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Season 13, Episode 4

ACQ2 Episode

November 26, 2023
November 26, 2023

The Complete History & Strategy of Visa

To paraphrase Visa founder Dee Hock, how many of you know Visa? Great, all of you. Now, how many of you know how it started? Or, for that matter, who started it? Who runs and governs it? Where is it headquartered? What’s its business model?

For the 11th largest market cap company in the world, Visa’s history and strategy is almost shockingly unknown. A huge portion of the world’s population uses their products on a daily basis (you might say Visa is… everywhere people want to be), but very few know the amazing story behind how that came to be. Or why Visa continues to be one of the most incredible and incredibly durable business franchises of all-time. (50%+ net income margins!! On $30B of revenue!) Today we do our part to change that. Tune in for one heck of a journey.


Thanks to our fantastic partners, any member of the Acquired community can now get:

More Acquired!:


Carve Outs:

Corrections and Follow-Ups:

  • It was South Dakota, not North Dakota that originally changed their usury laws to support credit cards. (Great PBS article here)
  • It’s actually banks themselves that pay Apple when cardholders use Apple Pay, not a “swipe fee”. (See WSJ piece here)
  • Visa is actually a 4-sided network, not 5-sided, since the network itself doesn’t count as a side.


We finally did it. After five years and over 100 episodes, we decided to formalize the answer to Acquired’s most frequently asked question: “what are the best acquisitions of all time?” Here it is: The Acquired Top Ten. You can listen to the full episode (above, which includes honorable mentions), or read our quick blog post below.

Note: we ranked the list by our estimate of absolute dollar return to the acquirer. We could have used ROI multiple or annualized return, but we decided the ultimate yardstick of success should be the absolute dollar amount added to the parent company’s enterprise value. Afterall, you can’t eat IRR! For more on our methodology, please see the notes at the end of this post. And for all our trademark Acquired editorial and discussion tune in to the full episode above!

10. Marvel

Purchase Price: $4.2 billion, 2009

Estimated Current Contribution to Market Cap: $20.5 billion

Absolute Dollar Return: $16.3 billion

Back in 2009, Marvel Studios was recently formed, most of its movie rights were leased out, and the prevailing wisdom was that Marvel was just some old comic book IP company that only nerds cared about. Since then, Marvel Cinematic Universe films have grossed $22.5b in total box office receipts (including the single biggest movie of all-time), for an average of $2.2b annually. Disney earns about two dollars in parks and merchandise revenue for every one dollar earned from films (discussed on our Disney, Plus episode). Therefore we estimate Marvel generates about $6.75b in annual revenue for Disney, or nearly 10% of all the company’s revenue. Not bad for a set of nerdy comic book franchises…

Season 1, Episode 26
LP Show
November 26, 2023

9. Google Maps (Where2, Keyhole, ZipDash)

Total Purchase Price: $70 million (estimated), 2004

Estimated Current Contribution to Market Cap: $16.9 billion

Absolute Dollar Return: $16.8 billion

Morgan Stanley estimated that Google Maps generated $2.95b in revenue in 2019. Although that’s small compared to Google’s overall revenue of $160b+, it still accounts for over $16b in market cap by our calculations. Ironically the majority of Maps’ usage (and presumably revenue) comes from mobile, which grew out of by far the smallest of the 3 acquisitions, ZipDash. Tiny yet mighty!

Google Maps
Season 5, Episode 3
LP Show
November 26, 2023


Total Purchase Price: $188 million (by ABC), 1984

Estimated Current Contribution to Market Cap: $31.2 billion

Absolute Dollar Return: $31.0 billion

ABC’s 1984 acquisition of ESPN is heavyweight champion and still undisputed G.O.A.T. of media acquisitions.With an estimated $10.3B in 2018 revenue, ESPN’s value has compounded annually within ABC/Disney at >15% for an astounding THIRTY-FIVE YEARS. Single-handedly responsible for one of the greatest business model innovations in history with the advent of cable carriage fees, ESPN proves Albert Einstein’s famous statement that “Compound interest is the eighth wonder of the world.”

Season 4, Episode 1
LP Show
November 26, 2023

7. PayPal

Total Purchase Price: $1.5 billion, 2002

Value Realized at Spinoff: $47.1 billion

Absolute Dollar Return: $45.6 billion

Who would have thought facilitating payments for Beanie Baby trades could be so lucrative? The only acquisition on our list whose value we can precisely measure, eBay spun off PayPal into a stand-alone public company in July 2015. Its value at the time? A cool 31x what eBay paid in 2002.

Season 1, Episode 11
LP Show
November 26, 2023

6. Booking.com

Total Purchase Price: $135 million, 2005

Estimated Current Contribution to Market Cap: $49.9 billion

Absolute Dollar Return: $49.8 billion

Remember the Priceline Negotiator? Boy did he get himself a screaming deal on this one. This purchase might have ranked even higher if Booking Holdings’ stock (Priceline even renamed the whole company after this acquisition!) weren’t down ~20% due to COVID-19 fears when we did the analysis. We also took a conservative approach, using only the (massive) $10.8b in annual revenue from the company’s “Agency Revenues” segment as Booking.com’s contribution — there is likely more revenue in other segments that’s also attributable to Booking.com, though we can’t be sure how much.

Booking.com (with Jetsetter & Room 77 CEO Drew Patterson)
Season 1, Episode 41
LP Show
November 26, 2023

5. NeXT

Total Purchase Price: $429 million, 1997

Estimated Current Contribution to Market Cap: $63.0 billion

Absolute Dollar Return: $62.6 billion

How do you put a value on Steve Jobs? Turns out we didn’t have to! NeXTSTEP, NeXT’s operating system, underpins all of Apple’s modern operating systems today: MacOS, iOS, WatchOS, and beyond. Literally every dollar of Apple’s $260b in annual revenue comes from NeXT roots, and from Steve wiping the product slate clean upon his return. With the acquisition being necessary but not sufficient to create Apple’s $1.4 trillion market cap today, we conservatively attributed 5% of Apple to this purchase.

Season 1, Episode 23
LP Show
November 26, 2023

4. Android

Total Purchase Price: $50 million, 2005

Estimated Current Contribution to Market Cap: $72 billion

Absolute Dollar Return: $72 billion

Speaking of operating system acquisitions, NeXT was great, but on a pure value basis Android beats it. We took Google Play Store revenues (where Google’s 30% cut is worth about $7.7b) and added the dollar amount we estimate Google saves in Traffic Acquisition Costs by owning default search on Android ($4.8b), to reach an estimated annual revenue contribution to Google of $12.5b from the diminutive robot OS. Android also takes the award for largest ROI multiple: >1400x. Yep, you can’t eat IRR, but that’s a figure VCs only dream of.

Season 1, Episode 20
LP Show
November 26, 2023

3. YouTube

Total Purchase Price: $1.65 billion, 2006

Estimated Current Contribution to Market Cap: $86.2 billion

Absolute Dollar Return: $84.5 billion

We admit it, we screwed up on our first episode covering YouTube: there’s no way this deal was a “C”.  With Google recently reporting YouTube revenues for the first time ($15b — almost 10% of Google’s revenue!), it’s clear this acquisition was a juggernaut. It’s past-time for an Acquired revisit.

That said, while YouTube as the world’s second-highest-traffic search engine (second-only to their parent company!) grosses $15b, much of that revenue (over 50%?) gets paid out to creators, and YouTube’s hosting and bandwidth costs are significant. But we’ll leave the debate over the division’s profitability to the podcast.

Season 1, Episode 7
LP Show
November 26, 2023

2. DoubleClick

Total Purchase Price: $3.1 billion, 2007

Estimated Current Contribution to Market Cap: $126.4 billion

Absolute Dollar Return: $123.3 billion

A dark horse rides into second place! The only acquisition on this list not-yet covered on Acquired (to be remedied very soon), this deal was far, far more important than most people realize. Effectively extending Google’s advertising reach from just its own properties to the entire internet, DoubleClick and its associated products generated over $20b in revenue within Google last year. Given what we now know about the nature of competition in internet advertising services, it’s unlikely governments and antitrust authorities would allow another deal like this again, much like #1 on our list...

1. Instagram

Purchase Price: $1 billion, 2012

Estimated Current Contribution to Market Cap: $153 billion

Absolute Dollar Return: $152 billion

Source: SportsNation

When it comes to G.O.A.T. status, if ESPN is M&A’s Lebron, Insta is its MJ. No offense to ESPN/Lebron, but we’ll probably never see another acquisition that’s so unquestionably dominant across every dimension of the M&A game as Facebook’s 2012 purchase of Instagram. Reported by Bloomberg to be doing $20B of revenue annually now within Facebook (up from ~$0 just eight years ago), Instagram takes the Acquired crown by a mile. And unlike YouTube, Facebook keeps nearly all of that $20b for itself! At risk of stretching the MJ analogy too far, given the circumstances at the time of the deal — Facebook’s “missing” of mobile and existential questions surrounding its ill-fated IPO — buying Instagram was Facebook’s equivalent of Jordan’s Game 6. Whether this deal was ultimately good or bad for the world at-large is another question, but there’s no doubt Instagram goes down in history as the greatest acquisition of all-time.

Season 1, Episode 2
LP Show
November 26, 2023

The Acquired Top Ten data, in full.

Methodology and Notes:

  • In order to count for our list, acquisitions must be at least a majority stake in the target company (otherwise it’s just an investment). Naspers’ investment in Tencent and Softbank/Yahoo’s investment in Alibaba are disqualified for this reason.
  • We considered all historical acquisitions — not just technology companies — but may have overlooked some in areas that we know less well. If you have any examples you think we missed ping us on Slack or email at: acquiredfm@gmail.com
  • We used revenue multiples to estimate the current value of the acquired company, multiplying its current estimated revenue by the market cap-to-revenue multiple of the parent company’s stock. We recognize this analysis is flawed (cashflow/profit multiples are better, at least for mature companies), but given the opacity of most companies’ business unit reporting, this was the only way to apply a consistent and straightforward approach to each deal.
  • All underlying assumptions are based on public financial disclosures unless stated otherwise. If we made an assumption not disclosed by the parent company, we linked to the source of the reported assumption.
  • This ranking represents a point in time in history, March 2, 2020. It is obviously subject to change going forward from both future and past acquisition performance, as well as fluctuating stock prices.
  • We have five honorable mentions that didn’t make our Top Ten list. Tune into the full episode to hear them!


  • Thanks to Silicon Valley Bank for being our banner sponsor for Acquired Season 6. You can learn more about SVB here: https://www.svb.com/next
  • Thank you as well to Wilson Sonsini - You can learn more about WSGR at: https://www.wsgr.com/

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Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)

Ben: It's funny. When we picked this episode, I was like, oh, this is going to be pretty down in the middle and easy. Of course, as we get into the research as always, it's like, oh, nope. Big story here.

David: Yup. There's always a story.

Ben: 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.

David: I'm David Rosenthal.

Ben: 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. 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.

This is just the rosy side of the story. 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.

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 ask most people what Visa does, they could not actually articulate it.

Visa does not extend credit. They do not issue cards. They do not work directly with merchants. They do not work directly with consumers. They are not a bank or a financial institution. They don't ever bear any risk. They are merely a network connecting banks to other banks. David, it is insane.

David: 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.

Ben: Perhaps not underrated the last decade or so.

If you, listeners, want to know every time an episode drops, you can sign up for email updates at acquired.fm/email. Two new fun things: (1) Emails now include little hints and some teasers about what the next episode will be. If you want to play the guessing game, sign up at acquired.fm/email. And (2) the emails have another new feature we are including follow ups from previous episodes when we learn new things from you after the release.

Come talk about this episode with us after listening at acquired.fm/slack. If you want more from David and I outside of these big, long main Acquired episodes, check out ACQ2, our interviews on a second podcast feed.

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

David: 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. 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.

Ben: A fellow Seattleite and the book, which is so wonderfully esoterically named Electronic Value Exchange was his, I think, PhD thesis that they turned into a book.

David: Correct.

Ben: All right, take us back in time.

David: Dee Hock, the founder of Visa—who we will talk a lot about as we go along here—told this great story of how after his time at Visa in his 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? Of course, every single hand in the room would go up, as I assume all of you listening are going up now too.

Many 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? He would say, how did this company start? No hands. Who runs it and who governs it? No hands. Where is it headquartered? No hands.

It's just as wild as we were saying in the intro how important this company is. And yet, still to this day, I think maybe a few more people than in this time know the answer to these questions, but not many.

Ben: It's one of these things too. It's one of the only essential pieces of financial infrastructure in the United States that is not run out of New York.

David: Our task today is to tackle these questions. 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.

Ben: 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. It's chapter one, The Drop, 1958. The Drop has become, if you say the drop to someone in the fintech industry, they're like, oh, September 1958, Fresno.

David: Yup, and the rest of the world has no idea.

All right, what happened? 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.

Ben: 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.

David: Yeah, mostly farmers and merchants in San Francisco. It really started as the bank of the little guy. Bank of America decides that they are going to mail out little rectangular pieces of plastic to every single one of their 65,000 customers in the city of Fresno, completely unsolicited.

A couple of things about this. (1) It's wild. I think the Fresno population at this point in time was maybe 200,000–250,000 people. A huge portion of the city of Fresno banked with Bank of America, and that was true for all of California at the time. (2) They just send these things out. Obviously, these are credit cards. People don't know what they are, they have no idea how to use them, mass chaos ensues.

Ben: 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.”

David: 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 US more broadly. 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 the JP Morgan's. 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.

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. It would generate lots of deposits, lots of lending activity.

The investment banking activities around that were obviously very lucrative. That's how the JP Morgan's, the Morgan Stanley's, et cetera, of the world came to be. For the most part, consumer banks were backwater, small. There was no way to aggregate enough customers that you could get big enough.

Ben: 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 a bank of a city. You could almost think about these more as credit unions than the big banks that we think about today.

California happened to be unique in that you could actually have branches all over the state. California happened to have quite a large population, so it was the only place you could pull off a large consumer bank.

David: 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.

The business of banking is 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. Obviously, mortgages and car loans still exist today, but they were doing washing machine loans.

Ben: They were doing 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. 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.

David: Yeah, and for specific items like go buy a refrigerator.

Ben: Wild.

David: It was just wild to imagine today. 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 is 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. This is what they are launching first in Fresno as the pilot market, and they call it the BankAmericard.

Ben: Beautiful name.

David: Beautiful name, and it would survive for quite a long time. This wasn't exactly a new idea on the part of Bank of America. Charge cards and credit cards had been around for decades. What was new was this was the first time that a bank had entered this market at scale. Let's talk about the history.

Historically in the US, transferring money was actually not that easy. You had two options, you could use cash, or you could use checks. Checks worked, but they also had a bunch of problems. 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 in mailing stuff around, traveling around the country that had to be done. And that was taken as a discount out of the check.

Ben: 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. 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 can have in your possession.

David: Totally. Problem number one, you didn't get all the money. Problem number two, also a big problem, it took a really long time. Imagine—we're talking the 1800s, early 1900s—his stuff was on the Pony Express. Pieces of paper going around a really, really big country. Not ideal.

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

David: Spoiler alert, ACH doesn't get developed in the US until the 1970s. Humans, though, are quite ingenious creatures at solving their problems, particularly when motivated by money.

There is an obvious solution to this for merchants and their usual regular customers, and that is credit accounts, charge accounts. Rather than giving me money or a check, let me just keep tabs on a ledger of what you bought, what the value is, I'll tab it all up, and then at the end of the month, you'll come give me a check or cash for it.

I remember even me growing up in the 1980s, we had this at our local gas station near our house. We had a credit account. 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. They just write down what it was, and then at the end of the month, I see my dad would go give them some money.

Ben: Which saves on operations for everyone. It's 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.

David: 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. The gas stations get into this in a big way. Standard Oil gets into this in a big way. There are lots of standard stations across the country. You can have an account that works at all standard stations.

Ben: In 1939, Standard Oil of Indiana sent 250,000 unsolicited cards directly to all of their customers.

David: Making the Fresno Drop look like a drop in the bucket, shall we say?

Ben: 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.

David: 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.

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

David: 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 your Visa to everywhere you want to be?

Ben: Yes. Not to mention, on top of this, there is a 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.

David: This comes to be post depression in the 1930s–1940s in the US. This really is starting to sound a lot like Visa. Except as you pointed 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. 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 a couple of hundred or thousand participants here, are individual merchants equipped to manage a network like this? No, they don't have the resources to do this.

Ben: So you have to spin up some 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.

David: Or there could be an independent third-party for-profit network that does this. This is when Diners Club and American Express arrive on the scene. Diners Club was first. People might know and have heard of Diners Club. It still exists today. It's like a sub brand of Discover.

There's a very famous legendary origin story behind Diners Club, and it goes like this. In 1949, post-World War II, economic prosperity, beginning of the madmen years in New York, in Manhattan, a New York businessman named Frank McNamara is hosting a lavish business dinner 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. Face is saved. His reputation as an erudite businessman is preserved.

Afterwards, he's talking with his wife. It'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 will work at all the restaurants in Manhattan where business people host dinners.

Ben: So nobody ever needs to bring their cash. You could just imagine that 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. Of course, I get to look super awesome in front of all of my colleagues.

David: I think there are two really important points here. (1) You said, I pay it. I don't pay it, my company pays it, I don't care. (2) The most important point, I get to look super awesome in front of all my colleagues, 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.

Ben: Just to start tracking a certain number here. When we were talking about checks earlier that we're getting a discount, and even in this era of early Diners Club, early American Express, we're talking about a 5%–7% discount of what actually got remitted ultimately to the restaurant or the retailer versus what the bill was originally that the consumer authorized.

David: 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 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 competitive with one another, but it's not exclusive competition. This isn't JC Penney's versus Macy's. No restaurants in Manhattan, no matter how good they are, really honestly believe that a majority of their customers are only going to dine at their restaurant.

Ben: 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 the top 5% of your customers. Sure, you want some 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 bundling system that makes you work with complements of yours, so that people can shop you and everything like you the easiest way possible, and you can still make some money on everybody.

David: You're enabling people to spend money in your restaurant easier and more frequently. You don't really care that they also go to other restaurants, because they're going to do that anyway. It's crazy, ladies at Diners Club are able to charge restaurants and other merchants. They expand to hotels, airlines, anything that a businessperson traveler would need, 7% of the gross bill. Merchants complain about 3% today, but 7%. These are restaurants, that's crazy.

Eventually, they have so much power in what they're doing—this product is so good—they also add a fee for the card holders and their companies. It's not individual people paying this fee, it's the company's paying this fee. Of course, they're happy to pay it, it enables business. Amazing, brilliant idea back in the day.

Ben: We should say, this has 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. It's just operating with a bunch of restaurants and retailers in New York City.

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. It turns out, there's just a lot of cost in the system to run it.

David: And Diners Club would ultimately fade, although it grossed over a million members. It goes national, it gets acquired by Citibank, and then sold to Discover in 2008, as we said, still a brand today. But it's basically impossible to create an independent from the ground-up network of this at the time, because you were just talking about the operational costs of running this thing.

Think about that merchant and customer acquisition costs. Nobody knew what Diners Club was. They have to now canvas the entire island of Manhattan and ultimately the whole country in the world, 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 relationships, 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.

Ben: Which is the Diners Club of today. It's the favored card by businesses. It is the card that is most used for travel, entertainment, and meals.

David: As you might remember from our Berkshire Hathaway series a couple of years ago, Amex at this point in time was primarily a traveler's checks business.

Ben: That's how they started, right?

David: Actually, no. They started in 1850. This is amazing. Do you know who started American Express? This is a version of Dee Hock holding up the Visa card.

Ben: No, I don't.

David: 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...

Ben: Wells and Fargo.

David: Henry Wells and William Fargo.

Ben: Amazing.

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

Ben: It was something like they started American Express but then had a conflict, so they left and they started Wells Fargo after that.

David: 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. I think Wells Fargo was doing banking, so obviously banks. As we're talking about, you need to move stuff around the country. It was a related business.

Ben: It's amazing. I think it's fascinating that Wells Fargo came after Amex. You think Wells Fargo as this old timey Foundation of America. American Express is even older than that.

David: 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 made good money.

You would buy a $100 traveler's check and pay Amex a little fee or whatever, but the float and the breakage. There are traveler's checks out there today that are 50–100 years old that have never been cast, and Amex has just been sitting on that cash for decades investing it. What an amazing business.

Ben: Okay. Amex observes Diners Club and says, hey, we need to get into this, and we actually have an ability to get into this fast.

David: And they actually tried to buy Diners Club, but they can't get their own price. They're like, well, we don't need to pay you a lot of money because we can just do this too. 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.

Just within a year or maybe even two from when Amex launches their charge card business traveler program, they signed up 700,000 members, which is almost as much as Diners Club had signed up many years of working on it.

Ben: Importantly, here, the thing you're seeing is, this is the first time a real financial company is coming into the industry. All of the we-know-you're-good-for-itness was happening directly from retailers before or by organizations that represented retailers and restaurants. Now you have not a bank, but a bank-like entity that is starting to say, oh, this could be an interesting business.

David: 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. They're like, okay, the time is right, let's do credit cards. Let's go to Fresno.

Hopefully, as we painted the picture, their motivation and Diners Club, AmEx, and even the merchants' and retailers' motivations, are very different. B of A wants two things out of this. (1) 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.

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

Ben: 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 BankAmericard, 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 BankAmericard 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. 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, so the modern credit card is born.

David: And it was already happening at B of A. They were doing these loans. This wasn't actually new behavior. It was just way easier, way more streamlined, on-ramped into this consumer lending that turbocharged it.

Ben: 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 the consumer lending. 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 BankAmericard is it really bundled two different things together. One was convenience and the other is credit.

David: 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 the B of A was doing this. A California homeowner wants to go buy a new refrigerator. They walk into B of A, talk about it with the lending officer, blah-blah-blah, 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, 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, and no money has left B of A's hands yet. They get to keep the money.

Ben: A transaction has been authorized. But yes, they get to keep the money.

David: Because we're talking about California here, there is a very high likelihood chance—I think at the beginning, I suspect a 100% chance—that the merchant also banks with B of A. That money is never leaving Bank of America's hands, which frees up more capital, which frees up float. The B of A of management must have been beside themselves with glee about this.

Ben: In theory, if they managed to put any 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...

David: It's exactly where we're going.

Ben: When you mail 65,000 cards indiscriminately with the same credit limit to every single customer and say, have at it, guys, and this is a brand new consumer behavior that they've heard about, or they might have witnessed in one form or another but now they have a bonafide charge plus credit card sitting in their hands, you're going to lose a lot of money at first.

David: Because there's another more pernicious way that this type of lending is different from 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 repossess the refrigerator, but push comes to shove, you can go repossess the refrigerator. This whole consumer credit card land is unsecured lending.

Ben: You probably shouldn't apply the assumptions about your loss ratios from secured lending to unsecured lending, but that is exactly what happened.

David: This all comes back to why it really had to be Bank of America to start this program, because they do this. They do the drop in Fresno, 65,000 unsolicited cards go out to unsuspecting consumers. Fraud is out of control, $20 million of fraud within the first pilot program, 22% of the credit that they issued to that initial Fresno cohort ends up being default or delinquent, which I think is five or six times what their delinquency rate was before on traditional lending.

Ben: It is pretty crazy. It's worth pointing out, we're talking a lot about credit and debt at this point in time. Now in 2023, some of these sounds like bad words. Frankly, it's because of the situation that society has pushed Americans too, but it was a very different time back when credit cards were first getting started and when this practice of installment loans was extremely common in the pre card era.

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, a credit union, a department store, or a loan shark for that matter. There isn't another western country that has relied so heavily on consumer credit.

Between 1958 and 1990, there was never a year where the amount of outstanding consumer debt wasn't higher than the year before. Years later, a Bank of America executive could look back on his lifetime and 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."

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, so they're fine taking on debt.

That is what has 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 that you should be fine. betting that the future is going to be better than today.

David: It's 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.

Ben: That may not be true on an individual basis, but it's absolutely true on a societal basis.

David: 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 a set of months, they would have pulled the ripcord immediately. B of A, though, can absorb this loss, no problem. And they know if we can make this work, this is going to transform our business.

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. Do you know how many card holders they sign up in that first year?

Ben: No.

David: Two million California card holders 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 too; 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. That's one year and one state.

Ben: This is like Meta launching Threads or Microsoft launching Teams. You can 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.

David: And it's even more than that. As we said, this really was a big innovation. It wasn't just that they copied AmEx, Diners Club, or anything else. They were adding credit to this. This was a huge innovation.

By 1961, year three of the program, they're able to get fraud under control enough that the whole program is profitable.

Ben: But they keep that under their hats.

David: They don't want anybody else to know about this. There's been all these newspaper articles about all this money that B of A is losing. 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 were 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. 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 the secret comes out in 1966. From 1966 to 1968, in just two years, approximately 440 credit cards were introduced by banks large and small throughout the country.

Ben: And it is specifically 1966 when the secret gets out, because phase two of Bank of America's grand master 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.

They have been itching for any way to expand to truly be the Bank of America. Why the hell did they change the name to Bank of America? It's not because they wanted to be the Bank of California. They're like, maybe this is our path. California is only 10% of the US population.

In 1966, they create the BankAmericard service organization with the express purpose of licensing out the BankAmericard program and network to banks across the country, across all 50 states. This is the seed of Visa.

Ben: Listeners, before we talk about how the BankAmericard 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, Go1, where David and I are proud angel investors.

David: 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.

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 Dee Hock's memoir, One From Many, at blinkist.com/visa.

Ben: 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.

If you want to read our favorite books broadly having nothing to do with this episode, but literally what's behind me on that bookshelf that I feel are our trophies from all the episodes that we have researched, you can go to blinkist.com/acquired and look at Ben and David's bookshelf, and you can get those for free.

Beyond that, Blinkist is always giving Acquired listeners an exclusive 50% discount on all their premium content, which is really great stuff, all the summaries, and especially the audio summaries of really important books.

David: 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 in which acquired them this year, is an amazing corporate learning and development content platform, that if you're an 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. This is HR training, specific skill set development classes, everything you need across your whole company. They're the leader in the space. They're just an awesome company that you should definitely work with, if you are not already.

Ben: Our huge thanks to Blinkist and Go1. Go take advantage of all this free content by clicking the link in the show notes.

Okay, David, how do we get to Visa? You have been telling me about the BankAmericard from Bank of America, and I opened this show saying Visa is not a bank and Visa doesn't have direct relationships. This is a big indirect thing, where they work with other banks. This is a big mismatch.

David: The 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 the second chapter, there is also only one person in the world that could have taken BankAmericard and turned it into Visa, and that is Dee Hock.

Here we are in 1966. B of A now starts going around to all the other consumer banks in other states and selling them on joining the network as BankAmericard licensees. The deal is that you pay B of A a $25,000 franchise fee to get your franchise of the BankAmericard. This is like Wendy's or something. Plus you pay them a percentage of the gross transaction revenues. It literally is like a McDonald's. This is wild.

The executives must have just been throwing party after party, because (a) this whole thing turbocharged their own business, (b) now they're like, oh, we're going to make all the other consumer banks in the country essentially into serfs in our kingdom here.

Ben: One of the assumptions they made was correct, and the other one was too hubris. The first assumption is a good business model decision, which is, okay, we've now created this distributed asset, which is all these customers with our card that want to use our card at lots of merchants.

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

David: It was also an intensely private thing, a taboo thing, because when you were using a credit card these days, you were implicitly saying I'm using debt to buy this transaction. You didn't want other people to necessarily know that.

Ben: It's a bit odd. But consumers clearly did want to use this thing for some subset of the purposes that they did today. Bank of America is 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, all these merchants out there, and accept the card, is this weird franchising thing.

David: The bad assumption was that other banks would consent to basically being serfs in their kingdom. 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. They're like, wow, this is already the biggest charge card credit network in America, if not in the world, we can now bring this to our state. 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.

Within two years, by 1968, a couple of hundred banks had signed up. There are six million card holders across the country and beyond the country. Actually, Barclays Bank in the UK had signed up to be a franchisee of BankAmericard back in the day.

Ben: What year is this?

David: This was in the mid-60s.

Ben: That's way earlier than I realized for international expansion.

David: 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 isn't going to scale to hundreds of banks, all 50 states, multiple countries around the world.

One of the examples I alluded to earlier, in California, in the Bank of America–owned and operated BankAmericard system, usually all parties in the transaction were Bank of America customers. There wasn't really any difference between the bank of the consumer, the cardholder, and the bank of the merchant. B of A controls both sides. Once they expand the network and let other banks in, all of a sudden, that's almost never the case.

Ben: B of A realized that the 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. When I'm just making the same assumptions about all the future customers about serving my own needs, that's actually a false assumption.

David: B of A has no distinction between what ultimately now in the Visa network, 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.

Ben: These merchant banks—we'll come back to some of this terminology later—have gone on to become the acquiring bank, because this is the bank that acquires the merchant relationship as a customer.

David: Now in this new world, where there are 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. Interchange fees are, obviously, what Visa does today.

Ben: This is the first moment that we start to see a departure from what American Express was doing. The original BankAmericard was very similar to American Express and Diners Club where they were closed-loop systems. It was a bank that issued a card to be used at a payment terminal, that all stayed within the bank's closed-loop network.

With this new BankAmericard licensee system that they're starting to develop here that would become Visa, it's an open-loop system. It's, hey, there's one bank on one side who owns the customer, who owns the cardholder and one bank on another side. We're going to enable those systems to talk to each other, but they're not the same party. This is an open-loop now.

David: This interchange thing, all of the other banks that are now signing up to become B of A franchisees for the BankAmericard system, 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.

Ben: The problem they're experiencing is like, hey, Bank of America, how did you build all the technology...

David: To do this? Bank of America's response was, we didn't have that problem because in our corner of the world, we're the bank on both sides.

Ben: We're a closed-loop.

David: I don't know. You guys figure it out. This sounds like a you problem, not a me problem.

Ben: I see. 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?

David: No, I don't think price was an issue. I think it was this and 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. Bank of America was like, no, no, we sold you a marketing system.

Ben: I see. It's like, you buy a McDonald's franchise, they ship you some golden arches, and they're like, good luck figuring out how to make cheeseburgers.

David: That is exactly right. To be somewhat fair to Bank of America here, the golden arches are worth a lot. The BankAmericard, three colored bands, blue, white, and gold, are also worth an incredible amount here.

Ben: And of course, the ability to actually be on the network that sends those payments, right?

David: Yes, of course. The network has incredible value. Back to the brand and the marketing. As all these other banks are considering whether to become franchisees of BankAmericard, some of them are like, no, I'm not going to do that. Some of the ones who do become franchisees, really, all the ones who become franchisees become very frustrated. Of course, people are going to start competing systems.

Right in this time over this 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.

At this point in time, Interbank is a Franken network. There's no common brand, mark, or visual identity for all of these cards. 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 or 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.

Ben: I see. It's like when I'm trying to figure out 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. Was it Oneworld?

David: Oneworld, yeah. 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.

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

David: That's right. But now, the scale that these networks are starting to be at, obviously that's not tenable. 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 BankAmericard name, brand, and importantly, mark. What are the colors of Visa? I'm sure everybody listening probably around the world knows this. It's blue, white, and gold.

Ben: Which is the hills of California, right?

David: There's this amazing origin story to this. It's super reminiscent of the Windows XP Bliss wallpaper that is the most viewed photo in the world, the hills. It's actually in Sonoma, California.

The story is the B of A team, when they were first rolling out the program, the guy tasked with card design lived in Pleasanton, California, in the East Bay of the San Francisco Bay area, where it's pleasant.

One fine spring morning, he looks out his back door at the local hillside, the sky is this beautiful blue with white puffy clouds, very much like the Windows XP bliss background, and the hill is covered with beautiful golden colored California poppies in bloom. He rushes back inside, he paints an abstracted version of his beautiful hillside. Voila, the three bands, blue, white, gold BankAmericard Visa.

Ben: This would go on to be incredibly valuable to plaster on your storefront and say, we accept BankAmericard here, and that just means your sales are going to go up. Friction to purchase goods goes down, customers are excited to spend with you, because they're shiny, cool things that they like spending money on. It works there, and it's good for your business to be able to accept it.

David: It's so wild that today, we would think, oh, what's a moat? What's a competitive advantage? What's durable? You need technology advantage, even how we think of brands. 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?

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?

Ben: They got this marketing program. How did it literally work, because this is a pre-magnetic stripe?

David: There's no technology here.

Ben: 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?

David: The banks have to resort all the way back to how checks worked back in the 1800s, early 1900s in the US, where it was all decentralized.

Ben: The bank would sign up a merchant in their local town.

David: Rhe banks would take the sales drafts from their merchants that the merchants had brought to them, and then they would go individually decentralized mail around the country to the issuing banks, the card holder banks, to get the money.

The way they've financed all this was a discount fee, just like checks back in the day like, oh, hey, this sales draft is for $100, this is all really hard to figure out, so, okay, you give me $97 instead or you give me $90 instead. There was no standardization. It wasn't like a set discount fee, it was just whatever they negotiated with one another.

Ben: The sales drafts get handed to the licensee. Let's say you're running a department store and keep going with the Illinois example that you said. You're running a Chicago department store. After a whole day of sales, you've got a bunch of sales drafts where you say, all these customers came in with BankAmericard. They said good for the money, so I gave them the goods. And now I'm holding the sales draft.

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 93¢ on the dollar or whatever. The bank is responsible, probably?

David: Yeah, so the merchant bank, that acquiring bank…

Ben: Mails all those, effectively, invoices to all the other banks…

David: That the people who bought the goods there to their banks with their cards, and there was no standardized discount.

Ben: This is ludicrously expensive.

David: It's chaos. People are so pissed, and again be amazed like, yeah, whatever.

Ben: Yeah, whatever. For us, we just moved a few numbers internally; we actually didn't have to do any of this.

David: And you all are paying us now money, so our empire dreams are coming true.

Ben: Wow.

David: This is maybe painting Bank of America into poor light. Like I said, nobody knew. This is the first time that a banking charge card/credit card system is operating at scale in the country. Even though BankAmericard had been operating for a couple of years internally to B of A in California, now it's going across state lines. This had never been a problem before—the merchant banks versus the consumer banks, the issuing banks, et cetera.

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, demand a summit. They need to air their grievances with 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.

Ben: Really? No way.

David: In the middle of the country. You didn't know this?

Ben: No.

David: I thought you knew this. Yeah. Columbus, Ohio. Ohio State.

Ben: Wow. Amazing.

David: This is where the birth of Visa happens. The summit gets organized. For the franchisee banks, this is 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, which just says everything.

These poor guys who show up are literally facing pitchforks. The franchisees are incensed. They're incensed both because the situation sucks, and they're like, God dammit, B of A. Take us seriously. You have meddled in our entire businesses. This is in chaos. We got to fix this.

What did 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. They don't have any authorization from Bank of America to do anything. They're just the people sent to face the mob.

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

But unfortunately for their goals, they're very narrow goals that particular morning, but very, very fortunately for all involved, the franchisees, the world, consumers...

Ben: In the long-term, at least.

David: 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 BankAmericard franchisee program manager from a small bank in Seattle, the Seattle National Bank of Commerce, which would go on to become Rainier bank. Ironically, do you know what happened to Rainier bank? You can't make this stuff up.

Ben: No, I don't, but I can guess where this is going.

David: 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 BankAmericard franchisee program is one Dee Hock, and I think you could really say on Dee's day, the founder of Visa.

Ben: 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.

David: No, and we're going to talk about more about Dee in a minute, but just to keep the story going so we don't leave you all in suspense on Dee's day. During the lunch break, Dee 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, design and propose a new way of operating the whole thing?

After some convincing, the B of A guys are like, sure. 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. Probably, almost assuredly, this is a committee we're talking about, nothing is going to come of this.

The whole summit reconvenes after lunch. Dee gets up on stage, not the Bank of America guys, and he proposes this idea to the group. He said, hey, we've got this committee. Rather than us taking a list of grievances back to B of A, what if we try to 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 think 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 Dee thinks he just got authorization to go create Visa.

Ben: A whole new system. He has no power at this point, but he thinks he does. Listeners, now is a great time to tell you about our next favorite company, Crusoe.

David: 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.

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.

Ben: How did 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. 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 real optimization.

Here are some of the things that Crusoe's team has had to do and why it required people with backgrounds in data centers, oil fields, utilities, networking, software, and manufacturing all working together to do it.

(1) They have to trench high bandwidth fiber themselves. 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.

(2) 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.

(3) 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, repairs, and manage the failures when they do inevitably happen. The team has deep datacenter operations expertise to ensure that customer AI workloads operate seamlessly when minimal disruption. They really do plan for these things to happen and have great redundancy in place.

David: It's so cool. 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?

Ben: If you, your company, or your portfolio companies could use lower cost, more performant infrastructure for your AI workloads, go to crusoecloud.com/acquired or click the link in the show notes.

Okay, David, Dee Hock thinks he's got a mandate to go change things up in a big way and create some big crazy new proposal.

David: And he's not wrong. Fortune favors the bold, might you say?

Ben: Yes.

David: To say a few more words about why this is so hard to organize this group of now competing banks to collaborate with one another, you've got multiple banks in the same state that are part of this system.

Let's take Illinois again to stick with this. You've got a bunch of banks in Illinois that are now all part of the BankAmericard payment network, which is intimately linked with their banking operations. If I'm any one of those banks, I would want to say, hey, I want to be the only bank in Illinois doing this. Okay, maybe there are a few others here with me, but I sure as hell want to shut the door to anybody else coming in and being part of this network.

Whereas when you think about growing the value and power of the network, you want as many merchants and card holders in the system as possible. The merchants obviously want as many card holders as possible, and the card holders obviously want as many merchants as possible. That means that you need all the banks, because you need all the merchants, you need all the customers, you need all the banks.

Ben: And you basically want it to happen as fast as possible. Maybe if you only allow 20% of the banks in America, or 20% of the banks in a state to be members of this thing, eventually, they can 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 baking relationship. They already have one, they're good.

David: 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.

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 also if they're going to make this thing actually work, they need to collaborate and work together.

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 this is Dee. He's like, okay, if we could do this, what is the opportunity? We've seen what the opportunity is for Bank of America. That is the shining case study. 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. 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.

Ben: Frankly, all powered by the fact that this is what consumers want.

David: Absolutely. In a certain way, this is, 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, 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 begs the imagination to think about what this could be.

Ben: And if we can grow the pie enough, would B of A be comfortable not owning the whole thing? That's the bottom line here.

David: There's this great passage from him in his book, One From 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, "24 hours a day, 7 days a week around the globe, would have a market. Every exchange of value in the world that beggared the imagination. The necessary technology had been discovered and would be available in geometrically increasing abundance at geometrically diminishing costs.

But there was a problem. No bank could do it. No hierarchical stock corporation could do it. No nation state could do it. In fact, no existing form of organization we could think of could do it.

On a hunch, I made an estimate of the financial resources of all the banks in the world. It dwarfed the resources of most nations. Jointly, they could do it, but how? It would require a transcendental organization linking together it wholly new ways, an unimaginable complex of diverse institutions and individuals." This is the opportunity, and this is what he essentially takes to Bank of America.

Now we have to say a few words about Dee, because this situation is nuts. Dee is a banker. He is running the BankAmericard franchise program at what will become Rainier bank in Seattle. But he's an outsider, he's 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 is 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 BankAmericard program because it is in your self-interest to do so, which almost literally are the words that come out of his mouth in that boardroom. It's just absolutely wild.

Ben: Fortune favors the bold.

David: Fortune favors the bold.

Ben: 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.

David: This is the thing, Dee is an odd duck for sure, but he is amazingly smart. He's basically all self-taught. He's incredibly well read. He started reading every book on his little farm in Utah that he could get his hands on when he was seven years old.

Super importantly—this is a Steve Jobs you-can-only-connect-the-dots-looking-backward moment—he was not very good at sports in high school, so he got into debate instead, and then he also did debate in college when he did his associates degree. 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." Dee basically is the prototypical Silicon Valley founder. He's just a generation too early and in the wrong industry.

Ben: 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.

David: Totally, cut from the same cloth right down to every single stitch. There's one other important aspect to Dee that I think we should highlight here, that enables him and all of Visa to succeed. That's that he's about as far from the man and image of JP Morgan, as you could imagine.

That is what enables this, because if he were the CEO of another bank, a senior executive, or some well-respected person, marching into the Bank of America boardroom, 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.

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

Ben: 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 BankAmericard’s?

David: 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 just beginning, because there are two things now that he needs to do. (1) He hasn't actually figured out how to architect this thing such that it works, so he's got to go do that. (2) Now he has to go back to all of the soon-to-be former franchisee banks and convince them why they should do this.

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 of banks in Illinois that are existing franchisees of the BankAmericard system and say, hey, the new regulations, the new operating laws for this organization are going to be all the banks of Illinois can join, and we actively want to go convince all of your competitors to come join this system.

Ben: I see. 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 or 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.

David: You know what? This is back in our NFL episode.

Ben: Exactly right.

David: When the NFL started negotiating national television rights collectively as an organization, 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.

Ben: 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 the 60s or 70s.

David: It is exactly the same thing here. Okay, how's this whole thing going to work? Dee and a few of his other fellow committee members go to Sausalito, California, just north of San Francisco, just across the Golden Gate Bridge. And they do an off site for a couple of days at a hotel in Sausalito. 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.

(1) Ownership of this new organization, that's going to be called National BankAmericard Inc, the new owner of the BankAmericard program, is going to be in the form of irrevocable, non-transferable rights of participation. You're not going to own stock in this thing. There's no equity. The way that you have ownership and the percentage ownership that you have in the network is by participating in it and the amount of volume that you are contributing to the network.

Ben: Oh, interesting.

David: This means a couple of things. (1) It's a representation and ownership according to value contributed. (2) It's non transferable, so you can't sell it. Any individual bank, if they were to say, 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. There's no way to do that.

Ben: It's basically designed for you to breakeven 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.

David: You're making the assumption that this is a cost-only organization. You're 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 that we are extracting from the merchants and the card holders.

Ben: 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 give a discount to the retailer. 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 a network form.

David: Exactly. The actual legal structure that Dee and his fellow committee members land on for this is a for-profit, non-stock membership corporation.

Ben: That is a mouthful.

David: It is. There's a myth out there that Visa was originally a nonprofit and then was converted to a for-profit before the IPO in 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. If you don't participate in it, you don't own it.

Ben: Say it one more time. It is a for-profit.

David: A for-profit, non-stock membership corporation. Your ownership is your membership.

Ben: Fascinating.

David: It's like a coop. It's like REI or something like that. 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.

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

David: Yes, but the NFL sets all the regulations for how the game is played, and all the teams submit to it.

Ben: That's actually probably the best analogy for Visa, the NFL league organization.

David: I think it totally is. Okay, 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. This is, I guess also how it's like the NFL. Basically this means this is a democracy.

Every member has a vote in determining how this organization runs. Anything that you could conceivably have a vote on, changing our regulations, setting them in the first place, budgets, fees, all this stuff, every single member bank will have a vote. Importantly, every single member bank can call a vote at any time. It's literally a pure democracy.

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

David: They set the threshold at 80% for anything to happen. 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, which, in practice, just gives Dee 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 BankAmericard 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 an implicit forbidding of banks in the network from going off and also forming or participating in competing networks. To borrow a crypto phrase here, no side chains allowed. Everything happens on the main network.

Ben: I see. None of these banks are members of Interbank at this point. These banks are exclusively members of whatever the heck Visa's predecessor name is.

David: National BankAmericard Inc.

Ben: National BankAmericard Inc.

David: Yes. At this point in time, an antitrust lawsuit would change that very shortly. But at this point in time, it's like, nope, you are part of NBI 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're doing in payment card operations needs to route into this network.

Ben: This is a big contract to sign.

David: Totally. Again, this is why you need to paint the picture both to Bank of America and all the other banks. The prize is worth it.

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.

Also like the US Constitution to its citizens, all members agree to be bound by its law, both now and as it is so then modified in the future. 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 leave the democracy.

Ben: 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.

David: That is exactly the pitch. 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 a tour across the country. He goes and meets with all the banks. Bank of America helps them out. They bring senior executives too to help convene meetings with all the banks to persuade them. Every single member bank of the previous BankAmericard franchisee organization, every single one of them signs up for the new organization led by Dee, not a single person jumped ship.

Ben: How many banks were at this point?

David: Over 200.

Ben: Wow.

David: Isn't that wild?

Ben: Once you get to 70 or something, then it seems likely that everyone's going to tip. But in those first 20, the fact that nobody was out is crazy.

David: Totally, and Dee writes about this, too. Bank of America helped him out. They identified the 13 most influential banks, and they can be in the first summits with them of, hey, what do we got to do to horse trade to get you guys involved, and they began to spiral out from there. But every single one, nobody jumped ship.

Ben: When is this, 1970-ish?

David: The process starts in 1968. It all wraps up in either 1970 or 1971. Importantly, we've talked about antitrust and DOJ a bunch here. You would think that this would be setting off massive alarm bells in Washington and with the Department of Justice. They get ahead of this.

Dee goes to see them, and he gives the same pitch to the government. He says, 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. They actually get a letter from the DOJ saying, hall pass, you're good on this one.

Ben: Wow, it's just like the Presidential exceptions for the NFL, 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.

David: America wants both its football and its credit cards. Amazing. That was a key point and 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. Dee is able to say, nope, got the letter right here, we're good.

Ben: Wow. Amazing.

David: Very shortly after this, after the creation of NBI (National BankAmericard Inc), Dee in 1972 is thinking globally from the get-go. He goes and creates a parallel, similar organization of international banks using the BankAmericard system.

Visa was global from basically day one. 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 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?

Ben: For many of them, they'd be right in saying, it actually would be better to be singular and dominant. You look at China Union Pay. That is the dominant way of payments flowing in China. That was, for them, the right move.

David: Totally. Once again, in Sausalito, this all comes to a head. Dee knows that probably not all of the international banks are going to agree to this, and some of them are going to go their own way. 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 out on their own.

Dee gives this nostalgic speech at the end of dinner saying, “Here in Sausalito, looking at the bay, this is where me and my colleagues dreamed up the original vision for what this could be. 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.

He's like, “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.” 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. Under one side, it says in Latin, Studium Ad Prosperadum, which translates as The Will to Succeed, and the other side says, Voluntas In Conveniendum.

Apologies to Latin speakers out there that I'm butchering that. It translates as The Grace to Compromise. He explains this all, and somebody from the crowd yells out, do you miserable bastard, because he just pulled out everybody's heartstrings. And he gets the votes. The next morning, all the holdouts reverse course. They all joined. You can't make this stuff up. It literally happens. The cufflinks are out there, you can google him, he did this.

Ben: He's basically saying, hey, whether you voted for this or not, you're getting to leave with something saying, I'm so great, I had the will to compromise even if you didn't and you are the reason that you killed it.

David: Dee is such a character. 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 the first IBANCO. 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 all the representatives from every region, from every country. There were 25 people on the board.

Dee holds board meetings all around the world, different cities all the time, it's a global organization, whatnot. He invites the spouses of all the board members to come to each location, because it's a family trip, et cetera. Then he gets the idea. He invites the spouses into the board meeting itself.

Ben: What a nightmare.

David: Twenty-five board members plus their spouses in his board meeting. This means two things. (1) Nothing is going to get done. There are 50 people in the room. (2) He needs all these people to behave well together and be generous and gallant. What better way to make sure they're on their best behavior than to have their spouse sitting behind them?

Ben: Wow.

David: 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?

Ben: That's so funny. Let's start doing that.

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

Ben: Definitely not.

David: Amazing.

Ben: I think neither would join for that.

David: Totally, no. They'd be like, no way.

Ben: Okay, how does the name Visa come about? How is the joining of the international and the domestic?

David: Visa is so important. It's not just a rebrand. It has to happen once this international organization is set up.

Ben: Yeah, America can't be the name.

David: Yeah, BankAmericard ain't going to work. Importantly, as we'll get into it in a little bit, this is a huge problem for American Express too. The soon to be Visa knows, if we're really going to 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.

Dee holds a contest internally within NBI/IBANCO to generate a new name, and he offers a $50 prize for the winning entry that is chosen. 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 made out to everyone in the company, which is funny. But then they changed the name to Visa. It's the most incredible name ever created. Nike was so great. This is even better. You cannot have a better name for what this is.

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

David: No, it's not just an English. The name Visa in every, if not almost every language on Earth...

Ben: When you're traveling, you need a Visa for our country, they call it a Visa in other languages too?

David: 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.

Ben: Yeah, the universality. It's a presumptive close, because at this point, they've got 300, 400, or 500 banks. They have 16,000 today. It's quite the presumptive close that it will be universally accepted everywhere the way that Visa would imply.

David: Just in 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.

The Visa name, brand, everything, there are two more levels at which it becomes really important. They do something really, really, really smart. We talked about the need for the universality of a mark and why early Interbank 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, all want their own branding on the card too.

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.

Ben: In the blue stripe on the top of the top third of the card, the bank start cobranding with the name of their bank and some affinity.

David: Yup. This is the brilliance of the Visa model. They were like, it's open. You can do whatever you want up there.

Ben: Right, that seems good for us. We're happy with that.

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

Ben: Wow, and that's how I ended up with BB-8 on my card today.

David: 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 BankAmericards need to be migrated to Visa cards I think within two years of this being declared or something like that.

Some banks start to see this as an opportunity to go poach card holders from other banks. The competition within the network, obviously this still exists, because consumers now know and Visa runs a national advertising campaign. Hey, your BankAmericard is going to switch to Visa.

Some banks in aversion to the Fresno drop, they start sending unsolicited letters to consumers who are already Visa BankAmericard 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.

Ben: Nice of them to, at this point in history, offer applications. I think a hundred million cards got dropped in the United States before the government made it illegal to just start randomly issuing credit to people without their awareness or asking for it.

David: Totally wild. But because of this, a whole bunch of consumers start unconsciously switching the bank that issues their Visa card. 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, 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.

Ben: By the way, this is the thing that pushes Visa ahead of what was, I believe, then called Master Charge. The Interbank had changed Master Charge, they hadn't yet turned it to MasterCard. But in 1976, Master Charge was actually bigger. They had 7400 banks. At this point in history, Visa had about 7000 banks.

Master Charge also had more card holders, 37 million versus BankAmericard's 31 million before they change to Visa. Despite all the deck chair rearranging between the member banks, it was great for Visa to leap ahead of MasterCard.

David: Totally. The number of member banks grows by 20%. The number of active card holders in the Visa network in this one year grows by 45%.

Ben: Wow.

David: Isn't that wild? 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. This really puts them on the path to becoming the dominant global network that they are today.

Ben: It's worth a moment on Amex here, because I would have thought, just like Facebook, WhatsApp, or Google, when you have this 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?

One of the answers of why this open-loop system beat the closed-loop system is, Visa adopts this strategy of the network of networks. They go sign up one bank, that bank can go sign up 100 million customers or 2 million merchants. They get so much scale leverage on signing up just one bank that this strategy makes it so that they have far more scalability than something like AmEx.

Amex also is a bank themselves, so it's highly regulated. They're a bank by this point in history, I believe, on both sides of the transaction. They're both a card issuing bank, and they are a merchant acquiring bank. 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?

This network of networks thing, the open-loop system, while it creates a little bit more of a kludgy user experience because they're the lowest common denominator of data getting passed through the network, it's open source versus something that's wholly owned and operated by a company or 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 rule by fiat when you want to make a change, but it does potentially come with much better scalability, which is the reason why Visa and MasterCard have become the dominant way versus the closed-loop systems.

David: 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. This concept of duality takes hold for the bank's duality meaning they can multi-home on both Visa and MasterCard.

In all the testimony and the case with the DOJ, Dee is obviously 100% against this happening. He doesn't want his banks to be able to join MasterCard too, but he also makes the surprisingly correct argument. He's like, look, this would be a huge mistake, because the US government, if you do this, you are going to freeze the payment networks in the US. Nobody's 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 going to operate in lockstep.

Ben: The prices should be identical for both.

David: All this stuff. The DOJ is like, 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. Dee was right.

Ben: 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 they never work, or they haven't worked yet.

David: Great point. They're in the process of working. It's so great.

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

This actually continued until 1991 for many of their merchants and for Costco. It went all the way to 2016, where they had the exclusive agreement with Amex. 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. Eventually, the whole thing stopped. Flash forward to today, all cards are accepted at basically all locations.

David: This basically concludes the full Visa story. How did this incredible thing happen? We've answered Dee’s questions. Who owns this? Who runs it? How did it start? We could end the episode here, but we've actually really only told you half the story. What we've told you is all the incredible business, organizational, social, human behavior innovations that Visa and Dee created.

Ben: As Dave puts it in Electronic Value Exchange, there is a socio-technical aspect to this company. We've talked about the socio but not the technical.

David: Something that is also true and also, I think, really underappreciated about Visa is it's also a technology company. 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 in 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 does didn't make anybody rich except the banks who owned it and thus, were already rich. But there's an incredible technology story.

Ben: Great point. All right, what is it?

David: Before we get into it, this is actually the perfect time to talk about another great technology company and leader, one of our favorite ones, in fact, Statsig.

Ben: 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. 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.

David: Building reliable infrastructure is a very broad topic, obviously. But one easy way to improve reliability is staged rollouts. 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 two employees, then do 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.

Ben: Thanks to Statsig, though, it is now super easy to do this the right way. If you're building software products, Statsig is the one-stop platform you need for feature flagging, product experimentation, and analytics. The product just works. It makes it super easy to roll out features in stages and provides data on the impact at every stage of the rollout.

Statsig is a critical part of how companies, including financial ones like Brex and also Notion, launch their features to hundreds of millions of users without causing outages or hurting core metrics.

David: It's super impressive. If you're a startup, they have a generous free tier and a special program for venture-backed companies. 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 five million free events a month and white glove onboarding support. Just go visit statsig.com/acquired to get started on your data-driven journey.

Ben: Okay, David, what is Visa's technical infrastructure look like? And how did this come to be?

David: Everything we just described up until now, amazing, incredible, unlikely, one in a million. But all it really bought Dee and Visa was the opportunity. To actually realize what he sold to Bank of America and the other banks of an 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.

If you asked the question of Dee back in 1968—okay, let's assume we do this, and we put one of these soon-to-be Visa cards in the hands of every consumer on the planet—do they actually want to use them instead of cash and checks? The answer to that was probably not.

Ben: Fascinating.

David: 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 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.

Ben: To illustrate, we will link this in the show notes, but there is an old TV segment from 1993, not that old, pretty recent.

David: Ben, I have really sad news, 1993 was 30 years ago. We remember it.

Ben: I know.

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

Ben: Not good, David.

David: Not good.

Ben: 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. 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.

A second guy is interviewed and says something to the effect of, I just hope it doesn't slow things down, because they'll have to call New York, and then they'll have to do the thing. I just hope it doesn't slow things down. The prevailing idea is that cash is fast, cash is easy.

David: 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.

Ben: But even at this point in history, it was viewed as this cumbersome thing rather than a convenient thing to bust out the card. 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 losing some money on the interchange.

David: It's crazy, that was 1993. Compare that to today. 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.

Ben: What are you doing? 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.

David: To get from there to today, three major pieces of technology needed to be built by Visa. One was transaction authorizations. 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, they got to authorize the transaction, and all that, we glossed over one stop gap/band aid that Visa and other credit card networks implemented around authorization.

They didn't actually authorize every transaction. When you paid for something with a credit card in a store, all merchants had what was called a floor limit. The floor limit was any transaction over that limit could not be authorized directly on the floor and say it was $50 or something like that. Anything paid with a credit card under $50 was basically within the judgment of the cashier to say yes or no. Everybody just said, yes. 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.

Above that limit, the cashier had to go call up the merchant bank and say, hey, we got a card here, it's this number, somebody's buying a refrigerator, then that merchant bank would have to look up that card number, figure out based on the card number, what bank issued the card to the card holder, call up the card holder bank, and get somebody on the horn there and say, hey, I've got your caller ID holder, Benjamin Gilbert, his card number is XYZ123, can you look up his credit? He wants to buy a $500 refrigerator. Can you tell me if he's good for it?

Ben: This effectively would be like, have they hit their limit yet?

David: Yes, have they hit their limit? The issuing bank would go look that up. 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, yeah, Ben is good for it or no, Ben is not good for it.

Ben: You had banks talking to banks.

David: People at merchants talking to people at their bank, talking to people at the card holders bank, and then reversing the whole chain.

Ben: But importantly, you had a person at the merchant’s bank calling a person at the cardholder’s bank.

David: Yes.

Ben: 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.

David: This is a big part of one of the first things that Visa builds. That process that we just described could take 20 minutes, and it just didn't work outside of business hours for those banks. Now that BankAmericard is nationwide, soon to be international, imagine you're trying to buy something in Japan, and the Japanese merchant bank calls your card holder bank back in America, closed for business, just no way for that transaction to happen.

Ben: Wow, that's crazy.

David: Not good. Definitely not good. Dee and Visa know that this is the first thing that they have to address. In 1971 right after NBI is formed, Dee starts a project called the BankAmericard 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.

Ben: God, that's always fun before our first board meeting.

David: They're like, well, it's 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. We're going to do this.

Dee, if you want us to remain part of NBI—remember, this is Bank of America, the most important part of NBI—I know you know that part of the operating agreement is we can't really operate outside of the bounds of NBI, but this isn't really outside the bounds of the NBI, this is a separate thing. This is authorization systems. We're going to do this, and if you say we can't do this, we're out. Not good.

Ben: It's true. It's not really like they're issuing new cards or acquiring new merchants. They're being a technology provider.

David: Because they and American Express both see that, hey, this is a really, really, really, really valuable piece of technology. Dee is of course pissed, but what's he going to do? B of A says, take it or leave it. Dee takes it.

As Dee then tells the story, Bank of America and AmEx go out and they try and pitch the other banks in NBI, Interbank, and MasterCard on joining the system. But there are all these problems with it, they don't know how to build technology, and the whole thing dies on the vine. 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, Bank of America, and thus, by association, NBI. Our old friends, the Department of Justice, start sniffing around and they're like, all right, now this is actually collusion and anti-competitive behavior. If you go forward with this, we're going to sue you. And they all abandoned the project. This is huge for Visa, because this means they can build it on their own.

Ben: Fascinating.

David: They do the natural thing at the time. 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, the Accenture's of the day to go build this technology for them. Go build a computerized authorization system for the BankAmericard Visa network.

All the bids come back. Of course, they are all way over budget and way over time. Dee says, screw it, we're going to do it ourselves. How hard can it be? In his very Dee way, he goes and recruits the guy from the firm that impressed them the most throughout the bidding process. It was a firm named TRW and a guy named Ahram Detulian.

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. I'll give you the resources, you come join us, and you'll build out your own tech team here within NBI/Visa. Ahram comes and joins, and starts the core of the Visa tech team. Dee gives him nine months to build this entire thing from scratch.

To do this, (1) it involves building a first nationwide and then ultimately worldwide telecom network so that the electronic communication can happen. (2) Installing computer systems in each of the member banks around the country so that instead of the banks calling the other banks, this can happen over computers. (3) Training the people at the banks on how to use these new computer systems. (4) Maybe most importantly for the long run, building a new centralized data center for Visa in the Bay Area.

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, a huge campus in San Mateo where they build the data center.

Ben: Until I think next year, it's going to go back up to San Francisco when they finished the new building.

David: That's right. I think it's going to Mission Bay. Miraculously, Ahram and his new tiger Visa tech team do it in nine months. And it works. 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—on shorter projects with uncompromising deadlines.

Ben: They will just consume it. Fascinating. Okay, they build what becomes VisaNet in-house. At this point, there's no internet, so it's all just working over telephone communication.

David: Yup, direct networking.

Ben: Amazing. They're just operating the whole network out of this data center in California.

David: Importantly, this is only for transaction authorizations. 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.

Ben: I see. How does the settlement happen at this point in history?

David: That's what's next. That's the next big operational technical problem that Visa needs to solve.

Ben: It's literally moving the money when it needs to be moved.

David: 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 think of the first piece that we just described as the authorization as the front end of a payment card system. The settlement is the back end. The front end piece consumed a lot of phone time and people, the back end piece consumed a lot of paper and time too, maybe more time, but a lot of paper.

Ben: Because you're effectively mailing checks.

David: 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 exponentially. Every new bank node that you add into the system now has to interact with all the other bank nodes, so this is a hard computer science problem.

Ben: It's an n-squared problem.

David: 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.

Ben: N-squared is much worse when you're doing it with paper than with computers.

David: What you really need to do this efficiently to bring it all the way back to the beginning of the episode is a clearing house. You need an automated clearing house. This is unbelievable. A few people had referenced this to us as we were doing the research, but I forgot about it till the end when I got to this point. I was like, holy crap.

Visa builds an automated clearing house for themselves to do settlement electronically over the network. They ended up calling this project BASE II after BASE I, which was the first thing doing authorizations. This happens at the exact same time and place as when the Federal Reserve is building their own ACH system for checks—automated clearing house, 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 clearing house system.

Ben: That is wild.

David: I've never read anything, I couldn't find anything. I've never heard anybody say that they 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.

Ben: Solving the same problem.

David: Solving the same problem.

Ben: Again, the problem is this gigantic list of a whole bunch of transactions just happened. People just agreed to make them happen, and now we need to settle up at the end of the day. If you paid me $100 500 times, and I paid you $100 400 times, what is the net that actually needs to get transferred? That is a far more efficient way. Batching them up is a far more efficient way than transferring the money back and forth every single time, but still can be a complicated problem, especially when you have thousands of banks on each side of that equation.

David: It really is the exact same problem that both of these teams are solving with the same users, the same banks. It's totally wild. Once BASE II 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. The speed is super important. This has lots of implications for float amongst the banks, some good, some bad between the banks, between the merchants, the issuing banks.

Ben: If you're the one that owes the money, you want the payment to take more time.

David: 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. Imagine if this were done manually today. It wouldn't be possible to do this manually today.

Ben: You needed the technology solutions that they've put in place to enable the commerce scale that flows on this network today.

David: It is also during this project that one of the most famous Visa tech team stories in history happens.

Ben: This is a good one.

David: This is in Dave's book. One of the guys—I think he was working on BASE I and then maybe got transferred into BASE II—is thinking about the system, and reliability is so important. This network can't go down. He's like, we actually have a pretty serious vulnerability in the system. He goes to see Dee. The whole Visa organization I think is less than 50 people at this point in time. It's just wild.

He's like, Dee, all this technology we're building, we've got authorizations running, we're in the middle of getting settlement running, the whole Visa network now depends on this technology. We're providing the service off of one computer in one data center, which is made out of wood and sits on a hillside that has dried grass, right by a freeway, below a parking lot that is perched on a cliff. We're also about a mile from the San Andreas Fault.

We really might want to think about having some redundant parallel site data center out there. It is very Dee way. 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. Your marching orders, you are to go move somewhere on the East Coast, I don't care where, find a site where you can build a redundant data center, get it all built, and have it done within six months.

Ben: And invent the technology to keep these things synchronized so they are actually redundant.

David: Dee is not technical enough to talk about that, but this is super important. Up until this point in time, the state of the art in the 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 cold storage. They were 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, if we're going to go through all this trouble and expense of building another data center, let's use it. They re-architected BASE I and completed architecting BASE II to run concurrently across multiple datacenters as shared operations running across multiple data centers, which I think may have been either the first or one of the first examples of that ever happening.

Totally wild, right? I don't know that it was the first, but it was definitely not state of the art before. This whole data center world was still pretty new, and Visa definitely, through ingenuity, invented a way to do this. Of course, this is now how every data center in the world runs today. Pretty amazing. That was data center innovation, which 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. That requires both figuring out some way to make the cards digital or capable of being read in a digital manner and digitizing the point of sale terminal in the merchants.

Ben: The Verifone, traditionally, they had a huge market share.

David: This is when Verifone gets built. There was no Verifone before this. This is huge. This is the holy grail. The BASE I authorization system, that was still only for transactions above the floor limits at the merchant, above $50, $100, or whatever. It replaced the need for phone calls, but it didn't digitize the transactions themselves.

Ben: This is actually, every transaction now is running digitally for authorization over the network.

David: Exactly. Not only authorization, but just think about all the things that happen digitally around transactions, the data, everything. This is the beginning of it all.

The first step to doing this, as we mentioned, is digitizing the cards. That really meant making them machine readable. Before this, the cards were just pieces of plastic with embossed numbers on them. You had to say or type the numbers into something.

Ben: The nice thing about the embossing is that if you run a [...] on it, 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 imprint reader machines.

David: Visa makes the decision. They end up going with the mag stripe technology. This is the magnetic strip on the back of, still to this day, almost everybody's cards out there. There's a whole bunch of drama around this. Citibank had financed a proprietary magnetic solution that they were trying to push on the industry. I think they're a bunch of lawsuits.

Ben: Didn't they tried to hack the magnetic stripe, and then they did just to prove that the proprietary thing would have been more secure?

David: Yes, but it was proprietary. Visa is like, hey, we're not going to pay you, Citibank skiff, on everything that we do here. We take the skiff.

Ben: You pay us a skiff on everything.

David: Exactly. They standardize on the mag stripe for the cards. The next step then is they have to create a digital point of sale terminal. This is pretty far outside the scope of what Visa itself could do. Mass produce a small, inexpensive piece of hardware that needs to get distributed to millions of merchants around the globe.

Ben: That is outside their circle of competence.

David: We mentioned earlier, and you alluded too, this is when Verifone takes off. What Visa does is they create a spec. They're like, this is the spec of what we need to be created. 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.

Ben: I think they had two-thirds of the market at peak.

David: 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 incentivize 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.

Ben: I see. If you use this instead of the zip-zap, you'll get cheaper fees.

David: Exactly.

Ben: That business model carries through today. The way that you charge a card massively affects the interchange that gets charged, whether it's keyed in with numbers, whether it's swiped, or whether it's an ecommerce transaction.

David: One really fun piece of implementation detail around this, just like with BASE I and authorization, where Visa had to build out a telecommunications network amongst all the banks. Now, Visa needs a telecommunications network amongst all the merchants around the whole country and the world. That's another whole step change.

Ben: That's single digit millions of nodes.

David: 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 consumer networking service out there called CompuServe. For folks who either weren't alive in the US at this time or not Americans, CompuServe was an AOL competitor in the early days of the Internet.

Ben: I think they invented the GIF.

David: I think that might be right, yeah. As a consumer, you would pay a monthly fee to CompuServe, AOL, or whatever, and it would be your internet service provider, but also your email and your portal to the web.

Ben: It was a proprietary internet.

David: They somehow get in touch with CompuServe. They realized that CompuServe has this dynamic where they've architected out their network for peak capacity demand, which is probably when consumers are home at night. The rest of the day, they've got all this capacity that's unused sitting on their network. Visa ends up renting CompuServe network capacity to send their digital transactions from merch and point-of-sale terminals. I think this goes on for years.

Ben: That's crazy. I had no idea. That's fascinating.

David: Totally wild.

Ben: Normally, you run into the problem with spare capacity, where the time where people want your extra capacity is when you have none. It's amazing to find two complementary use cases for the same infrastructure that when one is waxing, the other is waning.

David: Pretty cool. 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.

Tons of fraud was happening below the floor limits. If you're charging a $5 transaction to a card, it's just not worth it to the banks and Visa to figure out whether that's fraudulent or not. Now, because it's all digital and instant, they can figure out whether that's fraudulent or not.

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. A massive amount of fraud gets eliminated.

Ben: 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.

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 lower the cost of running the whole thing.

David: Two other results from now having all parts of the system them aggregated digitally. (1) 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 and you tap, whatever, and it just works, and it gets authorized and you get your thing immediately. This is the backbone to all that being possible. (2) For Visa as a company and Visa as a business, they are now fully digital. They can scale infinitely with essentially zero marginal cost.

Ben: We will later talk about what an astonishing financial profile this business has. But for now, just know that at this point, they got to stop spending money. They got to only make every dollar after this basically fell to the bottom line.

David: This unlocks just an unfathomably good business model. Before this, some element of adding scale into the system required manual labor. Now, it's all just ones and zeros.

Ben: Now the toll booth is fully built. It is a high functioning toll booth. It's immovable toll booth.

David: It's digitized. It no longer has a human sitting there. They've got the fastpass system or whatever.

Ben: 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 get into analysis.

Before that, I know there's obviously the IPO event that we want to talk about in 2008 and how the structure of the whole thing changed, but I think you've got a marketing thing that you want to talk about, too.

David: 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.

Ben: They're probably the most associated brand other than NBC.

David: But that's only in America. NBC doesn't mean anything around the globe. Visa is the Olympics everywhere. This happens right around the same time as the digitization of point of sale in the cards. It's 1986. The Olympics, for the first time, 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. There's no event like the Olympics that could really do this. Certainly not the Super Bowl, not even the World Cup, you're missing a large part of America. This is the only thing, where you're going to reach everybody in the world.

Up until this point, one of the main stay 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. 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 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-n kind of guy, especially when the industry in which you're going from one-to-n and your shareholders and board is all some of the most conservative financial institutions in the world.

A lot of conflict starts to erupt. It 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. 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 into 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, 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, 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.

Ben: Which is so interesting, because a signature piece of the BankAmericard 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. 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.

David: 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.

Ben: 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.

David: Yes. You are using debt, you're just not paying interest.

Ben: Yes.

David: Which, hey, that's a great thing to do.

Ben: That's an amazing gift that these banks give the world.

David: 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.

How do we go after American Express? The network is much smaller. The American Express merchant network at the time was about 25%, the size of Visa's. They design a whole marketing campaign around going after American Express. The tagline of the campaign, they showed these exotic locales that the type of customers who would be using American Express, that they would be dining at these restaurants, going to these events, or going on these vacations.

At the end, folks 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. It's so great. And then the second tagline to it was Visa, it's everywhere you want to be.

The Olympics come up. After Amex declines, John and the team get in touch with the IOC. The price tag has gone up to $17 million just for the rights. That's before any media buys, no advertising, it's just for the right to be a global sponsor of the Olympics.

They pulled 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. There are two, there's the Summer and the Winter Olympics, but one year of global events.

Ben: That's about $110 million in today's dollars.

David: Yeah, wild. Way more than they spent on any of the technology projects that we were just talking about.

Ben: R&D costs money, but go-to-market costs more.

David: What's the line? First time founders focus on technology, second time founders focus on distribution?

Ben: Yup.

David: The real kicker, they, of course, become the exclusive payment provider at the Olympics. Everybody now coming to the Olympics, which is a lot of people from around the world that are going to the Olympics, the only payment card provider accepted there is Visa.

They're training all these people that are going to the Olympics year after year after year. It has now been 37 years that Visa is the exclusive payments global sponsor of the Olympics. They're contracted through 2032, so it will be at least 46 years where Visa is the only card accepted at the Olympics.

Ben: That's not that big of a deal, because there's not that many people that go relative to the people that see the media and understand the brand association.

David: Of course. But the reason we're talking about this is 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.

Ben: Love it. David, take us to the IPO. This thing was an organization that was owned but not with stock.

David: A for-profit, non-stock membership organization.

Ben: And now they're an enormously profitable public company. How did we get from there to here?

David: Just about a half a trillion dollar market cap. The precipitating event wasn't actually the banks trying to get greedy and monetize their asset, although they did monetize the asset.

Ben: They were monetizing it just fine the way that they currently owned it.

David: 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.

Ben: It actually is a class action lawsuit that the merchants brought. They basically got fully fed up with interchange. Every 10 years, there's some meaningful merchant push to try to change interchange, and they either do it in Congress, or they do it in a class action case. There's variety of different ways.

This particular class action suit in 2005 is still running today. The numbers have mostly been figured out of how much Visa will owe from a 2012 ruling that then got appealed, so it's 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?

MasterCard had gone public and did not sort through this issue at all. They just said, we're going public and shareholders, yup, there are lots of uncertainty in our future, and we'll see, but buy our stock. That, as you can imagine, did not go well at all.

As they're getting ready to go public, for lots of reasons, basically it was time, they wanted to have some liquid currency that floated for acquisitions. They had to be competitive with MasterCard who was going public. Amex was already public. You can reward and retain talent easier. There are just lots of reasons why you would want this thing to be a standalone entity, especially at this point in history.

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. 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.

David: 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 wasn't primary capital to the company's balance sheet because obviously Visa was incredibly profitable, did not need capital.

Ben: It prints money. Why would you want to raise capital and dilute?

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

Ben: Yup. Now, Visa is owned mostly by big institutional shareholders, the Vanguards and Fidelities of the world. The banks are much smaller shareholders.

David: At this point, Visa's market cap is significantly larger than any of its former member banks.

Ben: It's wild. Dee Hock basically was right. That's the TLDR on this. This thing, this information network that doesn't have to take on any of the risks 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. Let's go through the shape of the business today, and listeners, you can decide.

David and I have made passing references to the idea to this ludicrously cash-generative business. 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 understand it.

Visa's business model. The first thing to know is almost nothing has changed since the 80s to today on how the transactions work. 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 issuers bank. Is this account in good standing to make this transaction or not?

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. Within milliseconds, unbelievably short period of time, no matter where you are in the world and 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.

What is this merchant discount rate? There are a few things at play here. There are interchange fees, and those interchange fees, go to the issuing bank. There are assessment fees or network fees, and that network fee goes to Visa, MasterCard, et cetera. And then there are payment processing fees. 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. Three fees—interchange, network fees, payment processing fees.

Here's what those could look like. 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 can imagine. 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, US credit card.

The merchant is charged a 2% discount off the sale price. It was $100 pair of shoes, you're now making $98. What happens to that 2%? That 2%, the lion's share of it is the interchange. The 1.6% goes to the bank that issued the card.

David: To the cardholder, to the consumer?

Ben: Right. When everybody on the planet is marketing credit card offers to you, they get the lion's share of the interchange. 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 cost in there, too, because they bear all the fraud risk. There are a lot of things they got to do, but they get most of the money.

A small amount on the order of 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 the merchant’s bank. It is important to know, this may also get split with a technology provider. 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 get split between the financial institution and the technology provider.

David: Those are folks like First Data and stuff like that, right?

Ben: Yes. 0.15%–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? 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 obfuscated, but it's not super easy to figure this out.

Visa, let's round it to 0.2%, gets 20¢ of that $100 shoe sale. But the cool thing about their 20¢ is there are basically no variable costs. It's not dealing with fraud. It's not moving heavy data around. 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 are no 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¢ on the $100 transaction, very low variable costs associated with that.

A few caveats on this. Debit is significantly less in most cases, and often thanks to regulatory reasons. 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. Debit cards are going to be less.

Smaller merchants often pay closer to 3% than 2%, because they're just doing lower volume. 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 while small businesses behave like individuals. Because the acquiring bank actually has to do a lot more work and incur costs, they get to make more money.

There's 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. I was talking with Lisa Ellis at Moffitt Nathanson who woke me up to this idea.

The interchange pool has an elegance to it. Since the money never actually gets sent to the merchant, the network and its partner banks or constituent banks can 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 play with. I think an important thing to realize about interchange is that it's intentionally flexible.

David: Which brings up an obvious point that we perhaps didn't highlight 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's bank.

This envelope of value concept makes sense, because those three parties in the middle, Visa and the two banks, need to split up the value. Depending on who is doing what work, it should be split different ways.

Ben: Visa has created these products where it's not just a Visa card. You might get a Visa Signature or a Visa Signature business. I don't even know what they are. They basically have said, why don't we come up with other types of Visa cards that just have higher interchange? The merchants are like, what do you mean just have higher interchange?

David: Your new product is you're charging me more.

Ben: 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.

Let's say we want to tell the issuing bank, hey, for this tier, this Visa Signature, you actually get more money. Well, then they turn around and say, cool, I'm going to go, and I'm going to give better rewards to higher spending, 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.

It's this very interesting, again, envelope of value, I think is the way to describe it. I'm sure the merchants wish they could be more a part of the decision process. But it does, theoretically, enable incentives to be spread around that benefit everyone in the ecosystem.

David: For merchants of scale today, they're cutting on this, too. There's the Alaska Airlines mileage card, there's the Costco card. Merchants are able to, by working with banks, be part of this discussion, too, if you're of a certain size.

Ben: In the olden days, 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. Even though oftentimes, we're the merchant, actually what we're doing is we're helping you distribute cards on the issuing side. Maybe there are cool things we can do when those cards are spent at our establishment where we give extra awards, but it's effectively marketing channel for the issuing bank. They get to split some of those economics.

David: I guess at the absolute very highest levels of scale, you have something like the Amazon and JP Morgan Chase relationship, where JP Morgan Chase is the merchant bank, and JP Morgan Chase is one of the largest issuing banks for cards in the world.

The Amazon Chase credit card that I have—I do all my shopping on Amazon with, and all my shopping at Whole Foods with—is able to give me 5% cashback rewards. Amazon or JP Morgan and in this case, the two of them working together, represent three of the five parties in this transaction. The only people not party to this are the consumer and Visa the network itself. Thus, that's how they're able to do so much special stuff. They can control so much to that envelope of value.

Ben: 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. The issuers and the networks end up with the consumer as their advocate for the system as it exists today. Meanwhile, no retailer owns enough of the total transactions to actually go invent their own better system.

When merchants have tried to go and get consumers to go direct and give them their bank account information, typically consumers won't do it unless they get some very high number of percent back, and that's actually more expensive than the interchange.

The way that you end up having to pay your consumers in order to change their behavior away from credit cards that they love the rewards so much on is to do something non economic. You have to believe that there's some long-term benefit to doing it.

David: 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.

Ben: The reason is basically, no one can ever figure out how to incentivize all the parties that need to change behavior, enough to change the behavior.

David: The merchant, in most cases, is really the only party that is not thrilled with this arrangement.

Ben: 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.

David: 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.

Ben: 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, because all the goods are marked up to accommodate interchange.

David: No matter who's buying the goods and marked up.

Ben: Right. If you aren't someone that has a rewards-based credit card, then your stuff just got more expensive. 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. On average, a cash using household pays $149...

David: Effectively in subsidy.

Ben: Yes, but a card using household receives $1100 in value.

David: $1100? I guess that makes sense thinking about the value of the rewards I get every year.

Ben: It’s, on average, 2% of everything you put on your card.

David: Especially us running a business, we put a lot of stuff on cards.

Ben: That is the other argument that this is 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 the chicken or the egg problem. Every two-sided marketplace is a chicken or the egg problem. BankAmericard solved this when there were no regulations by dropping 65,000 credit lines on unwitting Americans. You can't do that now. How do you bootstrap one side of the marketplace when you can't do something like a drop?

David: 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 effectively create this network themselves.

Ben: What you're basically relying on now is some extrinsic paradigm shift, probably a technology paradigm shift, that enables a new entrant to bootstrap one side of the marketplace in one way or the other to create a new system. Without a new paradigm emerging, this is the system. It's a new paradigm or the government intervention. This is the system that we've made our bed and we're stuck with for good and for bad.

David: I love my rewards cards.

Ben: And look at all of the economic value that it created by enabling ecommerce. It is truly astonishing that without UPS to ship packages and without credit cards to let us pay for things on the Internet, it just wouldn't have happened. It's trillions of dollars of transactions in the economy that would not exist.

The arguments to merchants are that 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 cards 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.

David: 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.

Ben: Yup. 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–$250. There's a pretty meaningful amount of cash that piles up in your establishment, so you need to make sure that you have security. 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 make time to go to the bank to deposit it.

David: The operational overhead associated with that.

Ben: There is a value to providing payment, and there is a cost to whatever the payment method is. Am I saying that the cost is 3%, or in the old days 5% or 7%? Absolutely not. But there certainly is some cost no matter what form of payment is used.

David: Absolutely.

Ben: The business today, what does visa look like? 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?

David: One fun way to think about that I calculated is if you start from 1971, the first full year that the BankAmericard 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.

Ben: Oh my God.

David: Wild.

Ben: It turns out, the world eventually did want to pay with frictionless, fast, and often credit-extending methods. Wow, 17% compounded for 51 years.

David: This is Berkshire levels of compounding that is happening here. It's not like people may think, oh, 17%, oh, I have seen IRRs greater than that. Have you seen them greater than that over 51 years? Not many of those.

Ben: It's amazing. The number of transactions they processed last year was over 190 billion. That is 27 transactions per person on earth, including young children every single year.

David: Hey, man, young children require a lot of commerce, let me tell you.

Ben: So I hear. There are 4.1 billion Visa cards in circulation. Their net revenue is $29 billion. That's up from $22 billion two years ago.

There's an interesting thing that I didn't really realize with Visa, which is it had a hell of a decade. In my head, Visa has been the steady state thing in the world as has MasterCard, but the last decade has been the story of Visa's incredible dominance in revenue, in transactions, and in 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. 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. Of the $30-ish billion that they made in revenue, their net income was $15 billion.

David: 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, perhaps, the largest market out there, certainly one of them is global commerce—both e- and non-ecommerce.

Ben: As Visa would argue, both consumer but also B2B commerce.

David: Fifty percent net income margins on $30 billion in revenue. There it is.

Ben: You might say, wait, if they have 50% net income margins, what is their gross margin? Because is it SaaS level good at 75%–85%? Their gross margins are 98%. There are no variable costs in this business. There are no cost of goods sold. It's crazy.

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 5 or 10 times smaller that have over a 50% net income margin, including MasterCard, which is 43%.

Just to throw some numbers out for people that are not 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 has a monopoly in a market of information. What are the costs involved in that business? Twenty-one percent net income margins.

David: Wow, I would have thought Google will 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 is higher. I didn't realize that.

Ben: It's nuts.

David: It's nuts.

Ben: They do have 27,000 employees. In some ways, it feels an oddly large number. 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?

David: That would be NVIDIA.

Ben: Yeah, so weirdly mirror image.

David: Even NVIDIA doesn't have gross margins like Visa. It is the ultimate solution. I think that is the takeaway.

Ben: Visa does 707 million transactions per day. That is 8600 transactions per second, every second throughout the year. 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.

David: Which is wild. You hear about AWS going down more frequently than you hear about Visa going down.

Ben: That's 16,000 banks in 200 countries. They have six data centers distributed across the world. It's amazing it's only six, to be honest, with that kind of reliability and uptime.

David: Related to that, though, you raised a good point earlier. The data envelope, as opposed to the value envelope, although I guess it is the same, is also not that large, relative to the importance in the value.

Ben: This is not YouTube.

David: The transactions themselves, in part because this was all architected in the 70s...

Ben: That is definitely why. 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 the lowest common denominator protocol that we're shipping very crude pieces of information across.

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. 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?

David: I didn't realize that. Yeah, that is crazy.

Ben: The banks like that, because then the banks get to say, 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 turn my customer into your customer. Why would I do that?

David: One of the things we didn't talk about it 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 transaction is 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 Dee Hock's ouster. The banks were like, no, no, no, no, no, debit cards, that sounds like banking relationships.

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. Obviously, debit cards did eventually become part of the system, but not in the way that it was looking like Dee initially wanted them to.

Ben: It's pretty fascinating that debit came later. Functionally, to me, as a consumer, even though I get floated for a month, my credit card is essentially a debit card, where if I want to, I can turn it into a loan at the end of 30 days.

David: It's a debit card with a lot of benefits.

Ben: 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. 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.

David: That was the domain of the banks. Actually, there was a big fight between Visa and all the ATM networks. Dee wanted your Visa card to also be your ATM card. It makes sense. Why would you have different cards?

Ben: Mine is today. They basically are now.

David: But for many, many years, they weren't, and they certainly weren't back in Dee's day.

Ben: I think part of the reason why debit cards were 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, 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?

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. US 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.

David: Wow, that's a lot more billions.

Ben: That's a lot more billions. 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. No one was allowed to make usurious loans, and North Dakota was the first to drop them. 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. That's the sad history of why your credit cards always get mailed from there.

David: There's no denying, that is really sad and unfortunate on the consumer debt side of all this. On the fee side, on the one hand, I'm tempted to say, oh, obviously tripling the amount of fees that merchants are paying for credit card processing over 10 years, that's ridiculous.

Ben: But transaction value has meaningfully gone up, too. Gross volume is way up.

David: Yes, transaction value. But also, I have to imagine a big part of that is share of commerce that's happening as ecommerce versus traditional commerce. The credit card networks, really are providing a huge amount of value to ecommerce, as you were saying earlier. They are to physical commerce, too. Nobody wants to pay with cash or check anymore these days, but ecommerce, there's no other way that that can happen. Does it make sense that the credit card networks and their associated parties take more value in that world? I think so.

Ben: There has 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%. 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.

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

David: And it makes sense to just do the thought exercise. Let's say you're a physical merchant, and you decide to walk away from Visa and all the credit card networks. Let's say your only cash or check. You probably are committing suicide as a business, but you could operate. If you're providing enough value like ATMs exist, you can operate.

Ben: There are plenty of cash-only bars.

David: 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.

You could use PayPal, I guess?

Ben: But you're paying just as much for that. Unless you are literally getting people to type in their account and routing numbers, you're paying credit card-like fees to accept payments on the Internet.

It's worth sharing. While we're in the revenue streams here, the money that card issuers make, only a minority of it is actually from the interchange. 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.

David: 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? Take in deposits, make loans with them, make money on the interest rates on those loans. Nothing has changed in the banking industry.

Ben: Visa's incentives are more transactions, because we want more 0.2%. The issuers’ incentives are carry a balance, because that's where we make most of our money.

David: 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.

Ben: 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 and value added services is all brand new high margin products that they've invented in the last 10 years or so, that they're trying to sell to merchants.

David: High margin product. There's no higher margin product than the core product, brand new, also high margin products.

Ben: 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 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, that basically covers the high-level stats on the business today so that we can go into analysis. You can have a general shape of the business we're talking about, but 11th largest company in the world, valued at half a trillion dollars, around 30 billion in revenue, and they get to keep half of that at the end of the day, and they take no financial risk, and they are just moving information around. Mind-blowing.

David: They get to keep half of that after taxes at the end of the day.

Ben: That's wild.

David: There's actual cash in the bank.

Ben: Right. This is not EBITDA, this is net income. Crazy. All right, David, power. Does that sounds good to you?

David: Let's talk power.

Ben: All right, 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, be more profitable than their closest competitor, and do so sustainably.

David: It's an interesting one here.

Ben: This is a lot like the Lockheed Martin episode, where I'm actually not sure we can apply the formal definition where we say, what enables them to be more profitable than MasterCard, because together they're like this government enabled duopoly.

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 the five of them collectively to out-compete new entrants? 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.

David: 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 up market in perception, and partnering with the Olympics.

Ben: It's funny that even though it's a commodity, them and MasterCard are commodity, they somehow position themselves as more premium.

David: Sugar water is a commodity, too. That's why brand matters in these markets.

Ben: 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.

David: The brand is like the Intel Inside. It's an ingredient brand. Yes, the banks make the decision, but really the consumers make the decision, because if consumers have a preference for Visa or MasterCard, they'll demand it from the banks.

Ben: 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 what 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.

David: I think today, that's true. But I do think, based on the research and I was maybe too bias towards Visa, but I think Visa did accelerate past MasterCard. I think there was a strong brand element of that. I think it's more equal today.

Ben: It's interesting. It's funny how it used to feel more like you were getting a Visa card that was somehow 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 Visa or MasterCard audit.

David: Totally agree.

Ben: Or a merchant. 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.

David: I think there's totally also a story that's beyond the scope of this episode, about how banks and in particular Chase aid American Express' customer base over the last set of years.

Ben: In part, that's just bad strategy on Amex's part that, 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. How do you win as a niche player? You need to retain your highest value customers and your highest margin customers.

David: 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.

Ben: It's true. I think there are less affluent people in our generation who have Amexes versus the premium products from banks or merchants.

So Visa and MasterCard together, which of the seven powers do they have today? If you want to also do the analysis, which did they have early days? I will start. I think there's an easy no brainer that you have scale economies. Any investment that Visa or MasterCard makes get amortized across 16,000 member banks, across 4 billion cards, across half the humans on the planet, or whatever it is.

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 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.

David: Tell me if you think otherwise on this. I think there's basically 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 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.

Ben: 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.

David: Yes, of course, But yeah, you simply must, if you have those margins at that revenue scale, have scale economies.

Ben: That's a great point. Okay, explain to us the network economies.

David: This is even better than the classic two-sided network. This is the classic five-sided network effect.

Ben: 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.

David: 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 are plenty of single-sided networks. Facebook is a single-sided network. At least on the user base side, there are advertisers. You could argue that's a second side, but everybody's the same node in the network.

There are two-sided networks. Airbnb is the classic one or something like that. There are three-sided networks out there, probably some four. Clearly, this is an example of a five-sided network. But as you add sides to the network, the number of successful examples goes way, way, way, way, way down because it's just so hard.

Ben: Because they're way harder to pull off, but they're so locked in once they're in.

David: 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.

Ben: Totally agree on network economies. I don't think there's much process power. I don't think there's really any switching cost. In fact, that's probably a bear case, too. Any card company today, especially with digital payments, you don't even have to carry cards with you anymore.

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 pops the top of my wallet. I think there are 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.

David: This is true after the first antitrust lawsuit when duality was introduced and banks could multihome. Before then, yes, after then, zero.

Ben: Before then, there's interesting analysis to do between Visa and MasterCard. Now there is none.

David: Which is exactly what Dee Hock predicted.

Ben: Is there switching costs between the Visa, MasterCard oligopoly and someone else? I suppose, yes, there isn't another option. If you were a bank that wanted to issue a bunch of cards that weren't Visa or MasterCard...

David: I'm going to guess there's Discover.

Ben: No, that's a closed-loop network, too. They are their own bank. Pretty interesting.

David: Nobody else. Counter positioning, the last one, none now, I think.

Ben: You almost can't have it as an incumbent.

David: 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.

Ben: That's absolutely right. All right, I think that's it for power. Playbook?

David: Let's do it.

Ben: 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.

David: Well put. I'm going to do my best Charlie Munger. I have nothing to add on that one.

Ben: There you go. The next one that I think is pretty interesting is Visa, as I read their whole annual report, have a narrative around these new things that they're launching, especially the value added services being good for consumers. Everything that is good for consumers, often for security and privacy, is also good for Visa. That is the playbook that Visa runs.

They figure out, what is something that we can advertise as a benefit to you that also helps us either increase number of transactions, margin, or lock in? That is the way to analyze their entire product suite. You hear something is launched, you're like, okay, which of those three needles isn't moving for them? That's my main one. I've got more analysis to do in bear-bull, but what do you have?

David: The two that jumped out to me are one, just like our NFL episode, just like our benchmark episodes, communist capitalism.

Ben: Yes. The best example?

David: Yes. (1) It is the best example of communist capitalism, certainly, that we've ever studied, probably in the world, hard to imagine what better. (2) It's like a special breed of communist capitalism.

You're going to laugh at this that I foreshadowed. Democratic communist capitalism, the ultimate irony. It's this idea of like, yes, it's capitalism. Its competitors banding together to create more value than they could alone, but this is at a massive scale. With Benchmark, it's five partners. With the NFL, it's 30–32 teams, something like that.

Ben: This is our whole global financial infrastructure that is decided to do this together.

David: 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. Ben, you and me together, Acquired is communist capitalism, for sure. If we were starting a venture capital firm with three of our friends, can we pull it off with five people? Sure. Could we pull this off with 200 banks? No.

Ben: Especially when you're not starting from scratch. The 200 banks that they pulled it off with, they all had an agreement in place where they owned a franchise. You had to go to them and say, you have to forfeit your franchise and instead sign this other agreement. You're not starting from zero, you're starting from negative.

David: Bank of America, the franchisor, Dee had to go to them and say, hey, you're going to forfeit the whole asset.

Ben: That's a great point.

David: That's one. The other two, I think it's the twin stories of innovation here, which really had tipped 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.

Ben: Super true.

David: And right here in Silicon Valley.

Ben: Who would have thought that success story out of Silicon Valley? They've gotten so beat up over the last few years, they really deserve this.

David: That's what I find so funny. Nobody knows that this is a Silicon Valley company.

Ben: Do you ever run into these people, hanging out around San Francisco?

David: Exceedingly rarely. 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 Valet who are the Patreons with donors, the longtime chairman of the board of The Valet 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.

Ben: 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.

David: Yes.

Ben: Fascinating. All right, do you want to do value creation and value capture?

David: Yes.

Ben: 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.

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.

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 and should achieve pricing power if it can position itself to do so in a market.

David: We're looking for high gross margins to invest in.

Ben: 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. Other than a big technology innovation that shifts the paradigm in a huge way, 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 seemingly indefinitely.

David: There's a lot more to talk about in bear-bull there.

Ben: The worst place that this shows up is the couple of percent plus 30¢ that feel small.

David: Yeah. The 30¢ is really pernicious.

Ben: It's pernicious especially for small transaction items 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 their line item of what they had to pay in payment processing fees is actually larger than what they paid for beans.

David: Wow, that's crazy.

Ben: Even large retailers that run pretty thin margins, it is often the case that their EBITDA is the same size as their card processing fees.

David: Anytime where your average transaction value is less than $10, that 30¢ is a killer.

Ben: That's where the 30¢ 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.

The only place where this doesn't kill you is if you're a high gross margin, high ticket item business. That's when you can be like, card fees, whatever. But if you're selling too high priced of goods, then you often get into a scenario where you are doing less frequent transactions, more considered purchases, and you can go around the system.

This is a bear case on Visa. Are they ever going to participate in real estate or cars? No, not at these interchange rates. Why would anyone ever buckle to pay these things for things that cost $1000 or more?

David: Before we go into bear and bull, where I know we have a lot of talk about what could potentially disrupt Visa and MasterCard, I think it is worth just one minute on the value creation side of this. I really think you hit the nail on the head a while back when you said ecommerce.

Yes, all that other stuff we were just talking about, the 30¢, 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 ecommerce really would have happened. There's plenty of other value creation out there too, lots and lots and lots, but let's just take ecommerce. I feel like this is Passover, like that would have been enough. Ecommerce would have been enough, because I don't think it would have happened without credit cards.

Ben: Or at least it would have been many years behind because you needed to invent some new mechanism to enable payments over the Internet.

David: Yup, and PayPal and all that, but that would have been a long slog if PayPal had to get an adoption for all payments on the Internet to happen.

Ben: That's a good point. 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 blind to.

David: Really? I missed that in the research. That's quite surprising to me. That leads us right into bear and bull.

Ben: PayPal is an especially interesting company right now, because they're strategically pretty well-positioned, but they're going through a leadership transition. You don't actually know what the new strategy is going to be yet.

David: Okay, bear and bull. Let's do it.

Ben: Okay, bear. Before I actually go into it, a tongue in cheek joke is if they ever get to stop making the insane margins that they do on FX transactions, that's the ultimate bear case. It's something like a hundred times the margin that they make on domestic ones.

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. That's worth knowing when you're trying to understand the shape of the business. 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.

At this point in global history, which is 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.

David: We're on the back half of the adoption curve.

Ben: That is this tailwind that has been with Visa forever. 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 flatline, 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 as the years progress.

My next one is closed-loop systems like Alipay and Tencent's ecosystem, to the extent that super apps actually happened in the US the way that they did in China. You'd be telling a very different story. 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.

People often will cite, 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 managed to initiate a payment flow digitally that doesn't involve a card network.

David: The two things I would want to investigate on the could what happened in China happened here. (1) Just the build out of infrastructure happened more concurrently in China. Payments infrastructures already built out here, technology infrastructure got built out afterwards. Whereas it all happened all together in China. (2) Maybe more important is just the government influence. I doubt the Chinese government wanted Visa, ostensibly American corporation, powering their payments.

Ben: 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, it uses the CUP rails. But if you go internationally where there is no China Union Pay terminal at my local coffee shop here in Seattle, if you were to travel here and swipe it, it runs on Visa, but they have the national security benefit and the economic benefit of for people in China transacting in China that runs on China-owned payment rails.

David: I'm going to guess, that is an associated bear case, China in and of itself. And could other governments around the world start adopting similar postures?

Ben: 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. When you just initiate a bank transfer, there's no insurance around the chargeback, a refund, or anything like that, but you could build payment type features on top of it. Real time payments are starting to become a thing in a lot of countries.

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, Pix had very fast uptake. UPI in India is another one. The UK has something called Faster Payments. This can get especially scary for Visa when they start working across geographies.

Singapore and India have already linked to theirs up. That is a method of transferring money between countries that has nothing to do with Visa. That, 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?

David: Technology, infrastructure, and ecosystem is getting built on this, obviously, around the world and here too. Our great friends of the show, Modern Treasury, are enabling a lot of this.

Ben: Totally. Apple, I just think it's a general bear case here, but here's my specific implementation.

David: Specifically Apple Pay, right?

Ben: Yeah. On an 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. 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, MasterCard, Amex, 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?

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 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.

David: I actually don't even think they need to do that. They're Apple. They just use iPads. As part of Apple Pay, they would have Apple Pay for merchant software that would be on the iPads.

Ben: No, that's too hard. That adoption curve sucks. I think they would pay Square's market cap, or Blocks. It's $30 billion or something right now. Apple could totally just go buy Block, do this overnight, and light up all the existing merchants.

David: True.

Ben: What else are you going to do with $250 billion of cash? 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.

David: Agreed. I have a counterpoint to that, but I'll save it for the bull side of the ledger here.

Ben: Okay. 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. The card underneath it is not terribly important, other than the fact that you need to remember to auto pay it and ideally, it has the one with the best rewards. 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 forgot about it, and they pay.

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. I don't know exactly how that will manifest and 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 consumers' mind than they used to based on the fact that we now have mobile payments.

David: Apple Pay and Google Pay along with it are, I think, by many, many, many orders of magnitude, the most successful quasi alternative payment systems that have actually gotten install bases.

Ben: Google Pay is very popular, too.

David: Yeah, but what else? There have been other alternative payment systems over the years, and none of them match at least domestically in the US, Apple and Google Pay.

Ben: Yup. My TLDR on the bear case is the core business matures so that tailwind lessens. The debit networks gets chipped away at. More rails emerge for each use case that, 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, and the future might get eaten by other people, and they spend bunch of wasted money trying to figure it out. Those were the best bear cases I can come up with.

The funniest thing is—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.

David: Totally.  I think the obvious bull case is, this is just an incredibly powerful network effect that's 50 years in the making, is five-sided, and Lord knows, I can't think of any other five-sided network effects.

Ben: Riding a secular increasing market.

David: Riding a secular wave, and nobody has ever broken it, and past performance is a strong indicator of future performance in this domain.

Ben: The corollary of that, too, is lots of people have had lots of similar bear cases that they've said five years ago, ten years ago, and none of those things have come true. Visa has just continued to grow it low double digit percent growth every single year. 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. That's the most obvious.

Here are the few that are most evident to me that are potentials on top of their core business, because it is true that interchange is facing downward pressure. We talked about all the way from 7% down to 2% had change. 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 tokenization.

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 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? Those are high margin for us. 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. There are tokens on their network.

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. This is my favorite one from there. Remember the NVIDIA slide of the trillion dollar TAM?

David: Yup.

Ben: Here's Visa's version. All of payments is about $200 trillion of volume, and cards are only $20 trillion. Here, we've been playing in this tiny little fraction of the available market.

There are 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 2½% interchange on a company invoicing another company for a million dollar services provided thing, but there are elements of B2B that do have interchange. If you're issued a Ramp or Brex card, and you go swipe it, that's a B2B transaction. 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.

Also, we've been talking a lot about consumer to business. When I decide to pay for something at a business, if you flip that business to consumer, that is a $30 trillion TAM or a $30 trillion volume addressable opportunity. You can think of that as an insurance company needs to 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 Uber needs to pay their drivers. There's a whole business they've created called Visa Direct, which is the business to consumer push-based payments, which is a new foray for them.

The last one is just expansion of cross border payments if they can do more international transactions. That is hugely, hugely profitable. That is me trying to faithfully represent the bull case that Visa paints for their shareholders. David, these bull cases are so easy. You should read the annual report. The whole thing's a bull case.

David: Right. One other additional I was going to add on bull case as a response to the Apple and by association, Google. Pretty much everybody we talked to pointed out as the number one most obvious bear case for Visa right now is Apple, 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.

Ben: It’s a bull case today.

David: Yeah, it's a bull case today. There may be nuance that I'm missing here, but if you play out how 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. 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?

Ben: They could become like a Stripe.

David: I guess so.

Ben: Or like a Square. They're the technology providers, and they have merchant acquirer banks behind them.

David: 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?

Ben: It depends. Apple will eventually saturate their market. They are looking for what the next frontier is in $200 trillion of volume moving around the global economy.

David: I think, yes, absolutely. I'm not saying this won't happen, but Tim Cook board-level discussion on this. Let's play out the Dee Hock 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%.

Ben: 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.

David: Great point.

Ben: The Vision Pro will come out, and we'll have to see if that is the future or not. But post that, they're going to do a car, or they're going to go into payments.

David: They got to keep going after bigger and bigger markets. You're right.

Ben: The cute Apple that we know of years past is gone, and we just have to think about, what would a good capital allocator do with their strategic position?

David: True. I'm not making the argument that they're still the cute Apple. I'm just saying, 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.

Ben: 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 BankAmericard today?

David: I did not. Is it a branded Visa product from Bank of America?

Ben: 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. The beautiful irony that will tie a bow on this whole episode is the BankAmericard credit card by Bank of America runs on MasterCard's network.

David: As you started to set that up, I was like, I know where you're going with this. Interbank for the win.

Ben: We'll link to it in the show notes. Get yourself a BankAmericard, and run your transactions over MasterCard's beautiful, stellar network.

David: Wow, that is hilarious. What a great place to leave the story.

Ben: 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.

David: That's a crime against the Internet and business history. What a story, man.

Ben: Truly. Okay, carve outs?

David: Carve outs.

Ben: Mine is available on Netflix. It is a show called I Think You Should Leave. I have not laughed this hard in a long time. Each episode's 15 minutes. It's three comedy sketches with a guy named Tim Robinson as the brains behind it and is in many of the episodes.

David: We were talking about this at our drinks in New York.

Ben: If I were you, listeners, and you haven't watched this yet, I would go to Season 3, Episode 1. 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. He's so outlandish.

It's 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, a dating show, or a commercial, feels like the appropriate thing that they're trying to emulate. It's just really good.

David: It's amazing. I'll have to check it out.

My carveout is a book. I think this is my first fun fiction book in a while. Mistborn by Brandon Sanderson. It is an 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 a great friend of the show, Guy Podjarny, the founder of Snyk the 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.

Ben: Focused on developers, right?

David: Yeah. Developer security. You see their billboards all up and down 101 here in San Francisco. He recommended it to me a while back, and it took me a while to get to it, toddler parenting. 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, I highly recommend it.

Ben: Awesome. We definitely have a few thank yous on this one. 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 general, high level thoughts on payments industry.

Thank you to Lisa Ellis from Moffett Nathanson. Lisa did an amazing interview with Ben Thompson a few weeks back if you are a Stratechery 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. 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 Eidelson, 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/slack. You should check out ACQ2. In particular, our next episode, it is not out yet, but it 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. Gaurav has spent his entire career as a founder and investor in fintech companies. He actually gave a talk on the history of credit cards that we used for research in this episode. Check out ACQ2, search and subscribe to any podcast player.

Next week, maybe two weeks, our interview with Gaurav will come out. Be sure to check it out. With that, check out the merch store, acquired.fm/store. You can support some of this—I'm wearing the shirt right now—sweet swag around.

David: You can pay some interchange fees.

Ben: That's right. With that, listeners, we'll see you next time.

David: We'll see you next time.

Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions.

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