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Visa

By Ben Gilbert and David Rosenthal

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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Visa

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Visa

1-Page Summary

Planned the "Drop" in Fresno

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.

Formed Interbank to compete with BankAmericard

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.

BankAmericard summit demanded changes; Dee Hock led the effort

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.

Built Authorization System (BAS), Clearinghouse (BASE), and Point-Of-Sale Digitization (POS) (Key Tech Innovations)

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

Additional Materials

Clarifications

  • The "Drop" initiative by Bank of America in Fresno in 1958 was a pioneering move where the bank mailed out unsolicited credit cards to a large portion of the city's population. This action led to confusion, a high default rate, and significant losses initially. However, it ultimately sparked the growth of the modern credit card industry, with the program expanding rapidly and reshaping consumer banking preferences.
  • The Interbank Card Association faced challenges with its brand and identity, which initially hindered merchant and consumer adoption of its credit card offering. These challenges included establishing a distinct positioning in the market and building trust among consumers and merchants. Overcoming these hurdles required strategic marketing efforts and improvements in the card's features and benefits to compete effectively with BankAmericard. Despite the initial difficulties, the association eventually rebranded as Master Charge and successfully established itself as a major player in the financial sector.
  • At the BankAmericard summit, member banks demanded significant changes that led to Bank of America relinquishing control of the system. This resulted in the formation of National BankAmericard Inc. (NBI), which transformed the system into a cooperative managed by the banks. The changes aimed to stabilize and democratize the credit card system, marking a pivotal shift in its governance and operation. Dee Hock played a crucial role in driving these changes and advocating for a more collaborative and inclusive approach to managing the credit card network.
  • Dee Hock played a pivotal role in convincing Bank of America to relinquish control of the BankAmericard system, leading to the formation of National BankAmericard Inc. (NBI). This move transformed the system into a cooperative managed by member banks, democratizing its governance. Hock's efforts were crucial in stabilizing and restructuring the credit card system, paving the way for its future success. His leadership and vision helped shape the evolution of the BankAmericard into the widely recognized Visa credit card network.
  • Visa introduced VisaNet, a nationwide network automating transaction authorizations. The BASE clearinghouse automated settlement processes, reducing settlement time and costs. Point-Of-Sale (POS) digitization streamlined transaction processing and batch settlement efficiently. These innovations helped Visa modernize payment systems and reduce fraud.
  • Visa's technological innovations, such as VisaNet for automated transaction authorizations, streamlined the process of verifying and approving card transactions in real-time. The BASE clearinghouse automated settlement processes, enabling faster and more efficient processing of payments between banks and merchants. These innovations significantly reduced the time and resources required for transaction authorization and settlement, ultimately enhancing the overall efficiency and security of the payment system.

Counterarguments

  • The unsolicited mailing of credit cards raised ethical concerns about privacy and consent.
  • The high default rate and losses due to fraud suggest that the initiative may have been poorly planned or executed.
  • The expansion of the program might have been driven by aggressive marketing rather than genuine consumer demand or satisfaction.
  • The formation of the Interbank Card Association and Master Charge could be seen as a reactive rather than proactive move in the market.
  • The success of Master Charge (MasterCard) might have been due to other factors not mentioned, such as marketing strategies, partnerships, or consumer preferences.
  • The summit's demand for changes in the BankAmericard system could indicate underlying systemic issues that required significant overhaul.
  • While Dee Hock's role was pivotal, it may overshadow the contributions of others who also played important roles in the transformation of the credit card system.
  • The technological innovations introduced by Visa, while groundbreaking, may have also led to increased consumer debt and financial risk.
  • The adoption of magnetic stripe technology, while innovative at the time, has since been surpassed by more secure technologies like EMV chips and contactless payments.
  • Visa's early investments in digital infrastructure, while beneficial, may have also contributed to the exclusion of certain populations from the financial system due to the digital divide.
  • The narrative may understate the complexity of the financial ecosystem and the interplay of various factors that contributed to Visa's success.

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Visa

Planned the "Drop" in Fresno

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.

Launched credit cards unsolicited to 65,000 customers

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.

Initial losses but eventual explosive growth in California

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 ...

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Planned the "Drop" in Fresno

Additional Materials

Clarifications

  • Mailing unsolicited credit cards involves sending credit cards to individuals without their request or application. This practice was used by the Bank of America in Fresno as a pioneering strategy to introduce credit cards to a large customer base. Recipients received these cards without actively seeking them, leading to confusion and challenges in understanding their purpose and usage. This approach aimed to jumpstart consumer adoption and drive rapid growth in the credit card market.
  • Bank of America's initiative in Fresno was significant as it marked the introduction of the modern credit card through the unsolicited mailing of credit cards to a large portion of the population. This pioneering move led to the birth of the credit card industry and transformed consumer banking behavior in the United States. Despite initial challenges such as high fraud rates and defaults, the initiative ultimately paved the way for the widespread adoption of credit cards and fierce competition in the banking industry. The impact of this initiative extended beyond Fresno, catalyzing a shift in consumer banking habits and setting the stage for the rapid growth of credit card usage across California and beyond.
  • The credit card program led to a surge in consumer spending and banking activities, as it introduced a new way for people to make purchases and manage their finances. The ease of using credit cards prompted a shift in consumer behavior towards more convenient and immediate transactions. This shift also sparked competition among banks to offer similar services, leading to a broader adoption of credit cards by consumers. The program's impact on consumer behavior was significant, as it revolutionized the way people interacted with financial services and influenced their spending habits.
  • The lack of initial financial controls or risk underwriting means that when the credit cards were first issued, there were no strict measures in place to assess the creditworthiness of the recipients or to monitor their spending behavior. This lack of oversight led to a significant amount of fraud and defaults initially. Essentially, the bank did not have detailed processes to evaluate the risks associated with issuing credit card ...

Counterarguments

  • The ethics of mailing unsolicited credit cards could be questioned, as it may have taken advantage of consumers' lack of understanding.
  • The initial high level of fraud and default rates suggests that the program may have been poorly planned or executed.
  • The losses incurred by Bank of America could be seen as a result of inadequate risk assessment and management.
  • The success of the program might have contributed to the normalization of debt and consumer credit culture, which can have long-term negative economic and social impacts.
  • The aggressive expansion and lack of initial financial controls could be criticized for potentially undermining the stability of the financial system.
  • The replication of The Drop by other banks with unsolicited offers could be viewed as a practice that potentially i ...

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Visa

Formed Interbank to compete with BankAmericard

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).

Interbank struggled with lack of common brand and identity

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.

This hindered merchant and consumer adoption and network effects

The lack of a common brand undermined the adoption rates among merchants and consumers. This difficulty in est ...

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Formed Interbank to compete with BankAmericard

Additional Materials

Clarifications

  • The Interbank Card Association was a group of banks that collaborated to create a credit card network to compete with BankAmericard (now Visa). It was formed to establish a unified payment system that could rival BankAmericard's dominance in the market. This association played a crucial role in the development of what eventually became MasterCard, a major player in the financial services industry.
  • Master Charge was the original name of what is now known as MasterCard. It was created by an alliance of banks to compete with BankAmericard, which later became Visa. Master Charge faced challenges initially due to a lack of a common brand and identity, hindering its merchant and consumer adoption rates. Despite these obstacles, Master Charge evolved into MasterCard and became a significant player in the financial services industry.
  • Network effects describe ...

Counterarguments

  • While the lack of a common brand may have initially hindered adoption, it could also be argued that the diversity of banks in the Interbank Card Association may have provided a wider range of options and potentially more competitive offerings to consumers.
  • The struggle with brand identity might have spurred innovation and a stronger focus on customer service to compensate for the lack of a strong brand, which could have contributed positively to the company's long-term success.
  • The comparison of network effects between Interbank and BankAmericard might not fully account for other factors that could have influenced adoption rates, such as regional preferences, specific bank promotions, or economic conditions at the time.
  • The text implies a direct causality between the struggles with brand identity and weaker network effects, but there could have been other strategic or operational missteps that also played a significant role in the early challenges faced by Interbank.
  • The event ...

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Visa

BankAmericard summit demanded changes; Dee Hock led the effort

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.

Hock convinced BofA to relinquish control to member banks

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.

Formed National BankAmericard Inc. (NBI) as member-owned entity

The resolution of these negotiations led to the formation of National BankAmericard Inc. (NBI), a member-owned entity. This structural refor ...

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BankAmericard summit demanded changes; Dee Hock led the effort

Additional Materials

Clarifications

  • Member banks are banks that are part of a larger banking network or system. In this context, member banks were part of the BankAmericard system and had a stake in its operations. They collectively influenced decisions and governance within the system. Dee Hock led efforts to empower these member banks and shift control from Bank of America to a collaborative entity owned by them.
  • Bank of America (BofA) is a major American multinational bank and financial services company headquartered in Charlotte, North Carolina. It is one of the largest banking institutions in the United States and globally. The bank has a long history dating back to the 18th century through various mergers and acquisitions. In the context of the text, BofA played a significant role in the BankAmericard system and its evolution.
  • National BankAmericard Inc. (NBI) was established as a member-owned entity following negotiations led by Dee Hock. NBI represented a collaborative organization governed by member banks, marking a significant shift in the BankAmericard system's structure. This change aimed to address operational challenges and promote a more equitable and sustainable credit card industry model. Dee Hock's efforts were instrumental in facilitating this transition towards a more cooperative approach to managing the credit card system.
  • The stabilization of the credit card system referred to the efforts to address and resolve operational challenges that were affecting the BankAmericard system. This included improving the efficiency, reliability, and overall functioning of the credit card system to ensure its smooth operation. By making changes and restructuring the system, the goal was to create a more stable and sustainable environment for the credit card industry as a whole. Dee Hock's leadership in convincing Bank of America to relinquish control to member banks was a key part of this effort to stabilize the system.
  • Operational challenges in this context referred to difficulties and issues faced in the day-to-day functioning of the BankAmericard system, such as technical problems, inefficiencies, and obstacles hindering smooth operations. These challenges could have included issues like transaction processing delays, system errors, security concerns, or difficulties in coordinating activities among member banks. Dee Hock's efforts aimed to address and overcome these operational challenges by restructuring the system and transferring control to member banks through the ...

Counterarguments

...

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Visa

Built Authorization System (BAS), Clearinghouse (BASE), and Point-Of-Sale Digitization (POS) (Key Tech Innovations)

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.

BAS and Introduction of VisaNet

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.

BASE Two and Clearinghouse Functionality

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.

POS Digitization and Transaction Integrity

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 ...

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Built Authorization System (BAS), Clearinghouse (BASE), and Point-Of-Sale Digitization (POS) (Key Tech Innovations)

Additional Materials

Clarifications

  • BAS stands for Built Authorization System, which was developed by Visa to automate credit approval processes. BASE, or Clearinghouse, was introduced to automate electronic settlement processes on the Visa network. POS stands for Point-Of-Sale Digitization, which aimed to streamline transaction processing and reduce fraud rates.
  • The term "float" in the context of payments and settlements typically refers to the time delay between when a payment is initiated and when it is actually processed and settled. In the context of the BASE system mentioned in the text, ...

Counterarguments

  • While Visa's technological advancements were significant, it's important to acknowledge that they were not the only company working on electronic payment solutions at the time. Other companies and financial institutions were also contributing to the evolution of the payments industry.
  • The reduction in settlement times and the savings in labor and postage costs are impressive, but it's worth considering the potential job losses that may have resulted from the automation of these processes.
  • The digitization of POS systems and the reduction of fraud are notable achievements, but it's possible that these innovations also led to new types of fraud that required different methods of detection and prevention.
  • The claim that Visa's system allowed for infinite scalability with zero marginal cost may overlook the ongoing costs associated with maintaining and upgrading technological infrastructure, as well as the costs of managing security and compliance issues.
  • While Visa's adoption of magnetic stripe technology was a key factor in their success, it's also true that this technology has since been surpassed by more secure options like EMV chips and contactless payments, suggesting that technological leadership i ...

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