Dive into the founding story of Visa in the latest "Acquired" episode with Ben Gilbert and David Rosenthal, where they explore the birth and evolution of the modern credit card. The journey begins in 1958, when the Bank of America's daring experiment in Fresno, California, set the stage for today's ubiquitous financial tool. Mailing out 65,000 credit cards led to initial losses and a high default rate, but perseverance turned the tables, with BankAmericard—Visa's predecessor—becoming the preference of both merchants and consumers across California.
Experience the challenges and triumphs of Visa as it competed with early versions of MasterCard, navigated demands for transformation at a pivotal summit, and witnessed Dee Hock's impactful leadership. The ingeniously built VisaNet, and the subsequent clearinghouse and POS digitization, underscore Visa’s commitment to innovation. These tech milestones paved the way for a future-ready digital payment system, demonstrating Visa's instrumental role in shaping a landscape where electronic transactions are instantaneous and secure.
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In 1958, the Bank of America launched a radical initiative in Fresno, California that led to the creation of the modern credit card. They mailed out 65,000 unsolicited credit cards to their entire customer base in Fresno, which represented a significant portion of the city's population. This action, while pioneering, resulted in confusion, a 22% default rate, and $20 million in losses due to fraud. However, Bank of America persisted, and the program exploded in growth throughout California. Within the first year, 20,000 merchants and two million cardholders jumped on board, outpacing the competition and causing a shift in consumer bank preferences for access to the Visa cards.
To compete with BankAmericard, today known as Visa, early iterations of what would become MasterCard were formed under the name of the Interbank Card Association. This association initially faced challenges with its brand and identity, which hindered merchant and consumer adoption. Despite a rocky start, Master Charge, as it was later known, managed to overcome these difficulties to become a major force in the financial sector.
A pivotal summit concerning the BankAmericard system led member banks to demand significant changes. Dee Hock was instrumental in driving these changes, convincing Bank of America to give up control of the system, which resulted in the formation of National BankAmericard Inc. (NBI), transforming it into a cooperative managed by the banks. The establishment of NBI was a critical step in stabilizing and democratizing the credit card system, due primarily to the efforts of Dee Hock.
Visa revolutionized the payment industry with the introduction of several technological innovations. VisaNet emerged as a result of Dee Hock's vision and Aram Tatulian's execution, a nationwide network that automated transaction authorizations. The BASE clearinghouse automated settlement processes, cutting the average time from a week to overnight, saving money and resources. Although details on POS digitization were minimal, its importance in efficiently batch-settling transactions was acknowledged as a key to Visa’s infrastructure, significantly reducing fraud.
The company's foresight in data center architecture and the adoption of magnetic stripe technology allowed every transaction to be processed digitally by 1986, streamlining processes and scaling up with zero marginal cost. Visa's early investments in digital infrastructure have powered the modern digitized payments industry, supporting widespread electronic payment methods and handling the global demand for immediate transaction processing.
1-Page Summary
In 1958, the Bank of America in San Francisco, the largest bank in America at the time, embarked on a pioneering initiative known as The Drop in Fresno, California, leading to the birth of the modern credit card.
As part of this innovative strategy, the Bank of America mailed out 65,000 unsolicited credit cards to its entire customer base in Fresno. At the time, Fresno had a population of about 200,000 to 250,000 people, highlighting that a significant portion of the population banked with them. These credit cards, mailed indiscriminately with the same credit limit, were the first of their kind for many residents, who were largely unfamiliar with what the cards were or how to operate them. This confusion initially led to a high level of fraud and a 22% default or delinquency rate among recipients in Fresno.
Despite the initial losses, amounting to $20 million due to fraud and uncontrolled consumer behavior, Bank of America absorbed the costs and pushed forward with their credit card program. This was predicated on there being no initial financial controls or risk underwriting, leading to an explosion of banking and spending behavior that had not ...
Planned the "Drop" in Fresno
The podcast discussion takes a look at the early days of Master Charge, known today as MasterCard, highlighting its mission to compete with BankAmericard (now Visa).
Initially, the Interbank Card Association faced challenges due to its lack of a cohesive brand and identity. This issue proved to be a significant obstacle for the company.
The lack of a common brand undermined the adoption rates among merchants and consumers. This difficulty in est ...
Formed Interbank to compete with BankAmericard
During a critical summit addressing the issues of the BankAmericard system, substantial changes were demanded by member banks. Dee Hock, playing a pivotal role in the negotiations, led the effort for these changes.
Through Hock's leadership and persuasive arguments, he successfully convinced Bank of America (BofA) to concede control over the BankAmericard system to member banks. This decision aimed to stabilize the credit card system, which had been marred by various operational challenges.
The resolution of these negotiations led to the formation of National BankAmericard Inc. (NBI), a member-owned entity. This structural refor ...
BankAmericard summit demanded changes; Dee Hock led the effort
...
Visa's evolution from processing paper sales drafts to managing electronic transactions catalyzed a series of technological breakthroughs. The development of a built authorization system (BAS), the implementation of a clearinghouse (BASE), and the digitization of the point-of-sale (POS) radically transformed the payments industry.
Recognizing the inefficiency of the bank-to-bank phone calls required for credit approval above a certain transaction limit, Visa set out to address the issue technologically. Before Visa's innovation, transactions below the floor limit were approved without authorization, whereas others needed verification from the bank in a time-consuming process. Visa, spearheaded by Dee Hock and initially paired with Bank of America, attempted to build a computerized authorization system internally after dissatisfactory bids from external firms.
Aram Tatulian from TRW was recruited to lead the effort within Visa. Against formidable odds and within a rapid nine-month timeline, Aram and his team built the necessary systems and established a centralized data center in San Mateo, which remains part of Visa's headquarters today. The system that emerged was VisaNet, a nationwide telecommunications network facilitating electronic transaction authorizations across member banks.
The clearinghouse, or BASE, revolutionized electronic settlement by automating the once laborious task. The introduction of BASE reduced average settlement time on the Visa network from a week to overnight, significantly impacting float and saving approximately $15 million in labor and postage costs in the first year alone. The rapid settlement process became a cornerstone for enabling scalable commerce on the Visa network.
While details of POS digitization were not specifically provided, it was identified as a crucial third component in Visa's technological infrastructure. This innovation aimed to address the problem of batch-settling numerous transactions efficiently and introduced a significantly reduced fraud rate by eliminating the need for phone calls for each transaction.
The system's reliability and vulnerability were of utmost concern. Visa responded by architecting multiple data centers, reconfiguring BASE to allow for shared operations, and implementing redundancies to maintain constant uptime. This technological foresight may be one of the p ...
Built Authorization System (BAS), Clearinghouse (BASE), and Point-Of-Sale Digitization (POS) (Key Tech Innovations)
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