doesn't slow things down. And it's like the prevailing idea is that cash is fast. Cash is easy. Cash is respectable. Credit cards are debt. What this woman is saying is really sad if you need to use debt to buy a burger.

Yes. But even at this point in history, it was viewed as this cumbersome thing rather than a convenient thing to bust out the card rather than, you know, like I actually think Burger King corporate crunched the numbers and they were like, geez, for the amount of time we spend handling change, we just want to encourage everyone to be swiping the card all the time, even if they're, you know, losing some money on the interchange. It's crazy. That was 1993. I mean, yeah, compare that to today. And I mean, I don't know about you, but I get pissed when somebody ahead of me in line

starts breaking out cash and coins. I'm like, oh my God. Oh, what are you doing? So start us back. I think the last time we checked in on how the settlement worked was around literally collecting paper sales drafts and then starting to mail it around. Yes. So to get from there to today, three major pieces of technology needed to be built by Visa. One was transaction authorizations.

So when we were talking about transactions happening earlier and the person in Burger King was referencing like, oh, they got a call to New York and they got to authorize the transaction and all that. We glossed over one sort of stopgap slash band-aid that Visa and other credit card networks implemented around authorization. They didn't actually authorize every transaction. So when you paid for something with a credit card in a store,

All merchants had what was called a floor limit. And the floor limit was any transaction over that limit could not be authorized directly on the floor. And say it was, I don't know, 50 bucks or something like that. Anything paid with a credit card under $50, it was basically within the judgment of the cashier to say yes or no. And so everybody just said yes. I mean, the reality was...

This was the threshold below which the banks and Visa were willing to say, okay, we'll accept a certain amount of fraud. Interesting. And then above that limit, the cashier had to go call up the merchant bank, say, hey, we got a card here. It's this number.

Somebody is buying a refrigerator. Then that merchant bank would have to look up that card number, figure out based on the card number what bank issued the card to the cardholder, call up the cardholder bank. Oh, my God. Get somebody on the horn there. Say, hey, I've got your cardholder, Benjamin Gilbert. His card number is XYZ123. Can you look up his credit? And he wants to buy a $500 refrigerator. Can you tell me if he's good for it?

Right. And this effectively would be like, have they hit their limit yet? Yes, have they hit their limit? The issuing bank would go look that up. The person there, literally the person, talk on the phone to the person at the merchant bank, give them the answer. The merchant bank then switches the line back to the cashier at the store and says like, yeah, Ben is good for it or no, Ben is not good for it. So you had banks talking to banks. People talking.

at merchants, talking to people at their bank, talking to people at the cardholder's bank, and then reversing the whole chain. But importantly, you had a person at the merchant's bank calling a person at the cardholder's bank. Yes. Today, that is known as VisaNet. There's this piece of technology that sits in the middle that eliminates that bank-to-bank phone call. And so this is a big part of one of the first things that Visa builds.

And that process that we just described, that could take like 20 minutes. And it just didn't work outside of business hours for those banks. So say, you know, now that Bank of America is nationwide, soon to be international. Imagine you're trying to buy something in Japan and the Japanese merchant bank calls your cardholder bank back in America, close for business. Just no way for that transaction to happen. Wow. That's crazy. Not possible.

Good. Definitely not good. So Dee and Visa know that this is like the first thing that they have to address. In 1971, right after NBI is formed, Dee starts a project called the Bank AmeriCard Authorization System Experimental, or BASE, to build technology to address this problem.

The whole thing actually started rather inauspiciously because right after all the approvals came through for Dee to form NBI, I think it was literally the evening before the first board meeting, Bank of America comes up to Dee and they're like, "Can we take you aside? There's something you need to know." Oh, God. That's always fun before a first board meeting. And they're like, "Well, it's kind of hard to tell you. We've been in secret negotiations with American Express for months.

to create a joint venture together, Bank of America and American Express, that will create an automated system for transaction authorization for multiple credit card systems across the whole country.

And we're going to do this. So, you know, D, if you want us to remain part of 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 going to do this, and if you say we can't do this, we're out. Whoa. So, not good. And it's true. It's not really like they're issuing new cards or acquiring new merchants. They're being a technology provider. Because they and American Express both see that, hey, this is a really, really, really valuable piece of technology. Hmm. D is, of course, pissed, but what's he going to do? B of A says take it or leave it. D takes it. As D then tells the story...

Bank of America and Amex go out and they try and pitch the other banks in NBI and Interbank and MasterCard on joining the system. But there's all these problems with it and they don't know how to build technology and the whole thing dies on the vine. Maybe. Maybe that might be part of the story. The other thing that happens is Interbank and MasterCard actually get involved in the project.

The whole thing then morphs into a tripartite consortium of Interbank, American Express, and Bank of America, and thus by association, NBI. Our old friends at the Department of Justice start sniffing around and they're like, all right, now this is actually collusion and anti-competitive behavior. So if you go forward with this, we're going to sue you. And they all abandon the project. And this is huge for Visa because this means they can build it on their own.

So they do the natural thing at the time. I mean, these are bankers, even though they're based in San Francisco and Silicon Valley, these aren't tech folks. They put out an RFP to folks like IBM, systems integrators, you know, the Accentures of the day to go build this technology for them. Go build a computerized authorization system for the Bank of America Visa network.

All the bids come back. And of course, they are all way over budget and way over time. So Dee says, well, screw it. We're going to do it ourselves. How hard can it be? Wow. So in his very Dee way, he goes and he recruits the guy from the firm that impressed them the most throughout the bidding process was a firm named TRW and a guy named Aram Tatoolian. Dee goes back to him and he's like, I like you.

You come work for me. Leave TRW. I'm going to hire you. You build this here in-house. Wow. And I'll give you the resources. You come join us and you'll build out your own tech team here within NBI slash Visa.

Aram comes and joins and starts the core of the Visa tech team. Dee gives him nine months to build this entire thing from scratch. And to do this involves building a first nationwide and then ultimately worldwide telecom network so that the electronic communication can happen. Two, installing computer systems in each of the member banks around the country so that instead of the banks calling the other banks, you know, this can happen over computers.

Three, training the people at the banks on how to use these new computer systems. And then four, maybe most importantly for the long run,

building a new centralized data center for Visa in the Bay Area. And this becomes the San Mateo campus. You can see it right off of 101 as you're driving between San Francisco and Silicon Valley. It is, I believe, still the headquarters of Visa today now. Huge campus in San Mateo where they build the data center. Until I think next year, it's going to go back up to San Francisco when they finish a new building. That's right. I think it's going to Mission Bay.

So, miraculously, Aram and his new Tiger Visa tech team, they do it. They do it in nine months. And it works. So Dave Stearns writes in his book about this whole situation and about Dee.

Dee maintained that if you give computer people more time, they will just consume it. So he always insisted. It's so true. So he always insisted on shorter projects with uncompromising deadlines. They will just consume it. They'll just consume it.

Fascinating. Okay, so they build what becomes VisaNet in-house. At this point, you know, there's no internet, so it's all just working over telephone communication. Yep, direct networking. Amazing.

And so they're just operating the whole network out of this data center in California. Yep. Now, importantly, this is only for transaction authorizations. So the cards and the point of sale have not been digitized yet. That's going to be the final third piece of the stool of technology that Visa builds. This is just when a merchant makes a call to their bank saying, hey, is this card good for this amount?

This is then the interbank communication. I see. So how does the settlement happen at this point in history? So that's what's next. That's the next big operational technical problem that Visa needs to solve. It's like literally moving the money when it needs to be moved. Reconciling the transactions, moving the money, getting everything wrapped up at the end of the day, week, month, sending out statements, all this stuff.

You can sort of think of the first piece that we just described as the authorization as sort of the front end of a payment card system. The settlement is the back end. You know, the front end piece consumed a lot of phone time and people. The back end piece consumed a lot of paper and time, too. Maybe more time, but like a lot of paper. Because you're effectively mailing checks. And even more perniciously.

As the network grew, and at this point in time, soon-to-be Visa is growing explosively,

the complexity of this settlement piece also grows sort of exponentially. Every new bank node that you add into the system now has to interact with all the other bank nodes. And so like, this is a hard computer science problem. It's an N squared problem. Well, it's a problem that is easily solved by computers. But when you're doing all this manually with paper, this is a big, big problem. N squared is much worse when you're doing it with paper than with computers. Yes.

So what you really need to do this efficiently, to bring it all the way back to the beginning of the episode, is a clearinghouse. You need an automated clearinghouse. And this is unbelievable. A few people had referenced this to us as we were doing the research, but I kind of forgot about it till the end when I got to this point. And I was like, holy crap, Visa Clearinghouse.

builds an automated clearinghouse for themselves to do settlement electronically over the network. They end up calling this project Base 2 after Base 1, which was the first thing doing authorizations.

This happens at the exact same time and place as when the Federal Reserve is building their own ACH system for checks, you know, automated clearinghouse, ACH, everything in the banking system. That was built by the San Francisco branch of the Federal Reserve in the exact same years in the 70s when Visa was building their own essentially automated clearinghouse system.

That is wild. Now, I've never read anything. I couldn't find anything. I've never heard anybody say that they like talk to each other, that they knew anything about what was going on, that they were sharing practices. I assume they probably didn't, but it's wild. The same place, the same time. Solving the same problem. Solving the same problem. Which, again, the problem is this gigantic list of a whole bunch of transactions just happened. People

People just agreed to make them happen. And now we need to settle up at the end of the day. And if you paid me $100 500 times and I paid you $100 400 times, what is the net that actually needs to get transferred? And that is a far more efficient way. You know, batching them up is a far more efficient way than transferring the money back and forth every single time. But still can be a complicated problem, especially when you have thousands of banks on each side of that equation. It really is like...

the exact same problem that both of these teams are solving and with the same users, the same banks. It's totally wild. Once base two is done, and again, it also happens in less than a year that it's live and up and running, average settlement time for transactions on the Visa network go from taking a week on average to happening in batch overnight every single night. Every transaction on the network settled

every single night. So the speed is super important. This has lots of implications for float amongst the banks, you know, like some good, some bad between the banks, between the merchants, the issuing banks. Right. If you're the one that owes the money, you kind of want the payment to take more time. Yes, exactly. Exactly. Also importantly, this is from Dave's book, it ends up saving about $15 million in labor and postage costs to the banks by automating this.

just in year one. And imagine if this were done manually today. It wouldn't be possible to do this manually today. No. You needed the technology solutions that they've put in place to enable the commerce scale that flows on this network today. Yep. It is also during this project that one of the most famous Visa tech team stories in history happens. This is a good one. This is in Dave's book, Superstition.

So one of the guys, I think he was working on base one and then maybe got transferred into base two. He is thinking about the system and reliability is so important. You know, this network can't go down. He's like, huh, okay.

We actually have a pretty serious vulnerability in this system. So he goes to see Dee. The whole Visa organization, I think, is like less than 50 people at this point in time. Wow. Just wild. He's like, Dee, you know, all this technology we're building, you know, we've got authorizations running. We're in the middle of getting settlement running. Like the whole Visa network now depends on this technology. We're providing the service off of one computer in one data center, right?

which is made out of wood and sits on a hillside that has dry grass right by a freeway below a parking lot that is perched on a cliff. And we're also about a mile from the San Andreas Fault. So, you know, we really might want to think about having some sort of redundant parallel site data center out there. And Dee, in his very Dee way, he thinks about it. He's like, all right, let me think about this over the weekend. He comes back on Monday and he's like, all right, you're right.

Thought about it. You now have a new job. Your job is to solve this problem. You're marching orders. You are to go move somewhere on the East Coast. I don't care where. Find a site where you can build a redundant data center, get it all built, and have it done within six months. And invent the technology to keep these things synchronized so they are actually redundant. Yes. So now D is not technical enough to talk about that, but this is super important. Up until this point in time,

state-of-the-art in the sort of fledgling data center world was yes to have redundant other location backups But the way that it was typically done was you had your primary data center that operated at full capacity all the time The backups were just like cold storage They were like dormant backups that only were there to come online if you had to failover from the primary system

Visa, though, and the Visa tech team, they're like, you know, if we're going to go through all this trouble and expense of building another data center... Let's use it. Let's use it. So they re-architected base one and completed architecting base two to run concurrently across multiple data centers as like shared operations running across multiple data centers, which I think...

may have been either the first or one of the first examples of that ever happening. 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, through ingenuity, invented a way to do this. Fascinating. And of course, this is now how every data center in the world runs today. Yeah.

Pretty amazing. So that was data center innovation, which sort of happens in concert with settlement digitization. The third big leg of the technology stool that Visa builds is finally digitizing the point of the transaction itself. And that requires both figuring out some way to make the cards digital or capable of being read in a digital manner and

and digitizing the point of sale terminal in the merchants. Those Verifone, you know, traditionally they had a huge market share. Well, this is when Verifone gets built. There was no Verifone before this. Yep. This is huge. This is the holy grail. The base one authorization system that was still only for transactions above the floor limits at the merchant. So, you know, above 50 bucks or 100 bucks or whatever. It replaced the need for phone calls and

but it didn't digitize the transactions themselves. So this is actually every transaction now is running digitally for authorization over the network. Exactly. Not only authorization, but just think about all the things that happen digitally around transactions, the data, you know, everything. This is the beginning of it all. So the first step to doing this is

as we mentioned, is digitizing the cards. And that really meant making them machine readable. So before this, the cards were just pieces of plastic with embossed numbers on them, like you had to say or type the numbers into something. And the nice thing about the embossing is that if you run a shunk shunk on it, a zip zap,

With the Zip Zap or the card imprint reader, you actually can get the numbers off of it without writing it down yourself. That was a huge productivity gain when they launched the sort of imprint reader machines. Yep. So Visa makes the decision. They end up going with the 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 foreclosed

They financed a proprietary magnetic solution that they were trying to push on the industry. I think they're a bunch of lawsuits. And didn't they try to like hack the magnetic stripe and then they did just to prove that like the proprietary thing would have been more secure? Yes, but it was proprietary. So Visa's like, hey, we're not going to pay you Citibank a skiff on everything that we do here. We take the skiff. You pay us a skiff on everything. You pay us a skiff. Exactly. So they standardized on the mag stripe for the cards.

The next step then is they have to create a digital point of sale terminal. Now, this is pretty far outside the scope of what Visa itself could do. Like mass produce a small, inexpensive piece of hardware that needs to get distributed to millions of merchants around the globe. That is outside their circle of competence. Yes, we...

mentioned earlier and you alluded to, this is when Verifone takes off. So what Visa does is they create a spec. They're like, this is the spec of what we kind of need to be created. And they invite different technology vendors to bid on it. Verifone ends up becoming...

the large dominant i actually don't know what their market share was or is i think they had like two-thirds of the market at peak yeah and it's pretty crazy they come up with this sub 500 device that can sit pretty easily on a merchant countertop that already has a bunch of other stuff on it and not a lot of space and get it distributed and installed at all these merchants

Now, the merchants didn't exactly want this thing necessarily, but the way Visa incentivized them to get it is they gave merchants who used it a discount on transaction fees, I think for a period of time, for transactions that happen digitally over the digital network. I see. If you use this instead of the Zip Zap, you'll get cheaper fees. Yeah, exactly.

Which that business model carries through to today. I mean, the way that you charge a card massively affects the interchange that gets charged, whether it's keyed in with numbers or whether it's swiped or whether it's an e-commerce transaction. Totally. One really fun piece of implementation detail around this, just like with base one and authorization where Visa had to build out a telecommunications network amongst all the banks, right?

Now Visa needs a telecommunications network amongst all the merchants around the whole world, the country and the world. That's another whole step change. That's like single digit millions of nodes. Yes. So what are they going to do? For the pilot program, they work with one of the big telecom vendors and essentially build it out themselves.

We're now in the 1980s here. But they realized during this that there's this new fledgling kind of consumer networking service out there called CompuServe. And for folks who either weren't alive in the U.S. at this time or not Americans, CompuServe was like an AOL competitor in the early days of the Internet. I think they invented the GIF. Oh.

Oh, I think that might be right. Yeah. So as a consumer, you would pay a monthly fee to CompuServe or AOL or whatever, and it would be your internet service provider, but also like your email and, you know, your portal to the web. It was a proprietary internet. So they somehow get in touch with CompuServe and they realized that CompuServe has this dynamic where they've architected out their network for peak users.

capacity demand, which is probably when consumers are home at night. The rest of the day, they've got all this capacity that's unused sitting on their network. Visa ends up renting CompuServe network capacity to send their digital transactions from merchant point of sale terminals. And I think this goes on for like years. That's crazy.

I had no idea. That's fascinating. Totally wild. Normally you run into the problem where with spare capacity, where like the time where people want your extra capacity is when you have none. So it's kind of amazing to find two complimentary use cases for the same infrastructure that when one is waxing, the other's waning. Yeah, pretty cool. So now finally with this third step,

All the pieces of the transaction are digitized, computerized, fully implemented as part of the network. This has a huge impact on cutting down fraud. So like tons of fraud was happening below the floor limits. You know, if you're charging a $5 transaction to a card, it's just not worth it to the banks and Visa to like figure out whether that's fraudulent or not. Now, because it's all digital and instant, they can figure out whether that's fraudulent or not.

So during the pilot, banks and merchants that were participating in this program reduced chargebacks to the system by 82% relative to what was happening before. So just like a massive amount of fraud gets eliminated.

Which actually should totally justify a lower interchange. If you're not paying for all the fraud in the system, then the system should cost less to run. Absolutely. In many ways that, hey, we're going to reward you with lower interchange to install these terminals. 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

Two other results from now having all parts of the system aggregated digitally. One, this is what enables the modern payments world we know today. You walk up to a terminal, you double-click your Apple Watch, or you insert a card, or you tap your reader, whatever, and it just works, and it gets authorized, and you get your thing immediately. This is the backbone to all of that being possible. Two, though, for Visa as a company and Visa as a business...

They are now fully digital. They can scale infinitely with essentially zero marginal cost. Yes.

We will later talk about 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. This unlocks just like an unfathomably good business model. Before this, some element of adding scale into the system required manual labor. Right.

Now, it's all just ones and zeros. Now the toll booth is fully built. It is a high-functioning toll booth. It's an immovable toll booth. It's digitized. It no longer has a human sitting there. They've got the fast pass system or whatever. Yep. Well, David, catch us up

to today, I will give us a bunch of information about the business today, some changes to the business model, and then we can go into analysis. But before that, I know there's obviously the IPO event that we want to talk about in 2008 and sort of how the structure of the whole thing changed. But I think you've got a marketing thing that you want to talk about too. Yeah. There's one more really fun marketing piece that I want to come back to before we move on to today. And that's the Olympics.

A lot of people, probably everybody listening now knows Visa is associated with the Olympics. They're probably the most associated brand other than NBC. But that's only in America. NBC doesn't mean anything around the globe. Visa is the Olympics everywhere. So this happens right around the same time as the digitization of Point of Sale on the cards. It's 1986.

The Olympics, for the first time, they are going around to companies and offering a global Olympic sponsorship. This is just like the NFL episode. Before this, you could sponsor the Olympics in specific countries. You could sponsor whatever broadcast, whatever television radio was covering the Olympics in certain countries. You could have billboards and whatnot, but you couldn't do

a global sponsorship. And there's no event like the Olympics that could really do this. I mean, certainly not the Super Bowl, not even the World Cup. You're missing a large part of America. Like this is the only thing where you're going to reach everybody in the world. And up until this point,

One of the mainstay largest Olympic sponsors in America was American Express. Because this fits perfectly with American Express. It's for American business people who are traveling abroad. Olympics. Great. Amazing. The Olympics, the IOC...

goes to Amex to try and sign them up to take this marquee global sponsorship slot. They think it's a no-brainer. They give Amex a sweetheart introductory offer deal. You're the first people we're going to. $14 million. Amex declines. Whoa. So they had their bite at the apple and they missed it. A couple of years before this, right as the Visa empire was being completed with the full digitization of the network,

Dee 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 Dee was one of the most amazing zero to one entrepreneurs in history. Not so much a one to end kind of guy, especially when the industry in which you are going from one to end and your shareholders and board is all some of the most conservative financial institutions in the world.

A lot of conflict starts to erupt, ends up with Dee leaving the company in 1984. After this happens, Visa brings on a new global chief marketing officer, a guy named John Bennett, who came from 20 years at American Express. So he and his team see that Amex has passed on this new amazing global opportunity with the Olympics. They're also formulating the new Visa marketing strategy,

Up until that point, the marketing strategy had been mostly generate category awareness for consumers around the world. To the extent we competed with anybody, we competed with MasterCard, so we positioned against them. John comes in and he's like, no, no, no, no.

The path to victory here is not positioning against MasterCard. The path to victory is positioning against American Express. Not because we want to kill American Express. We don't actually care. We're way, way, way bigger than American Express. But we need global ubiquity and adoption and people to get comfortable with using...

Visa and using credit cards. Remember, there's still this social stigma. That woman in 1993 in Burger King who's like, oh, it's sad if you're using debt to buy a hamburger. Which is so interesting because a signature piece of the Bank of America card since it launched was that

It is actually a charge card where at the end of the first month, you have the option to turn it into a loan. But I have never elected that option. I hold these things called credit cards, but that's a misnomer. I've never once used any credit. Right. And if this were...

Certainly 1986 and still 1993, you would not feel that way. You might feel that way about your American Express card, but you wouldn't feel that way about your Visa card. Right. Although I should say, it's probably false to say I've never used any credit. The bank does float you the money for a month, but they have a one-month grace period where you have no interest. Yes. You are using debt. You're just not paying interest. Yes. Which, you know, hey, that's a great thing to do.

That's an amazing gift that these banks give the world. It's the American way. So, John had just started. The strategy is use American Express to eliminate the stigma around Visa and by association, paint MasterCard as having that stigma because we're not even bothering to talk about them. So, how do we go after American Express? Well, the network is much smaller.

The American Express Merchant Network at the time was about 25% the size of Visa's. So they design a whole marketing campaign around going after American Express and the tagline of the campaign, you know, they show these exotic locales, the type of customers who would be using American Express, that they would be dining at these restaurants or going to these events or going on these vacations.

And the end, folks who are of our similar age probably remember exactly the words here. If you go there, remember to take your Visa card because they don't take American Express. So great. And then the second tagline to it was Visa. It's everywhere you want to be. So the Olympics come up after Amex declines.

John and the team get in touch with the IOC. The price tag has gone up to $17 million just for the rights. That's before any media buys. No advertising. That's just for the right to be a global sponsor of the Olympics. They pull the trigger.

They become the founding global Olympic sponsor. They spend another $23 million in media for the 1988 Olympics. So $40 million in total on one global event. Well, two, there's the summer and the winter Olympics, but like one year of global events. That's about $110 million in today's dollars. Yeah. Wow.

Wild. Way more than they spent on any of the technology projects that we were just talking about. I mean, yeah, R&D costs money, but go-to-market costs more. Yeah. What's the line, first-time founders focus on technology, second-time founders focus on distribution? Yep. And then the real kicker,

They, of course, become the exclusive payment provider at the Olympics. So everybody now coming to the Olympics, which is like a lot of people from around the world that are going to the Olympics, the only payment card provider accepted there is Visa. So they're training all these people that are going to the Olympics year after year after year. It has now been 37 years that Visa is the exclusive payment

payments global sponsor of the Olympics. They're contracted through 2032. So it will be at least 46 years where Visa is the only card accepted at the Olympics. Which that's not that big a deal because there's not that many people that go relative to the people that see the media and understand the brand association. Of course, of course. But the reason we're talking about this, A, it's an awesome story. But

To the last outstanding piece of enabling the global visa empire, this last thing is the stigma. How do they get rid of the stigma of I can use my credit card and not feel like it's a taboo? This was it. Position against Amex, go to the Olympics. It's the perfect event. You're around the world. The type of people who go to the Olympics, the type of people who use Amex, they use their visa cards and they're proud of it. Love it.

So David, take us to the IPO. This thing was an organization that was owned but not with stock. A for-profit non-stock membership organization. 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 wasn't actually the banks trying to get greedy and monetize their asset, although they did monetize the asset. They were monetizing it just fine the way that they currently owned it. Yes. The profits being spit out of the system were just fine.

In 2005, there finally was another huge antitrust lawsuit, I think against both Visa and MasterCard. It actually is a class action lawsuit that the merchants brought. And they basically got fully fed up with Interchange. And, you know, every 10 years or so, there's some meaningful merchant lawsuit.

push to try to change interchange. And they either do it in Congress or they do it in a class action case. You know, there's a variety of different ways. And this particular class action suit in 2005 is still running today. And the numbers have mostly been figured out of how much Visa will owe from a 2012 ruling that then got

appealed. So it's sort of still going on. But basically, there was a lot of uncertainty in the 2005 and 2006 timeframe of, geez, what's the liability here going to be? And MasterCard had gone public and did not sort through this issue at all. They just said, oh, we're going public and shareholders, yep, there's lots of uncertainty in our future. And like, we'll see, but buy our stock. And that, as you can imagine, did not go well at all.

And so as they're getting ready to go public, for lots of reasons, basically it was time. They wanted to have some liquid currency that floated for acquisitions. They had to be competitive with MasterCard, who was going public. Amex was already public. You 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.

And what they had to do was they created these B shares and they isolated all the liability from this class action suit to the B shares. So while MasterCard had a pretty flubbed IPO, Visa had a great IPO because they said, whatever the courts rule, the banks who own the B shares, the pre-existing shareholders will own all that liability and all the A shares, the new people who are coming in as owners of the company will be protected. Right.

Oh, that's awesome. I didn't realize that in the research. It finally happens in 2008. Visa goes public right as the financial crisis is starting, which obviously wasn't planned, but ends up being great for the banks and probably for Visa too. It becomes the largest US IPO in history. Up to that point, they raised $18 billion at a $90 billion initial market cap. But that $18 billion was

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 $18 billion was secondary selling to the banks that owned the company, which I think for many of them proved to be a total lifeline through the financial crisis that helped them survive. Yep.

I mean, now Visa is owned mostly by big institutional shareholders, the vanguards and fidelities of the world. And the banks are much smaller shareholders. Well, at this point, Visa's market cap is significantly larger than any of its former member banks. It's wild. I mean, DeHawk basically was right. That's the TLDR on this, is...

this thing, this information network that doesn't have to take on any of the risk of any of these transactions. It's purely about connecting buyers to sellers and moving information back and forth has proven to be maybe the best business model ever. And let's go through the shape of the business today and listeners, you can decide. So David and I have made passing references to the idea that this ludicrously cash generative business

And I think it's time to actually examine interchange fees today, how they've changed over time, how they flow, who benefits, what's Visa's cut, all of that so you can kind of understand it. So Visa's business model.

The first thing to know is almost nothing has changed since the 80s to today on how the transactions work. So the authorization flow is exactly the same as it was where all the auth flows upstream. The merchant runs the card, checks with their bank, who checks with VisaNet, who checks with the issuer's bank.

is this account in good standing to make this transaction or not? And once they get the yes, then the response flows all the way back down the chain in the order that ultimately the flow of funds will happen later on. And, you know, within milliseconds, unbelievably short period of time, no matter where you are in the world, no matter what currency you are transacting in, your transaction can happen.

Pretty unbelievable. Amazing that within seconds, you can know for certain that someone is vouching for the customer's money and paying in full. Well, nearly in full, minus a merchant discount rate. So what is this merchant discount rate? There are a few things at play here. There are interchange fees, and those interchange fees go to the issuing bank. They're

There are assessment fees or network fees, and that network fee goes to Visa, MasterCard, et cetera. And then there are payment processing fees, and those go to the acquiring bank, the bank that acquired the merchant. This is the merchant's bank and the technology provider of whatever they're using to process their payments. So three fees, interchange, network fees, payment processing fees.

Here's what those could look like. And again, I say could because they are different in every scenario. There's a very long PDF on Visa's website that is available with every different concoction you could imagine. So here's an example of a large merchant in the United States, so no foreign transaction, accepting a credit card. It is obviously different whether we're talking debit, smaller merchants, but large merchant, U.S. credit card.

The merchant is charged a 2% discount off the sale price. So it was $100 pair of shoes. You're now making $98. And what happens to that 2%?

So that 2%, the lion's share of it is the interchange, the 1.6%. That goes to the bank that issued the card. To the cardholder, to the consumer. Right. So when everybody on the planet is marketing credit card offers to you, they get the lion's share of the interchange. So they actually have a lot to play with in customer acquisition for their cards because they make the lion's share of the transaction, the interchange.

There's a lot of costs in there, too, because they bear all the fraud risk. There's a lot of things they got to do. But, you know, they get most of the money. A small amount on the order of like 0.2% or 20 bips for you finance people out there goes to the bank that acquired the merchant. This could be Chase, Pfizer, Wells Fargo. This is, you know, the merchant's bank.

It is important to know this may also get split with a technology provider. So sometimes the financial institution directly has technology that you can use, but other times the checkout terminal or software that you're using is not actually the financial institution behind it. So that 0.2% can kind of get split between the financial institution and the technology provider. And those are folks like First Data and stuff like that, right? Yes.

0.15 to 0.2% goes to the network. This number is actually quite hard to find. You read Visa's entire annual report and you're like, wait, but what part of the split do you actually get? And it's because they get it in a variety of different ways. I would say, I don't know if the Visa people would tell you this is intentionally obfuscated or if it just ends up being kind of obfuscated, but it's not super easy to figure this out.

So Visa, let's round it to 0.2%, gets 20 cents of that $100 shoe sale. But the cool thing about their 20 cents is there's basically no variable costs. Yes. It's not...

dealing with fraud. It's not moving heavy data around. I mean, merchants are allowed to have a 20-character name in Visa's network. 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 NVIDIA chips that need to run in these data centers to do any crazy LLM processing. This is just shipping

very small pieces of information around the payload size of the data has remained infinitesimally small relative to the amount that technology has progressed. This 0.2%, the 20 cents on the $100 transaction, very low variable costs associated with that. So a few caveats on this.

Debit is significantly less in most cases, and often thanks to regulatory reasons. And the logic here is nobody's actually taking any risk to extend credit. So banks should not get to make a bunch of money on debit. It's literally just moving money out of your account and into the merchant's account. So debit cards are going to be less. Smaller merchants often pay closer to 3% than 2% because they're just doing lower volume. And for these small businesses...

the acquiring bank actually has to do a lot more work. Think about how difficult it is to market a credit card to an individual. Well, small businesses kind of behave like individuals. So because the acquiring bank actually has to do a lot more work and incur costs, they get to make more money. So there's sort of this very interesting thing that has happened where Interchange is intentionally quite flexible.

This is a playbook theme that I want to pull forward. This business is probably the greatest 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 of

The interchange pool has an elegance to it. Since the money never actually gets sent to the merchant, the network and its partner banks or constituent banks can kind of figure out exactly how it should flow in each of these particular types of transactions. It's an envelope of value that the whole ecosystem can sort of play with. And I think that's an important thing to realize about interchange is that it's intentionally flexible. Yeah, which brings up, you know, an obvious problem.

point that we perhaps didn't highlight as specifically as we should have earlier. This network is actually a five-sided system. There's the consumer that is buying something. There's the merchant that is selling that something to them. There's the Visa network in the middle. That's the third party. But then there also are the fourth and the fifth parties, which are the banks for each of

the consumer, the issuing bank, and the merchant, the merchant bank. So this sort of envelope of value concept makes sense because those three parties in the middle, Visa and the two banks, they need to split up the value and

depending on who is doing what work, it should be split different ways. And Visa has created these products where, you know, it's not just a Visa card. You might get a Visa signature, a Visa signature business, or a Visa... I don't even know what they are. But they basically have said, why don't we come up with other types of Visa cards that just have higher interchange? And...

merchants are like, what do you mean just have higher interchange? Your new product is you charge me more? And Visa says, well, the cool thing about higher interchange is that there's more money in the envelope to play with to reward other constituents in the transaction. And so let's say we want to tell the issuing bank, hey, for this tier, this Visa signature, you actually get more money. Well, then they

they turn around and say, cool, I'm going to go and I'm going to give better rewards to higher spending, you know, more credit worthy customers. And then Visa's argument back to the merchant is, well, hey,

because we're actually taking more money on this fancier card, you're getting access to customers that we've now brought onto our network who are much better customers that you really want to have at your establishment. And so it's this very interesting, again, envelope of value, I think is the way to describe it, where, you know, I'm sure the merchants wish they could be more a part of the decision process, but it does theoretically enable investors

incentives to be spread around that benefit everyone in the ecosystem. Yeah. And for merchants of scale today, they're cut in on this too, right? There's the Alaska Airlines mileage card. There's the Costco card. Like merchants are able to, by working with banks, be part of this discussion too, if you're of a certain size.

Right. In the olden days, you know, if you're the affinity logo that got printed in the top stripe, the way that works today is you have a special deal with the issuing bank where you're going to say, hey, we're going to help you get more card members by putting our logo on the card. And so even though oftentimes we're the merchant, right?

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 a marketing channel for the issuing bank. So they get to split some of those economics.

And I guess at the absolute very highest levels of scale, you have something like the Amazon and JPMorgan Chase relationship where JPMorgan Chase is the merchant bank and the

JPMorgan Chase is one of the largest issuing banks for cards in the world. And so the Amazon 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 5% cash back rewards. So Amazon or JPMorgan, and in this case, the two of them working together, represent three of the five parties in this transaction. The only people not participating

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. 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.

for the system as it exists today. And meanwhile, no retailer owns 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 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 is

that they love the rewards so much on is to do something non-economic. Like you have to believe that there's some long-term benefit to doing it. Yeah. 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 incentivize all the parties that need to change behavior enough to change the behavior. 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 extort the world's retailers using the retailer's own money. But that is 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. So that's a strong argument. There's been independent research firms that have looked into this and basically determined 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 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 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...

pays $149 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 because in most states, it's actually illegal to charge a meaningful premium to people who are using credit cards. So on average, a cash-using household pays $149... Effectively in subsidy. Yes. But a card-using household receives...

$1,100 in value. $1,100? I mean, I guess that makes sense. I think about the value of the rewards I get every year. It's on average, what is it? 2% of everything you put on 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 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.

Bank of America had solved this when there were no regulations by dropping 65,000 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 kind of effectively create this network themselves. Right.

So what you're basically relying on now is some sort of extrinsic parallelism

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 to create a new system. And without a new paradigm emerging, this is the system. I'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 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 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 buyers that use a card. Very cool feature of these credit card and debit cards is there's guaranteed payment with no risk. 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 going to 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 going to accept a check from somebody, 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 going to have way fewer customers.

Not to mention, there's totally a cost of facilitating cash. It's one thing for a coffee shop, but let's say you run a running shoe store and everything you sell is $150 to $250. 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 3% or in the old days 5% or 7%? No, absolutely not.

But there certainly is some cost no matter what form of payment is used. Absolutely. So the business today, what does Visa look like?

Well, last year Visa processed $14 trillion of volume through their network, which is an 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 1971, the first full year that the Bank of America network was liberated from Bank of America,

The growth in payment volume on the network since then has been 17.3% compounded annually for 51 years. Oh my god. Wild. It turns out the world eventually did want to pay with frictionless, fast, and often credit-extending methods. Yep.

Wow. 17% compounded for 51 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, 17%, like, oh, I have seen IRRs greater than that. Have you seen them greater than that over 51 years? Right. Not many of those. It's amazing.

The number of transactions they processed last year was over 190 billion. So that is 27 transactions per person on Earth, including young children, every single year. Hey, man, young children require a lot of commerce, let me tell you. So I hear. There are 4.1 billion Visa cards in circulation. Their net revenue is $29 billion. Twenty-nine.

That's up from $22 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. 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 want to come back to, was $6 billion. So look at their overall revenue number of $29 billion. Their value-added services is $6 billion. We'll talk about what that means. The most shocking thing about the business is they have 50% net income margins. So of the $30-ish billion that they made in revenue, their net income was $15. Yeah.

This is absurd. All the picture we painted in the whole story, it was all building toward that climax of they have created something with essentially zero marginal costs in the

perhaps the largest market out there, certainly one of them, global commerce, both E and non-E commerce. And as Visa would argue, both consumer but also B2B commerce. Yeah. 50% net income margins on $30 billion in revenue. There it is. And you might say...

So wait, if they have 50% net income margins, what is their gross margin? Because is it SaaS level good at 75, 85%? Nope. Their gross margins are 98%. Unreal. There are no variable costs in this business. There are no costs of goods sold. Unreal. It's crazy. So I think with 50% net income margins, this is literally the most profitable large-scale company in the world.

I don't know of any other businesses of this size or even like five or 10 times smaller that have over a 50% net income margin, including MasterCard, which is 43%. And just to throw some numbers out for people that are like not, you know, looking at financial statements all the time, Microsoft, 34% net income margins. Microsoft sells software. They ship bits.

Apple, 25%. They have an incredibly marked up product that is differentiated wildly by brand. 25% net income margins. Google, Google has a monopoly in a market of information. What are the costs involved in that business? 21% 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, Microsoft Desire. I didn't realize that. Yeah, it's nuts. It's nuts.

They do have 27,000 employees. In some ways, it feels like an oddly large number, and in other ways, it feels small. But I think we should talk about that in the context of the value-added services. Interestingly, there is another company that we have talked about recently on Acquired that does $30 billion in revenue and has 27,000 employees. Do you know what it is, David? That would be NVIDIA. Yeah. It's a weirdly mirror image. Even NVIDIA doesn't have gross margins like Visa. Yeah.

It is the ultimate solution. I think that is the takeaway. Yes.

Visa does 707 million transactions per day. That is 8,600 transactions per second, every second throughout the year. So a big takeaway should be like, my God, they have built high throughput infrastructure globally. That's an unbelievably impressive thing. With almost no downtime, it is 99.999% uptime, which I am not a 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 16,000 banks in 200 countries. They have six data centers distributed across the world. It's kind of amazing it's only six, to be honest, with that kind of reliability and uptime. You know, related to that, though, you raised a good point earlier.

The data envelope, as opposed to the value envelope, although I guess it is sort of the same, is also not that large relative to the importance and the value. Right. This is not YouTube. Yeah. The transactions themselves, in part because this was all architected in the 70s. 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 we're shipping very crude pieces of information across. Yep.

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. 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, and

Visa, 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 realize 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 going to like turn my customer into your customer. Why would I do that?

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 DeHawk's ouster. The banks were like, no, no, no, no, no. Debit cards, that sounds like banking relationships. Right.

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. And obviously debit cards did eventually become part of the system, but not in the way that, you know, it was looking like Dee initially wanted them to. It's pretty fascinating that debit came later. Functionally to me as a consumer, even though I get floated for a month, I'm

My credit card is essentially a debit card where if I want to, I can turn it into a loan at the end of 30 days. It's a debit card with a lot of benefits. Right. And...

Obviously, I get to keep the money for 30 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.

Right. That was the domain of the banks. And actually, there was a big fight between Visa and all the ATM networks. And Dee 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. But 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, and I don't want to use credit, then I'm going 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 a loan? So in closing on the numbers today, this is the important number to know, and one that may make you uncomfortable, but I'm curious how this lands for you, David.

U.S. merchants paid an estimated $93 billion in Visa and MasterCard credit card fees last year, according to the Nielsen Report and Industry Publication. That $93 billion was up from $33 billion in 2012. Wow. That's a lot more billions. 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

absolutely brutal since those interest rates right now are around 22%. 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, because you could do things like have 22% 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 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 10 years. Like that's ridiculous. But transaction value has meaningfully gone up too. Like gross volume is way up. Yes, transaction value. But also I have to imagine a big part of that is share of commerce that's happening as e-commerce versus traditional commerce. The credit card networks really are providing...

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 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 2.24, which is compelling considering we started at 7%. Right.

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, 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 the

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? Let's say you're a physical merchant and you decide to walk away from Visa and all the credit card networks and say you're only cash or check. I mean, you probably are committing suicide as a business, but like you

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. 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 credit card-like fees to accept payments on the internet. Yep. It's worth sharing. So while we're in the revenue streams here, the money that 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 1.6%, the bulk of the transaction. Most of the money that card issuers make is from interest payments. 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 taking deposits,

make loans with them, make money on the interest rates on those loans. Nothing has changed in the banking industry. Totally. Visa's incentives are more transactions because we want more 0.2%. And the issuer's 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.

And anti-fraud measures and other value-added services that they have to buy from Visa. Probably a good time to introduce that $6 billion that Visa is doing in value-added services. That is all brand new high-margin products that they've sort of invented in the last 10 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. Right.

merchants, banks, they're basically trying to sell products to people in the ecosystem, anti-fraud, analytics, 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. All right. So that 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 business we're talking about. But

You know, 11th largest company in the world, valued at half a trillion dollars, around $30 billion in revenue, and they get to keep half of that at the end of the day, and they take no financial risk, and they are just moving information around. Mind-blowing. 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, 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 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 what enables them to be more profitable than MasterCard because 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 enables them

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. 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 90s and 2000s was brand. I do think Visa made a genius move positioning against American Express going back

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. But you're literally never making, I guess it's for the banks, because 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. 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 Reserve 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 think...

based on the research. And that is maybe too biased towards Visa. But I think Visa did accelerate past MasterCard. And I think there was a strong brand element of that. I think it's more equal today. Yeah, it's interesting. 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 on it. Yes.

Totally agree. 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 MasterCard? I don't know. I don't care. It's the Alaska card. Yep. I think there's totally also a story that's beyond the scope of this episode, but how banks, and in particular Chase, aid American Express's customer base over the last set of years. Yeah.

Yeah. I mean, in part, that's just bad strategy on Amex's part that, you know, eventually 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 80 years old now.

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 that you have scale economies. Any investment that Visa or MasterCard make get amortized across 16,000 member banks, across 4 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 going to make. It'll pay back 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 because they can show it to more people. Visa is the exact same thing with all of their fixed R&D costs.

Tell me if you think otherwise on this. I think there's basically like a law of economic nature that if your gross margins exceed, call it 75, 80%, and you are of a certain revenue scale threshold, like our gross margins exceed 75, 80%, but like we're a two-person company with a de minimis amount of revenue in the global economy. But say you're in the billions of dollars of revenue scale,

you must have scale economy power. Right. It's almost stupid to say this one because 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. 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. Okay.

Well, I mean, this is even better than the classic two-sided network. 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 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. 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 because it's just so hard. Right, because 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...

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 especially with digital payments, you don't even have to carry cards with you anymore. I

I should go get approved for 50 cards and write a script to make it so that whatever the most interesting card for that given transaction is pops at the top of my wallet. I think there's almost no switching costs anywhere, really, because when any of these banks have their contract up, they just go and talk to Visa 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 DHOC predicted. Yep. But yeah, is there a switching cost between the Visa, MasterCard, Oligopoly, and someone else? I suppose, yes. There isn't another option. Yep.

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. No, that's a closed loop network too. Oh, yeah, right. They are their own bank. Yep. Pretty interesting. Nobody else. Counter-positioning, the last one, 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 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. That's absolutely right.

All right. I think that's it for power. Yep. Playbook? Let's do it. 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 going to do my best Charlie Munger. I have nothing to add on that one.

There you go. The next one that I think is pretty interesting is Visa, as 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, 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. And that is the way to analyze their entire product suite. You hear 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 Bearable, but what do you have? The two that jump out to me are

One, just like our NFL episode, just like our benchmark episodes, communist capitalism. Yes. The best example. Yes. A, it 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 going to laugh at this, that I foreshadowed as dip

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 and

But this is at a massive scale. Like with Benchmark, it's five partners. With the NFL, it's 30, 32 teams, something like that. Yeah. This is our whole global financial infrastructure that has decided to do this together. Right. This is thousands of banks that have decided to do this together. It is its own separate class of this, I think. Way, way, way harder to pull off than like

Yeah, Ben, you and me together, acquired is communist capitalism for sure. If we were starting a venture capital firm with three of our friends, could we pull it off with five people? Sure. Could we pull this off with 200 banks? No. Right. Especially when you're not starting from scratch. I mean, the 200 banks that they pulled it off with, they all had an agreement in place where they owned

franchise. And you had to go to them and say, you have to forfeit your franchise 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 franchisor, D had to go to them and say, hey, you're going to forfeit the whole asset. That's a great point. Totally. So

So that's one. And then the other two, 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. Incredible. Also the technology story here. Incredible.

Neither of which, because of 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. And right here in Silicon Valley. 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. But that's what I find so funny. Nobody knows that. This is a Silicon Valley company. Do you ever like run into visa people hanging out around San Francisco? Exceedingly rarely. Well, I take that back.

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, 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 longtime chairman of the board of the ballet was the CEO of Visa USA for many years. There are a lot of Visa people in that world here. It's funny, though, that you would think it would have bled more into the Silicon Valley world, but it really 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. It is what they all wish they could have. Yes. Fascinating. All right, you want to do value creation, value capture? Yes. So...

Originally, interchange was supposed to cover the costs of operating the network, creating a trusted system, preventing fraud, offering innovation every few years to improve the system.

And 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 a business can't

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 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, it's

These entities have massively optimized 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. Yep. Seemingly and definitely. There's a lot more to talk about in Bear Bowl there. Yes.

I mean, the worst place that this kind of shows up is the couple percent plus 30 cents that kind of feels small. Yeah. The 30 cents is really pernicious. It's pernicious, especially for 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 coffee roaster and shop where...

Where their line item of what they had to pay in payment processing fees is actually larger than what they paid for beans. Wow, that's crazy. 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 is less than $10, that $0.30 is a killer. Yeah.

That's where the 30 cents kills you. But anytime that you are a low margin business, which many retailers are, if you're a discounter, if you're a Walmart, you're paying 2%, 3% of the whole transaction. But 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 business

high ticket item 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, are they ever going to 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 $1,000 or more? Yeah.

Well, before we go into bear and bull where I know you and we have a lot to talk about what could potentially disrupt Visa and MasterCard, 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 30 cents, you know, everything. That is a lot of value capture. There's a lot of value capture that Visa is doing and MasterCard too.

On the other hand, I don't think e-commerce really would have happened 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. That would have been enough. E-commerce would have been enough. Because I don't think it would have happened without credit cards.

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. Yeah. 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.

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 have penetrated America. 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 Barron Bull. Yeah. PayPal is 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. Barron Bull. Let's do it.

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.

But my real bear 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. I mean, at this point in global history, which is kind of amazing we're finally here, over 50% of consumer payments to merchants go on cards now. It took forever to get here, 40 years or something like that, 50 years. But...

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 anytime you could come up with any bear case, it was always just trumped by the idea that, well, more people are going to do digital transactions, so they're just going to 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. Yep. My next one is closed-loop systems like Alipay and Tencent's ecosystem. To the extent that super apps actually happened in the U.S. 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, 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 checking account routing an account number? Everyone actually loads it using a credit card. 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.

Yep. 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 is already built out here. Technology infrastructure got built out afterwards, whereas it all happened altogether in China. Hmm.

Two, though, maybe more important is just the government influence, right? I doubt the Chinese government wanted Visa, you know, ostensibly American corporation powering their payments.

There's actually this really interesting, weird deal that got cut between China UnionPay and Visa where if you use a cup card in China, CUP, it uses the CUP rails. But if you go internationally where there is no China UnionPay terminal at 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. Which, you know, I mean, I guess that is an associated bear case, right? China in and of itself. And could other governments around the world start adopting similar postures? Yep.

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 are not exactly a payment system. It lacks a lot of the features that you would need for payments, like the ability to refund 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 FedNow, 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, PIC,

PIX has had very fast uptake. UPI in India is another one. The UK has something called 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? 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. Yeah.

Apple, I just think is like a general bear case here. But here's my sort of specific implementation. Specifically Apple Pay, right? Yeah. So on a...

Apple Pay Transaction, I'm pretty sure Apple makes about as much as Visa does because they stack an extra 15 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...

has convinced merchants that it's fine to lose another 15 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. Here's the 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, you need to have a card issued by a bank that likely is issued on Visa or MasterCard or Amrex 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, why would that ever need to run on Visa's network? And so Apple...

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 Verifone or a legacy provider, they could create their own closed-loop network where they're actually the payment method and the merchant's technology provider. Yeah.

I actually don't even think they'd need to do that. I mean, they're Apple, right? They'd just use iPads and they would have, 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...

$30 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, true. Like, what else are you going to do with $250 billion of cash? Yep.

I mean, maybe they would try, but Apple is not going to be in the business of directly having a sales force to sign up all these merchants. I don't think. Agreed. I have a counterpoint to that, but I'll save it for the bull 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,

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 and

And that's not what most people are thinking because 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 the means of payment, not the card. Even though it's flowing over their rails, consumers don't think of it that way. Yeah.

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 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 are, I think, by like many, many, many orders of magnitude, the most successful payment

quasi-alternative payment systems that have actually gotten install bases. Right. Google Pay is 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 U.S., Apple and Google Pay. Yep.

So my TLDR on the bear case is the core business matures, so that tailwind lessens. The 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...

But I don't know. Those are the best bear 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, hey, what's your bear and bull on Visa? Basically, everyone just gave us a bear case because they're like, the bull case is obvious. Yeah, totally. And I think the obvious bull case is this is just an incredibly powerful network effect that's 50 years in the making and is five-sided and

Lord knows I can't think of any other five-sided network effects. Riding a secular 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. The corollary of that too is lots of people have had lots of similar bear cases that they've said five years ago, 10 years ago, and like none of those things have come true. Visa has just continued to grow at

you know, low double-digit percent growth every single year, or I guess to your calculation of 17% over 51 years. People in the past have said many of these bear cases, but have never come true. 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 7% down to 2% and change. 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, is they

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. Instead, your card gets tokenized 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.

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. They're sort of tokens on their network. So Visa's quote on this is, 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 long-term margins and layering products later on.

Other bull cases. So this is like my favorite one from there. Remember the NVIDIA slide of the trillion dollar TAM? Yeah. So here's Visa's version. Payments, all of payments, is about $200 trillion of volume. And cards are only $20 trillion. So...

Here we've been playing in this tiny little fraction of the available market. And there's a few things that they call out that they want to move into, that B2B payments is about $120 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 paid via ACH or wire. 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 B2B both in their further push in cards, but also developing B2B specific products that have more appropriate monetization models. And then they also, 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, you're

That is a $30 trillion TAM or a $30 trillion volume addressable opportunity. And you can think of that as like an insurance company needs to like pay a payout after a car insurance and they need to make that happen fast.

Or 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 kind of a new foray for them. 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 that is me trying to faithfully represent the bull case that Visa paints for their shareholders. Because, David, these bull cases are so easy. You should read the annual report. The whole thing's a bull case. Yeah, right. One other additional I said I was going to add on bull case sort of as a response to the Apple and by association Google bear case issue.

Pretty much everybody we talked to pointed out as the number one most obvious bear case for Visa right now is Apple and Google and the incredible progress and inroads that they have made into rails and transactions. But as you say, all those transactions are still just tokenized Visa MasterCard cards. Right. It's a bull case today. Yeah, it's a bull case today. Yeah.

You know, there may be nuance that I'm missing here, but if you play out how, let's say Apple decides, okay, we want to go after Visa.

I'm not sure how Apple could actually do that, really, without becoming a bank themselves. You know, Amex is a closed-loop system. It's a bank. Discover is a closed-loop system. It's a bank. Does Apple want to be a bank? Well, they could become like a Stripe. Yeah, I guess so. Or like a Square. They're the technology providers, and they have merchant-acquirer banks behind them. Yeah, absolutely.

Sure, they could do that. Apple's finance and fintech operations do not exist in a vacuum.

Is Apple going to 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 $200 trillion 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?

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 25%. Well, I think they have to think that they can improve 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 going to do a car or they're going to go into payments. Right. They got to keep going after bigger and bigger markets. 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. Yep. 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 you can get a Bank of America card 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 bankofamerica.com. There's no annual fee. Click on their website to apply now. And the beautiful irony that will tie a bow on this whole episode is

is the Bank AmeriCard credit card by Bank of America runs on MasterCard's network. As you 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. That is hilarious.

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. Truly. Okay, carve-outs? Carve-outs.

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 is like 15 minutes. It's like three comedy sketches with a guy named Tim Robinson as sort of the brains behind it and as in many of the episodes. Oh, we were talking about this at our drinks in New York. 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 truly unbelievable ones. But it's just, 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 thing that they're trying to emulate. It's just really good. That's amazing. I'll have to check it out.

My carve out is a book. I think this is my first fun 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 Snyk. Last time we got together, which was super fun. Snyk is an amazing, very large cybersecurity company that I'm sure many of you know about. Focused on developers, right? Yeah. Developer security. 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, toddler parenting. But

I read it. I thought it was awesome. Jenny read it. She's, of course, now done the whole series because she's a voracious reader. The world building, the magical system, 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. A 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 Plaid. Very helpful to get 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 Stratechry 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 a huge thanks to her. Good friend of the show, Dimitri from Modern Treasury for helping us quickly get up to speed on payments. And good friend of mine and David's both, Ben Idelson, who is a former product person from

Stripe. Our huge thanks to Blinkist, Statsig, and Crusoe. Click the link in the show notes to get access to each of their awesome offers. 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. You should join the Slack, acquired.fm slash slack.

you should check out ACQ2. In particular, our next episode, it is not out yet, is going to be a follow-up to this episode on Visa. Our buddy Gaurav from Thrive Capital is joining us for a follow-up to analyze the payments landscape today.

And Gaurav 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 to any podcast player. And then the next week, maybe two weeks, our interview with Gaurav will come out. And be sure to check it out.

With that, check out the merch store, acquired.fm.store. You can support some of this sweet, I'm wearing the shirt right now, sweet swag around. You can pay some interchange fees. That's right. That's right. And with that, listeners, we'll see you next time. We'll see you next time.