Visa (Audio)

it's funny when we picked this episode I

was like oh this is going to be pretty

down thee middle and easy and then of

course as we get into the research as

always it's like oh nope big story here

yep there's always a story who got the

truth is it you is it you is it you who

got the truth

now is it you is it you is it you sit me

down say it straight another story on

the way got the truth welcome to season

13 episode four of acquired the podcast

about great technology companies and the

stories and playbooks behind them I'm

Ben Gilbert I'm David renthal and we are

your hosts today we tell the story of an

absolutely incredible system you can

show up anywhere in the entire world

with a piece of plastic and transact for

anything you want in any currency the

merchant doesn't need to know you or

trust you and you do not need to know or

trust the merchant and Visa along with

just one other competitor master card

has tirelessly spent decades stitching

together all the banks merchants and the

relationships with consumers to make

this possible now this is just the rosy

side of the story and Merchants May

Harbor far less Rosy feelings about Visa

given how much of their profits go to

Interchange fees but the duality of the

story is what makes it so interesting to

understand today we will explore how the

whole thing came to be and try to

understand the value that the credit and

debit card system creates compared with

how much it captures and by whom in what

situations so here are some astonishing

stats on Visa it is the 11th most

valuable company in the world it is

worth more than any Bank in the world

including every Bank involved in

creating it Visa's brand is among the

very most trusted in the world

associated with reliability and security

but that said if you asked most people

what visa does they could not actually

articulate it visa does not extend

credit they do not issue cards they do

not work directly with Merchants they do

not work directly with consumers they

are not a bank or a financial

institution they don't ever bear any

risk they are merely a network

connecting Banks to other Banks David it

is insane this is such an insane story I

can't believe we're all the way in

season 13 and we haven't talked about

this company yet but as we will get into

it's always been overlooked and

underrated

well perhaps not underrated the last

decade or so if you listeners want to

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listening at acquired. fm/ slack and if

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check out aq2 our interviews on the

second podcast feed now without further

Ado this show is not investment advice

David and I may have investments in the

companies we discuss and this show is

for informational and entertainment

purposes only David Rosenthal where are

we starting today well we are starting

actually with a big thank you to Dave

Sterns author of what is undeniably the

very best book on Visa and its history

electronic value exchange and we owe a

thank you to Dave both for writing the

book and for talking to us as we

researched and helping us sift through

everything as we're preparing here

fellow seattleite and the book which is

so wonderfully esoterically named

electronic value exchange was his I

think PhD thesis that they sort of

turned into a book correct all right

take us back in time so de Hawk the

founder of Visa who we will talk a lot

about as we go along here he told this

great story of how after his time at

visa and his kind of older age he would

start his speaking engagements with a

little thought exercise for the audience

he would get up on stage he'd hold up

his Visa card and he would ask how many

of you recognize this and of course

every single hand in the room would go

up as I assume all of yours listening

are going up now too then he would say

okay now how many of you can tell me who

owns this company and every single hand

in the room would always go down and

they would say how did this company

start no hands who runs it and who

governs it no hands where is it

headquartered no hands it's just wild as

we were saying in the intro how

important this company is and yet still

to this day I think you know maybe a few

more people than in D's time know the

answer to these questions but not many

yeah it's one of these things too it's

like one of the only essential pieces of

financial infrastructure in the United

States that is not run out of New York

so our task today is to tackle these

questions and we start where some of you

I suspect know but the vast majority of

you I also suspect don't we start in 198

in Fresno California with the drop the

drop this is the name of the title in

this fantastic book a piece of the

action how the middle class joined the

money class and is chapter 1 the drop

1958 the drop has become like if you say

the drop to someone in the fintech

industry they're like oh September 1958

Fresno yep and the rest of the world has

no idea yep all right so what happened

well the then largest bank in America

the San Francisco based Bank of America

which formerly was called the bank of

Italy both of which were total misnomers

because it was actually more accurately

the Bank of California it was illegal to

operate Banks across multiple States

back then as we will discuss and the

reason it was named Bank of Italy was it

was started by an Italian immigrant who

wanted to create something for the

underbanked Italians in his California

Community yeah mostly Farmers and

Merchants in San Francisco it really

started as like the bank of the little

guy so Bank of America decides that they

are going to mail out little rectangular

pieces of plastic to every single one of

their

65,000 customers in the City of Fresno

completely unselected now couple things

about this one it's wild I think the

Fresno population at this point in time

was like maybe 200 250,000 people so

like a huge portion of the City of

Fresno banked with Bank of America and

that was true for all of California at

the time two they just send these things

out obviously these are credit cards

people don't know what they are they

have no idea what to use them mass chaos

ensues well and certainly nobody asked

for them there's this great quote again

from a piece of the action that

describes it and says there had been no

outward yearning among the residents of

Fresno for such a device nor even the

dimmest awareness that such a thing was

in the works it simply arrived one day

with no Advance warning as if it had

dropped out of the sky all right so to

explain how we got here we need to spend

a few more minutes on Bank of America's

history and the history of banking and

payment Industries in the US more

broadly so like we said BFA was the

biggest bank in America in the 1950s but

it was not like all the other big banks

at the time it was a consumer bank the

other large and influential banks in

America back then were like the JP

Morgans they were white shoe corporate

Banks based in New York we talked about

this a lot in the Nike episode it was

illegal for banks to operate across

state lines until much much later in

history so for banks back then the only

way that you could actually get big for

just about everybody else in the

industry was to go the corporate route

and to go the investment banking route

because you could service very large

corporations that obviously were large

themselves would generate lots of

deposits lots of lending activity the

investment banking activities around

that were obviously very lucrative

that's how the JP Morgans you know the

Morgan Stanley Etc of the world came to

be for the most part consumer Banks were

kind of Backwater small there was no way

to aggregate enough customers that you

could get big enough well and in Most

states they would have restrictions on

the number of branches that Banks could

actually have in some states I think

Texas was one of them you literally

could only have one branch other states

would limit them as something like three

other states would limit them and say

none outside the city so you were sort

of a bank of a city you could almost

think about these more as credit unions

than the sort of big banks that we think

about today California happened to be

unique in that you could actually have

branches all over the state and

California happened to have quite a

large population so it was kind of the

only place you could pull off a large

consumer Bank yes exactly California was

already the second biggest state in the

nation at that time behind New York but

the New York banking industry was super

fragmented because Bank of America

starting as Bank of Italy with all these

immigrants had built up a consumer base

they really were unique so you know the

business of banking is well banking you

take deposits you make loans you make

your money on the loans B OFA was doing

tons and tons and tons of small little

and disperate Consumer loans and lending

so obviously mortgages and car loans

like those still exist today but they

were doing like washing machine loans

they were doing like buy now pay later

but instead of on the website you would

go to your local bank branch you would

schedule time you would sit down with

the bank manager and he would authorize

you to go spend

$150 at some Merchant and make you a

loan that you would come pay back over

the next few months in installments and

every single time that you wanted to buy

something now and pay for it later you

would repeat this very physical one-off

manual process yeah and for specific

items to like go buy a refrigerator wild

it was just wild to imagine today so you

can see why for a bank like Bank of

America that is doing this at such large

scale the idea of a consumer credit card

well it's pretty awesome because you can

take all of these disparate lending

programs consolidate it into just one

card cut out a ton of overhead fees and

make it way more efficient so this is

what they are launching first in Fresno

as the pilot market and they call it the

bank

americard beautiful name beautiful name

and it would survive for quite a long

time now this wasn't exactly a new idea

on the part of Bank of America charge

cards and credit cards have been around

for decades what was new was this was

the first time that a bank had entered

this Market at scale so let's talk about

the history historically in the US

transferring money was actually not that

easy you had two options you could use

cash or you could use checks and checks

worked but they also had a bunch of

problems one until the creation of the

Federal Reserve in the 1910s the parties

cashing the check receiving the check

didn't actually receive the full face

value of the check because there was a

bunch of work and like mailing stuff

around traveling around the country that

had to be done and that was taken as a

discount out of the check and this is

super important this thing that we have

today interchange rates on credit cards

that was happening with checks too there

was really a lot of expense and risk in

processing checks when they first got

started and like of course you would

take a discount out of the fact that

you're taking risk and you're spending

money to go and make sure that this

check that someone handed you eventually

turned into dollars that you could have

in your possession totally so problem

number one you didn't get all the money

right problem number two also big

problem it took a really long time

imagine you know we're talking like the

1800s early 1900s this stuff was on the

Pony Express you know pieces of paper

going around a really really big country

not ideal yeah and until a where the

banks would sort of all meet once a day

and decide okay how much do I owe you

how much do you owe me in aggregate okay

let's just settle one transaction and

then we'll figure out all of our

internal accounting ourselves they were

literally like check by check and saying

okay I have this check so you owe me $68

okay next check oh I owe you

$44.20 and it was this crazy system of

individual couriers bringing checks

from the person who gave it to the

merchant for the merchant to go and

track down the money and bring the money

back totally and spoiler alert a doesn't

get developed in the US until the

1970s wow humans though are quite

ingenious creatures at solving their

problems particularly when motivated by

money so there is sort of an obvious

solution to this for merchants and their

sort of usual regular customers and that

is credit accounts charge accounts

rather than giving me money or a check

let me just keep tabs on a ledger of

what you bought what the value is I'll

tab it all up and then at the end of the

month you'll come give me a check or

cash for it I remember even Me growing

up in the 1980s we had this at our local

gas station near our house really we had

a credit account and it was just like

whenever any of our family would go to

this gas station we would get the gas

and then we go inside and be like oh we

have an account here and they just write

down what it was and then at the end of

the month I assume my dad would go give

them some money which saves on

operations for everyone it's uh oh great

now we only need to move money once we

move it at the end of the month and I

trust you because I've seen you lots so

from charge Accounts at individual gas

stations or individual branches of a

grocery store chain or something like

that it's not a leap to think the next

stage of evolution would be oh a card or

account that would work it all the

branches of a brand so like the gas

stations get into this in a big way

Standard Oil gets into this in a big way

lots of standard stations across the

country you can have an account that

works at all standard stations yep in

1939 Standard Oil of Indiana sent

250,000 unsolicited cards directly to

all of their customers yeah making the

Fresno drop look like a uh drop in the

bucket shall we say well and

interestingly this is 20 years before

but again this is not a bank this is a

single Merchant mailing it out to all of

their customers exclusively for use at

their facility yep so there was that

phase then pretty quickly in a given

local area some of the retailers would

get together and be like you know we

compete with each other but it sucks

running these charge account programs on

our own we could collaborate and have a

standardized chart account system that

we could share and just literally to

simplify the back office as the first

value proposition here yep and for

consumers that's also pretty awesome

because do you really want to carry

around 57 different charge cards in your

wallet or would you rather have one that

would be like you know your visa to

everywhere you want to be yes and not to

mention on top of this there is 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 yep so this comes to be kind

of post depression in the 1930s 1940s in

the US and this really is starting to

sound a lot like Visa except as you

point out Ben there is a problem here as

the size of Any Given network of

retailers that are collaborating on this

grows so does the intensity of

competition within that Network so once

you get to a certain scale nobody's

really incentivized to keep making this

work a because now you're enabling

people to shop all your competitors but

also B once you get past I don't know a

couple hundred of thousand participants

here like are individual Merchants

equipped to manage a network like this

no they don't have the resources to do

this right so you have to spin up some

kind of like shared organization that

all the merchants are pulling their

Capital into in order to run the network

on behalf of all of the merchants it

gets messy or there could be an

independent third-party for-profit

Network that does this and this is when

Diner club and American Express arrive

on the scene so Diner's Club was first

and people might know and have heard of

Diner Club it still exists today it's

like a sub brand of discover totally

there's a very famous legendary origin

story behind Diner club and it goes like

this in 1949 you know post World War II

economic Prosperity beginning of the Mad

Men Years in New York and Manhattan a

New York businessman named Frank mcamera

is hosting a lavish business business

dinner in downtown halfway through the

dinner he realizes that he forgot his

wallet at home he does not have cash to

pay for the dinner so he excuses himself

he goes to the pay phone he calls his

wife at home on Long Island she speeds

into the city with enough cash in time

to pay the bill for the dinner and you

know face is saved his reputation as a

arod dite businessman is preserved and

then afterwards you know he's like

talking to his wife he's like oh there's

got to be a better way to do this there

really should be a businessperson

focused charge card Network that would

work at all the restaurants in Manhattan

where business people host dinners so

nobody ever needs to bring their cash

and you know you could just imagine that

like We're All in This Club of diners

where anywhere We Dine we can stand up

we can authorize the bill we can leave

we can pay no dollars out of our pocket

that moment and we get one nice

statement at the end of the month that

importantly we do need to pay in full we

cannot roll it over into a loan we must

pay it but that's nice because all of my

business transactions are on one single

statement it's easy for my expense

reports it's easy for me to not have to

carry a wallet around and of course I

get to look super awesome in front of

all of my colleagues I think there are

two really important points here one you

said I pay it I don't pay it my company

pays it you know I don't care to the

most important point I get to look super

awwesome in front of all my colleagues

and customers and people that I'm trying

to impress I don't need to bring cash

they know me here I'm good for it and

just to start tracking a certain number

here when we were talking about checks

earlier that we getting a discount and

even in this era of early Diners Club

early American Express we're talking

about a 5 to 7% discount of what

actually got remitted ultimately to the

restaurant or the retailer versus what

the bill was originally that the

consumer authorized so that's a very

nice story except it's completely

fabricated none of that actually

happened although stories like that did

play out I'm sure on a nightly basis in

Manhattan the reality is Frank just

thought this would be a good business

idea and he was right you know you see

this all the time with networks Network

effect businesses this was the right

little node of the network to start with

this was Lake Harvard and Facebook

because restaurants in Manhattan they're

competitive with one another but it's

not exclusive competition this isn't JC

Penney's versus Macy's no restaurer in

Manhattan no matter how good they are

really honestly believes that a majority

of their customers are only going to

dine at their restaurant great point so

there's some incentivized sharing it's

almost like the reason to enter into a

bundle for your most extreme fans which

are only going to be like the top 5% of

your customers sure you want some kind

of exclusive relation ship and you want

to maximize the dollar value you can get

out of them but for your casual fans who

like your business but aren't

necessarily exclusively going to use

your business you should figure out some

kind of bundling system that makes you

work with compliments of yours so that

people can shop you and everything like

you with the easiest way possible and

you can still make some money on

everybody you're enabling people to

spend money in your restaurant easier

and more frequently and you don't really

care that they also go to other

restaurants cuz they're going to do that

anyway it's crazy like you said Diner

Club is able to charge restaurants and

other Merchants they expand to hotels

you know Airlines anything that a

business person traveler would need 7%

of the gross bill you know Merchants

complain about 3% today 7% and these are

restaurants like that's crazy eventually

they have so much power in what they're

doing this product is so good they also

add a fee for the card holders and it's

companies like it's not individual

people paying this fee it's the

companies paying this fee of course

they're happy to pay it it enables

business amazing brilliant idea back in

the day and we should say this is

pricing power in action to have those

very high fees it's also a necessity the

cost of running these networks in a

previous technology generation was super

high and it was not at full scale yet so

it's just operating with a bunch of

restaurants and retailers in New York

city so you actually need a lot of

people both because there's not lot of

Technology but you need a lot of people

even though there aren't actually a lot

of merchants and so it turns out there's

just a lot of cost in the system to run

it and Diner's Club would ultimately

fade although it grows to over a million

members it goes National it gets

acquired by City bank then sold to

discover in 2008 as we said it's still a

brand today but it's basically

impossible to create a independent from

the groundup network of this at the time

because you were just talking about the

operational cost of of running this

thing think about the merchant and

customer acquisition costs nobody knew

what Diner Club was they have to now go

canvas the entire island of Manhattan

and ultimately you know the whole

country and world and sign up all of

these merchants and 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 to the market which of course

brings us to the brand you're all

probably thinking about here American

Express which is the Diners Club of

today it's the favored card by

businesses it is the card that is most

used for travel and entertainment and

meals yep and so as you might remember

from our birkshire Hathaway series a

couple years ago AMX at this point in

time was primarily a traveler's checks

business that's how they started right

well actually no they started in 1850

this is amazing do you know who started

American Express this is a version of

dhawk holding up the Visa card o no I

don't I did not either until doing

research for this episode it was started

by a group of people two of the most

prominent among whom were Wells and

Fargo Henry Wells and William Fargo

amazing totally amazing man 1850 the

wild west different time it was

something like they started American

Express but then had a conflict and so

they left and they started Wells Fargo

after that yeah something like that the

infrastructure of America was getting

built out so American Express it's

called American Express it was an

Express Mail company it was like the

Pony Express that was how they moved

stuff around and I think Wells and Fargo

were doing Banking and so obviously

Banks as we're talking about you need to

move stuff around the country it was

like a related business it's amazing and

I think it's fascinating that Wells

Fargo came after MX like you think Wells

Fargo as this old timey Foundation of

America American Express is even older

than that so AMX by this point in time

had become a traveler's check primarily

that was their primary business as we

talked about on the birkshire episode

that was a freaking awesome business

partially because Travelers checks you

know they made good money you would buy

a $100 Travelers check and pay MX a

little fee or whatever but the float and

the breakage like there's Travelers

checks out there today that are 50 100

years old that have never been cast and

MX has just been sitting on that c cash

for decades investing it what an amazing

business okay so AMX observes Diner club

and says hey we need to get into this

and we actually have an ability to get

into this fast and they actually try to

buy Diner Club but they can't get their

own price and so they're like well we

don't need to pay you a lot of money

because we can just do this too and like

I was just saying not only can we do it

too we can do it better than you because

we're American Express we have

relationships

with companies we have relationships

with restaurants we have relationships

with hotels We Don't Need You Diner Club

so just within like a year or maybe even

two from when MX launches their charge

card you know business traveler program

they sign up 700,000 members which is

almost as much as Diner Club had signed

up you know many years of working on it

and importantly here the thing you're

seeing is this is the first time a real

financial company is coming into the

industry all of the we know you're good

for itness was happening directly from

retailers before or by organizations

that represented retailers in

restaurants and so now you sort of have

not a bank but a bank likee entity that

is starting to say oh this could be an

interesting business so this brings us

right back to Fresno in

1958 because the timelines match up

exactly this is crazy MX launched their

charge card program in 1958 BFA sees

what's happening they of course had seen

everything else going on in the industry

before they understand the

transformative power that this can have

for their scaled consumer banking

business in California and they're like

okay the time is right let's do credit

cards let's go to Fresno but hopefully

as we painted the picture their

motivation and Diner club and AMX and

even the merchants and retailers

motivations

are very different BFA wants two things

out of this one like we were saying

earlier they want to streamline and

simplify all their wildly diverse

lending programs this is going to be

huge operational savings for the bank if

they can pull this off two though the

bigger opportunity for B OFA is what can

this do for our banking business itself

because remember how do banks make money

they make money on loans and this is

going to enable so much more effective

loan volume to flow through our system

that we can make money on so this is

where BFA informed by their previous

business model of lending to Consumers

really paves the path of what credit

cards would become today often in the

past before the bank amera card what

would happen is you'd have this charge

card not a credit card and the bill

would arrive at the end of the month and

then you would pay it the Innovation

baked into the bank Amer card is they

say well after the 30 days you get your

statement you can pay it in full or you

can roll it into a loan and we love

loans we would be happy to extend loans

to our customers we can learn a lot

about them we can make good amount of

money on that interest and so the modern

credit card is born and it was already

happening at BFA they were doing these

loans this wasn't actually like new

Behavior it was just a way easier way

more streamlined on-ramp into this

consumer lending that turbocharged it

this product is the combination of three

things the charge card that had been

happening over in Diners Club AMX the

gas stations the retailer land then the

second pillar is this consumer lending

and the third thing is it is now from a

real and proper bank that you already

have your primary

Financial relationship with not from

some industry Association or hodg podge

of retailers but now this is issued by

your bank the big takeaway for bank

americard is it really bundled two

different things together one was

convenience and the other is credit and

there's one more really really important

subo here to what this loan is and it

relates to the banks and why this is so

powerful for BFA and for all banks think

back to the old way that BFA was is

doing this a California you know

homeowner wants to go buy a new

refrigerator they walk into a b OFA talk

about it with the lending officer blah

blah blah a bunch of operational costs

who cares about that at the end of the

process B OFA gives them the money the

money is now out of bfa's hands it's out

the door the consumer then goes to the

merchant and gives the merchant the

money and buys the refrigerator what's

happening now with credit cards is

actually a little different the consumer

goes to the store the consumer buys the

refrigerator with the credit card no

money has left B ofa's hands yet they

get to keep the money right a

transaction has been authorized but yes

they get to keep the money and because

we're talking about California Here

There is a very high likelihood chance

and I think at the beginning I suspect a

100% chance that the merchant also banks

with boa so that money is never leaving

Bank of America's hands which frees up

more Capital which frees up float which

is just like the BFA management must

have been besides themselves with Glee

about this well in theory if they manag

to put any sort of financial controls or

proper risk underwriting on this whole

thing but it turns out David as I'm sure

you are about to tell us that's exactly

where we're going when you mail 65,000

cards indiscriminately with the same

credit limit to every single customer

and say have at it guys and this is a

brand new consumer beh 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 uh you're

going to lose a lot of money at first

yeah because there's another more

pernicious way that this type of lending

is different than the previous type of

lending that BFA was doing it's

unsecured if you give a customer a loan

to go buy the refrigerator you don't

want to go repossess the refrigerator

but push comes to shove you can go

repossess the refrigerator this whole

consumer credit card land is unsecured

lending so you probably shouldn't apply

the assumptions about your loss ratios

from secured lending to unsecured

lending but that is exactly what

happened and this all comes back to why

it really had to be Bank of America to

start this program because they do this

they do the drop in Fresno 65,000

unsolicited cards go out to unsuspecting

consumers fraud is out of control2

million of fraud within the first pilot

program

22% of the credit that they issued to

that initial Fresno cohort ends up being

default or delinquent which I think is

like five or six times what their

delinquency rate was before on

traditional lending yeah it is pretty

crazy so it's worth pointing out you

know we're talking a lot about credit

and debt at this point in time and now

in 2023 some of these kind of sound like

bad words and frankly it's because of

the situation that the society has sort

of like pushed Americans to but it was a

very different time back when credit

cards were first getting started and

when this sort of practice of

installment loans was extremely common

in the pre card era so I want to read

there's a great passage from a piece of

the action that I mentioned earlier that

I just want to read here despite the

denunciations despite the free floating

anxiety Americans have always borrowed

money to buy things if not from a bank

then from somebody from a finance

company or a credit union or a

department store or a loone shark for

that matter there isn't another Western

country that has relied so heavily on

consumer credit between 1958 and 1990

there was never a year where the amount

of outstanding Consumer Debt wasn't

higher than the year before years later

a Bank of America executive could look

back on his lifetime in the credit card

industry and say proudly Consumer Credit

built this country whatever one's

feelings about personal debt is

difficult to disagree with this

assertion so interestingly what's

basically Happening Here is people are

using debt not because of this Bleak

horrible time that they're in it's

actually because of their optimism they

believe that the future is brighter than

the present and so they're fine taking

on debt and that is sort of what has

sort of led us to today where because

the growth of the American economy and

the global economy has been so strong

people have always generally been fine

or at least we exist in a system that

teaches you you should kind of be fine

betting that the future is going to be

better than today such a good point as

long as growth is happening in an

economy a society industry whatever you

should absolutely use Capital to fuel

into that growth yep and that may not be

true on an individual basis but it's

absolutely true on a societal basis yep

so back to what I was saying about why

BFA is so important BFA can absorb this

loss no other consumer bank at the time

if they had seen $20 million of losses

in like a set of months they would have

pulled the rip cord immediately B OFA

though they can absorb this loss no

problem and they know if we can make

this work this is going to transform our

business so rather than pulling the rip

cord they expand they roll it out

quickly across the whole rest California

over the next year all within the first

year they sign up

20,000 merchants in California and get

this do you know how many card holders

they signed up in that first year no two

million California card holders signed

up using the card in the first year it

took Diner Club years to get to a

million MX was so proud in the first

year or two they get to

700,000 BFA instantly at scale is the

largest charge card credit card program

certainly in America I suspect in the

world and that's one year and one state

this is like meta launching threads or

Microsoft launching teams you can sort

of sit back for a while and watch The

Innovation and figure out what the very

best product is that people want and

then you can go Ram it through your

distribution channels when you invent

one of your own yep and it's even more

than that as we said this really was a

big innovation like it wasn't just that

they copied AMX and Diner club or else

like they wereing credit to this this

was a huge Innovation yep so by 1961

year three of the program they're able

to get fraud under control enough that

the whole program is profitable but they

keep that under their hats yes yes they

don't want anybody else to know about

this so there's been all these newspaper

articles about all this money that BFA

is losing so many banks that had been

thinking about launching a similar

program abandoned it cuz they were like

oh man we thought this was going to work

but clearly it's not working for BFA so

people were shutting down their efforts

there was rumors that another bank was

going to launch in LA in San Francisco

and BFA had actually rushed Theirs to

Market to go be sooner than these other

banks that actually never ended up

launching because the market perception

was that it was such a gigantic failure

here's a crazy stat from 1960 to 1966 so

this whole era is actually a profitable

era for a but no one else knows it there

were only 10 new credit cards introduced

in the entire United States because they

did such a good job keeping what became

a cash gusher for them quiet but secret

comes out in 1966 and from 1966 to 1968

just two years approximately 440 credit

cards were introduced by Banks large and

small throughout the country yes and it

is specifically 1966 when The Secret

Gets Out because phase two of Bank of

America's grandmas plan here gets

unveiled which is maybe worth a quick

setup as we said this was transformative

for their business in California but

they're the biggest bank in America and

they have been itching for any kind of

way to expand to truly be the Bank of

America like why the hell did they

change the name to Bank of America it's

not because they wanted to be the Bank

of California so they're like maybe this

is our path and California is only like

10% of the US population in

1966 they create the bank americard

service

organization with the express purpose of

Licensing out the bank americard program

and network to Banks across the country

across all 50 states and this is the

seed of Visa but listeners before we

talk about how the bank americard

licensing Association morphs into Visa

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show notes okay David so how do we get

to Visa you have been telling me about

the bank amera card from Bank of America

and I opened this show saying Visa is

not a bank and Visa doesn't have direct

relationships is this big indirect thing

where they work with other Banks this is

a big mismatch this story is so wild

because this first chapter that we just

told there's only one entity in the

world that could have done this Bank of

America in this second chapter there is

also only one person in the world that

could have taken bank americard and

turned it into visa and that is dhawk so

here we are in

1966 B OFA now starts going around to

all the other consumer Banks in other

states and selling them on joining the

network as Bank americard licenses and

the deal is that you pay BFA a $25,000

franchise fee to get your franchise of

the bank America this is like a Wendy's

or something plus then you pay them a

percentage of the gross transaction

revenues it literally is like a

McDonald's this is wild I mean again the

executives must have just been throwing

party after party because a this whole

thing turbocharge their own business B

now they're like oh we are going to make

all the other consumer banks in the

country essentially into like surfs on

our kingdom here right and one of the

assumptions they made was correct and

the other one was too hubris the first

assumption is a good business model

decision which is okay we've now created

this distributed asset which is all

these customers with our card that want

to use our card at lots of merchants

people still weren't using credit cards

the way we do today just treating it

like cash and using it for coffees and

little things here and there it was

still sort of treated as this is the

card for big purchases some of which I

may want to finance and decide later it

was also an intensely like private thing

kind of taboo thing right cuz when you

were using a credit card in these days

you were implicitly saying I'm using

debt to buy this transaction and so you

didn't want other people to necessarily

know that right it was a bit odd but

consumers clearly did want to use this

thing for some subset of the purposes

that they did today and so Bank of

America is kind of leaning into it and

saying we've got this asset surely we

can leverage that for great gain but the

specific implementation of it was a bad

assumption where they said the way that

we can take advantage of the fact that

now all these consumers have the card

and all these Merchants out there and

accept the card is this weird

franchising thing well the bad

assumption was that other Banks would

consent to basically being surfs in

their kingdom yes but at the outset

these other Banks see the power and now

that BFA is telling them of what this

has done for BFA and they're like wow

this is already the biggest charge card

credit Network in America if not the

world we can now bring this to our state

and I think BFA offers exclusivity to

banks in Geographic areas too to start

that eventually of course gets dropped

but it does tempt a lot of people so

within 2 years by 1968 a couple hundred

banks have signed up there are 6 million

card holders across the country and

Beyond the country actually Barclay's

Bank in the UK had signed up to be a

franchisee of Bank americard back in the

day whoa what year is this this is like

in the you know mid-60s whoa that's way

earlier than I realized for

international expansion yeah it was

already out of the US cu the system is a

great system but as this expands Beyond

BFA it becomes clear that a bunch of

stuff that were I either just

assumptions or ways of business within

BFA or things they didn't have to worry

about ain't going to scale to hundreds

of banks all 50 states multiple

countries around the world one of the

examples I alluded to this earlier in

California in the Bank of America owned

and operated bank americard system

usually all parties in the transaction

were Bank of America customers so like

there wasn't really any difference

between the bank of the consumer the

card holder and the bank of the merchant

and B OFA controlled both sides once

they expand the network and let other

banks in all of a sudden that's almost

never the case right you know BFA

realized the sort of cardinal sin of

many entrepreneurs which is my

particular situation is actually not a

pattern of several other customers It's

actually an N of one I'm idiosyncratic

so when I'm just making the same

assumptions about all the future

customers about serving my own needs

that's actually a false assumption yep

so BFA has no distinction between what

ultimately now in the Visa Network and

MasterCard and others is called issuing

banks these are the banks that give the

cards to the customers and Merchant

banks that are the banks of the

merchants it's all just one for BFA yes

and these Merchant Banks we'll come back

to some of this terminology later has

gone on to become the acquiring bank

because this is the bank that acquires

the merchant relationship as a customer

so now in this new world where there's

different banks on each side of the

transaction this creates the need for a

network and operational services to

settle those transactions this comes to

be known as interchange and interchange

fees are obviously what visa does today

yeah and this is the first moment that

we start to see a departure from what

American Express was doing the original

Bank americard was very similar to

American Express and Diner Club where

they were closed loop systems it was a

bank that issued a card to be used at a

payment terminal that all stayed within

the bank's closed loop Network and now

with this new bank americard license e

system that they're starting to sort of

develop here that would become Visa it's

an open loop system it's hey there's One

Bank on one side who owns the customer

who owns the card holder and One Bank on

another side and we're going to enable

those systems to talk to each other but

they're not the same party this is open

loop now so this interchange thing all

of the other banks that are now signing

up to become you know BFA franchisees

for the bank America card system they

come to BF and they're like hey this

whole thing is a problem Bank of America

isn't providing any service to do this

there are also all these costs that

these other banks are incurring because

they need to figure out this interchange

thing oh so the problem they're

experiencing is like hey Bank of America

how did you build all the technology to

do this and Bank of America's response

is like we didn't have that problem

because in our corner of the world we're

the bank on both sides right we're Clos

Loop so I don't know you guys figure it

out this sounds like a you problem not a

me problem I see so when these banks are

coming to Bank of America they're not

actually complaining about price in any

way they're literally just saying how do

you solve this problem no I don't think

price was an issue I think it was this

and like a set of other things along

these lines where the franchises were

like hey we signed up for a

franchise you operate the whole system

right and Bank of America was like no no

no we sold you a marketing system I see

so it's like you know you buy a

McDonald's franchise and they ship you

some Golden Archers and they're like

good luck figuring out how to make

cheeseburgers that is exactly right okay

now to be somewhat fair to Bank of

America here the golden arches are worth

a lot the bank americard three colored

bands the blue white and gold are also

worth an incredible amount here and of

course the ability to actually

beyond the network that sends those

payments right yes of course the network

has incredible value but back to the

brand and the marketing so as all these

other banks are considering whether to

become franchisees of bank americard and

some of them are like no I'm not going

to do that some of the ones who do

become franchisees well really all the

ones who do become franchises become

very frustrated of course people are

going to start competing systems and

right in this time over this kind of

year or two period a bunch of local

geographical competing credit card

systems by various Bank consortiums come

together those pretty quickly all merge

into a National Association called

interbank which spoiler alert interbank

is

Mastercard but at this point in time

interbank is a Franken Network there's

no common brand Mark visual identity for

all of these cards so now you're trying

to make this payments Network operate

how do you as a consumer know that my

card that I got from XYZ you know I

don't know Bank of Illinois that's part

of the interbank network supposedly now

I go somewhere I've got that card it

looks like one thing I'm looking at this

store at this restaurant or whatever

they've got a thing on the door that

says they take something that looks

totally different I don't know that this

is going to work even though it actually

might work cuz it's part of the

MasterCard inbank Network I see it's

like when I'm trying to figure out like

I have to keep pulling up Alaska

Airlines partner Network to figure out

what International Airline I should fly

since I pay no attention to anything

other than well it's Alaska you know is

it one world I don't I still don't even

know what the one world yeah yeah and

you know that's today with the internet

you can do that back in the 1960s

there's literally no way for a

prospective customer of a merchant to

know by looking at their card and

looking at the sign on the door if that

card is going to be accepted unless they

all have the same brand and Mark it's so

funny this is the original problem of

Diners Club too cuz Diners Club they I

think it was Diners Club that originally

shipped a little folded thing that fit

in your wallet with the card that was a

little booklet that was a list of all

the merchants so you could literally

know if the card would be accepted at

the restaurant you're at that's right

but now like the scale that these

networks are starting to be at like

obviously that's not tenable so back to

the mark what these franchises are

buying from Bank of America and what

Bank of America is like hey this is what

we're selling you it has value it's

access to the network but the network is

homogeneous it all is the bank americard

name brand and importantly Mark so what

are the colors of Visa I'm sure

everybody listening probably around the

world knows this it's blue white and

gold which is the hills of California

right there's this amazing origin story

to this it's super reminiscent to the

Windows XP Bliss wallpaper you know that

is the most viewed photo in the world

you know the hills and it's actually in

Sona California

H so the story is the BFA team when they

were first rolling out the program the

guy tasked with card design he lived in

Pleasanton California in the East Bay of

the San Francisco Bay area where you

know it's Pleasant and one fine spring

morning he looks out his back door at

the local Hillside the sky is this

beautiful blue with white puffy clouds

very much like the Windows XP Bliss

background and the hill is covered with

beautiful golden colored California

poppies in blue

he rushes back inside he paints an

abstracted version of his beautiful

Hillside voila the three bands blue

white gold Bank America card Visa and

this would go on to be incredibly

valuable to plaster on your storefront

and say we accept Bank America card 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 their shiny cool thing that

they like spending money on works there

and it's good for your business to be

able to accept it it's so wild that

today you know we would think oh what's

a mo what's a competitive Advantage

what's durable you know you need

technology Advantage you know even how

we think of brand all the companies

we've covered on the show it's so much

more than this but it was so simple back

in the day it was just could you create

a two-sided Network where there was a

common signal of acceptance yep so from

B's perspective they're like yeah we did

all the work we created this this is

what you are franchising from us take it

or leave it from the franchisees

perspective as we were talking about

they're like you gave us a marketing

program how do we run this damn thing

okay so they got this marketing program

how did it literally work because this

is premm magnetic stripe yeah there's no

technology here I mean this is literally

like cool I've become a Bank of America

lensee what transactions does that let

me do and how does that happen so the

banks they have to resort all the way

back to how checks worked back in like

the you know 1800s early 1900s in the US

where it was all decentralized the bank

would go sign up a merchant in their

local Town yep and the banks would take

the sales drafts from their Merchants

that the merchants had brought to them

and then they would go kind of

individually decentralized mail around

the country to the issuing Banks the

card holder Banks to get the money and

they just the way they financed all this

was a discount fee just like checks back

in the day like oh hey this Sales draft

is for $100 this is all really hard to

figure out so like okay you give me $97

instead or you give me $90 instead and

there was no standardization it wasn't

like a set discount fee it was just

whatever they negotiated with one

another so the sales drafts get handed

to the lensey so you've got let's say

you're running a department store and

keep going with the Illinois example

that you said so you're running a

Chicago Department Store after a whole

day of sales you've got a bunch of sales

drafts where you say all these customers

came in with Bank America card they said

they're good for the money so I gave

them the goods and now I'm holding the

sales drafts I actually have no idea if

they were good for the money but the

fact that I have a sales draft and the

fact that I the merchant have a contract

with a bank and that bank has a contract

with Bank of America means that I feel

very good that I'm going to get my you

know 93 cents on the dollar or whatever

so then the bank is responsible probably

yeah so the Merchant Bank that acquiring

Bank mails all those effectively

invoices to all the other banks that the

people who bought the goods there to

their banks with their cards and there

was no standardized discount H this is

ludicrously expensive totally I mean

it's chaos people are so pissed and

again BFA is like yeah whatever yeah

whatever for us we just moved a few

numbers internally we actually didn't

have to do any of this and you all are

paying us now money so like our Empire

dreams are coming true wow this is maybe

painting Bank of America into poor a

light you know 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 and

even though bank americard had been

operating for a couple years internally

to BFA in California now it's going

across state lines this had never been a

problem before you know the merchant

Banks versus the consumer Banks the

issuing Banks Etc right so all of these

tensions come to a head in October

1968 when the lies all the franchises of

Bank of America all these other Banks

across the country they demand a summit

they need to air their grievances with

you know the parent with Bank of America

this is untenable we can't operate like

this we got to fix this BFA says okay

fine we'll all get together in Columbus

Ohio really way in the middle of the

country you didn't know this no Oh amaz

I thought you knew this yeah Columbus

Ohio Ohio State oh wow amazing this is

where the birth of Visa happens so the

summit gets organized and for the

franchisee Banks this is sort of

becoming existential for their

businesses they're racking up such huge

losses this is such chaos they're

sending senior representatives from the

banks everybody running their card

programs everybody's converging in

Columbus BM sends two like mid-level

marketing managers to go face the angry

mob none of the senior Executives from

BFA could be bothered enough to go deal

with this WOW which just says everything

and these poor guys who show up I mean

they are literally facing like

pitchforks the franchises are ins sensed

and they're insens both because the

situation sucks and they're like godamn

it BFA take us seriously you have

meddled in our entire businesses this is

in chaos like we got to fix this so what

do these two poor BFA 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

plated but nothing actually happens

because 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 lenses to quote unquote

investigate all of the operating

problems and report back to us you know

they can come out to San Francisco they

can meet us at BFA headquarters and

we'll listen to their problems wow

but unfortunately for their goals their

very narrow goals that particular

morning but very very fortunately for

all involved the franchises the world

consumers in the long term at least in

the long term and also Bank of America

in the long term one of the people that

gets put on that committee is the bank

americard franchisee program manager

from a small Bank in Seattle the Seattle

National Bank of Commerce which would go

on to become reineer bank and then

ironically do you know what happened to

ber your bank you can't make this stuff

up no I don't but I can guess where this

is going yep once Interstate banking

regulations get loosened up they get

acquired by Bank of America of course in

the

1990s but for the moment the person

running their Bank America card

franchisee program is One D Hawk and I

think you could really say on this day

the founder of visa and one of the most

interesting characters in anything we've

ever studied because he's not a tycoon

the way that most of these people are no

and we're going to talk much more about

D in a minute but just to keep the story

going so we don't leave you all in

suspense on this day during the lunch

break D has gotten put on this committee

he goes up to the two BFA guys and he's

like hey rather than us just putting

together a list of Grievances and

Reporting back to you at

BFA What If instead we do examine all

the problems in this

system but what if we ourselves this

committee we design and propose a new

way of operating the whole thing and

after some convincing the BFA guys are

like sure I mean they're not agreeing to

anything their goal is just to escape

the mob anyway they're like whatever if

this makes you happy if this lets us

Escape back to California sure and

probably almost assuredly I mean this is

a committee we're talking about nothing

is going to come of this yep so the

whole Summit reconvenes after lunch

and D gets up on stage not the Bank of

America guys and he proposes this idea

to the group say hey we've got this

committee rather than us taking a list

of grievances back to BFA what if we try

and design a new way that the system

could operate and operate better for

everyone they take a vote on it

everybody

agrees mostly I think just cuz they

wanted to get out of there go back home

and away from the disaster of a meeting

they all get on planes they all leave

most of them probably thinking that

nothing is ever going to come of this

certainly the B OFA guys thinking

nothing is ever going to come of this

but D kind of thinks he just got

authorization to go create Visa whole

new system and he has no power at this

point but he kind of thinks he does and

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notes okay so David dhawk thinks he's

got a mandate to go change things up in

a big way and create some big crazy new

proposal yeah and he's not wrong uh

fortune favors the Bold you know might

you say yes so to say a few more words

about why this is so hard to organize

these group of now competing Banks to

collaborate with one another you've got

multiple banks in the same state that

are part of this system let's take

Illinois again to stick with this you've

got a bunch of banks in Illinois that

are now all part of the bank americard

payment Network which is intimately

linked with their banking

operations if I'm any one of those Banks

I would want to say like hey no I want

to be the only Bank in Illinois doing

this and 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 and 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 and you basically want it to

happen as fast as possible so maybe if

you only allow you know 20% of the banks

in America or 20% of the banks in a

state to be members of this thing

eventually they could sort of bootstrap

the whole network but it takes a lot of

time to go door to door to door to door

and maybe that particular Merchant

doesn't want to take on a second baking

relationship they already have one

they're good totally this is a classic

two-sided Network you want to race to

get ubiquity as fast as possible on both

sides of the network yep so as d 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 and

that sounds like a really really really

ult problem to solve even if you could

do that how are you going to get the doj

to let you do that antitrust is going to

be an issue here for sure but you know

and this is D he's like okay if though

if we could do this what is the

opportunity well we've seen what the

opportunity is for Bank of America that

is The Shining case study so at a

minimum this could do for all the other

Banks and the the world what it has done

for Bank of

America but even more than that though

Bank of America was trying to stretch

here they got greedy to a certain extent

in franchising this out to other Banks

but other Banks signed up for this and

they were willing to pay both a

franchise fee and a percentage of

transaction volume to Bank of America

because the siren song the reward of

doing this was so great to them and

frankly all powered by the fact that

this is what consumers want yes

absolutely so in a certain way this is

sort of I don't want to say inevitable

because this is definitely not

inevitable but again in the thought

exercise of could you do this the actual

organization itself like the network

would have so much value you know if you

could get every Bank in America and then

every Bank in the world and D is

thinking big from the beginning to be

part of this and you could power This

Global Payments and credit Network and

you were allowed to take a fee on the

transaction volume for doing that the

value that you would unlock and generate

it Beggars the imagination to think

about what this could be and if we could

grow the pie enough would BFA be

comfortable not owning the whole thing

that's the bottom line here so there's

this great passage from him in his book

one for many he says any organization

that could guarantee transport and

settle transactions in the form of

arranged electronic particles that's

what he calls digital information

amazing 24 hours a day 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 in wholly

new ways an unim

complex of diverse institions and

individuals this is the opportunity and

this is what he essentially takes to

Bank of America and now we got to say a

few words about D because this situation

is nuts D is a banker he is running the

Bank americard franchise program at what

would become reineer Bank in Seattle but

he's an outsider he's kind of a nobody

he's not senior in a small Bank in

Seattle

he was raised in rural Utah basically in

poverty during the Depression he didn't

go to a four-year College he only has an

associates degree he bounced around in a

bunch of random Consumer Finance jobs on

the west coast all of which he got fired

from because he's too insubordinate he

now walking into the boardroom in Bank

of America which is what he's going to

do and standing toe-to-toe with the vice

chairman of Bank of America and saying I

think you should give me the bank americ

card program because it is in your

self-interest to do so which almost

literally are the words that come out of

his mouth in that boardroom is just

absolutely wild fortune favors the Bold

fortune favors the Bold importantly

though fortune favors the Bold who have

done the work to figure out how to align

incentives such that a logical person

will think through and come to the same

conclusion he has and this is the thing

d is an odd duck for sure but he is

amazingly smart he's like basically all

self-taught he's incredibly well read he

started reading every book on you know

his little farm in Utah that he could

get his hands on when he was seven years

old super importantly you know this is a

Steve Jobs you can only connect the dots

Looking Backward moment he was not very

good at sports in high school so he got

into debate instead and then he also did

debate in college when he did his

associates degree and so he uses all of

the techniques that he learned from

competitive debate and persuasion he has

this amazing quote he says during my

years of college debate I held fast to

the notion that until someone has

repeatedly said no and adamantly refuses

another word on the subject they are in

the process of saying yes and don't know

it I mean d basically is the

prototypical Silicon Valley founder he's

just a generation too early and in the

wrong industry I once had a Silicon

Valley founder give a talk at a startup

weekend Ian 10 12 years ago who said

until your company shuts down you are

just in the act of succeeding totally I

mean cut from the same cloth yeah right

down to every single stitch there's one

other important aspect to D that I think

we should highlight here that enables

him and all of visa to succeed and

that's that he's about as far from the

man and image of JP Morgan as you could

imagine that is what enables this

because if he were the CEO of another

bank or a senior executive or some

well-respected

person marching into the Bank of America

boardroom and standing toe to- Toe with

their board and saying I want you to

give me your very precious Crown Jewel

there's no way it would work of course

Bank of America would say what's in it

for you I don't trust you I don't

believe you even if they did trust and

believe this person they would lose all

of their face and reputation if they

were subordinating themselves to

somebody who could conceivably be their

equal so de's just gone into B OFA with

this Grand Vision of like you should

give me this incredible asset because

the value that it will create outside of

your hands and your fractional ownership

thereof will be so much greater than

what it could be on its own and

miraculously that works like would you

rather own a few percent of something

that is the default Global way that

Commerce is produced or would you rather

Own 100% of you know Bank Amer cards yep

totally incredible that D actually

convinces Bank of America to do this

nobody in the world would have thought

that this could

happen but now the work is sort of just

beginning because there's two things now

that he needs to do one he hasn't

actually figured out how to architect

this thing such that it works so he's

got to go do that two though then now he

has to go back to all of the soon to be

former franchisee Banks and convince

them why they should do this and this is

a different argument from what he made

to BFA BFA he's trying to get them to

give him the asset with the other Banks

he actually needs to get them to change

their behavior he needs to be able to go

to say the couple banks in Illinois

that are existing franchises of the bank

of card system and say hey the new

regulations the new operating laws for

this organization are going to be all

the banks in Illinois can join and we

actively want to go convince all of your

competitors to come join this system I

see so he's basically coming to them

with a waiver and saying I want you to

wave your exclusivity to some territory

because in our new construct here where

we're all working together you and every

everyone else is agreeing that it's good

for the value of us all if we wave our

exclusivity you know what this is like

this is like back in our NFL episode yes

it's exactly right when the NFL started

negotiating National Television rights

collectively as an organization yep a

bunch of the individual teams hated that

because they were like if I'm the Jets

I'm making more money in my New York

metro area doing my own TV deals then

I'm going to get as a share from you the

NFL of a national deal but in the long

run run it was absolutely the right

decision and value a creative to

everybody including the Jets that the

NFL centralized this you'd rather be the

Jets with their proportional share of

the $4 billion a year TV deal that the

NFL has today than uh whatever their

very fat contract was alone in the what

the' 607s totally it is exactly the same

thing here okay so how's this whole

thing going to work de and a few of his

other fellow committee members they go

to Salo California just North of San

Francisco just across the Golden Gate

Bridge and they do an offsite for a

couple days at a hotel in Salo and there

they come up with a number of operating

regulations guidelines for this

hypothetical new entity four of which

we're going to talk about here that are

super critical one ownership of this new

organization that's going to be called

National BankAmericard Inc the new owner

of the bank americard program is going

to be in the form of

irrevocable

non-transferable rights of participation

so you're not going to own stock in this

thing there's no equity the way that you

have ownership and the percentage

ownership that you have in the network

is by participating in it and the amount

of volume that you are contributing to

the network oh interesting so this means

a couple things one it's sort of like a

rep representation and ownership

according to Value contributed two it's

non-transferable so you can't sell it

any individual bank if they were to say

like o this is valuable now I'm going to

go sell it and then I no longer have any

incentive to participate in the network

if that starts happening then it'll lead

to a Cascade for the exits and the

network will lose value so there's no

way to do that so it's basically

designed for you to kind of break even

on it if you're putting in 17% of the

transactions on the whole network and

you're paying in fees on 17% of the

transaction well good news for all of

the leftover profits from running the

network 17% of them go back to you

you're making the assumption that this

is a Coston organization forgetting the

fact that it is one of the greatest

business models in Revenue generators of

all time you are contributing 17% of the

volume to this you are entitled to 177%

of the profits I see that we are

extracting from the merchants and the

card holders yep because this this is

the natural business model of

interchange to do the exact same things

that was being done with the sales

drafts where you sort of give a discount

to the retailer and when I say discount

I don't mean a beneficial one I mean I'm

discounting the amount of money that I

am giving you off of the 100% that you

would have received by the customer

basically taking that old check Courier

business model and carrying it into sort

of a network form yep exactly so the

actual legal structure that de and his

fellow committee members land on for

this is a

for-profit non-stock Membership

Corporation that is a mouthful it is

there's a myth out there that Visa was

originally a 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 H and that was to

get around Banks selling their interest

so you don't participate in it you don't

own it so say it one more time it is a

for-profit a

for-profit

non-stock Membership Corporation your

ownership is your membership fascinating

it's like a co-op it's like REI or

something like that yeah yeah the way

that D describes it to all the other

Banks is it is a reverse holding company

the parent entity is owned by the

subordinate members as opposed to the

top level holding company owning all the

subordinates there's actually another

NFL analogy here the NFL doesn't own the

teams the team owners own the NFL yes

but the NFL sets all the regulations for

how the game is played and all the teams

submit to it that's actually probably

the best analogy for Visa as the NFL

league organization I think it totally

is okay so that's Point number one maybe

the most important one point number two

it is a

self-organizing body with irrevocable

governance rights for each member and

this is well I guess also how it's like

the NFL basically this means this is a

democracy every member has a vote in

determining how this organization runs

anything that you could conceivably have

a vote on changing our regulations

setting them in the first place budgets

fees all this stuff every single member

bank will have a vote and importantly

every single member Bank can call a vote

at any time I mean it's literally like a

pure democracy wow you could IM imine

nothing happening if everybody has the

right to do that well they set the

Threshold at 80% for anything to happen

I see so there's a strong incentive not

to call a vote and waste everybody's

time unless you really think you can

round up 80% of the votes fascinating

which in practice just gives D all of

the control and power of the company

because everybody's going to listen to

him as the CEO point three we've

basically already discussed and that is

that the mission of this organization is

to facilitate cooperation and Trust

trust among competing institutions to

grow the bank americard payment Network

larger than any one institution could on

its own which is the pitch he gave to

Bank of America leadership also though

this is a implicit kind of

forbidding of banks in the network from

going off and also forming or

participating in competing networks so

to borrow like a crypto phrase here like

no side chains allowed everything

happens on the Network I see so none of

these banks are members of inbank at

this point these banks are exclusively

members of whatever the heck Visa's

predecessor name is National Bank

America card Inc National Bank americard

in yes at this point in time a antitrust

lawsuit would change that very shortly I

see but at this point in time it's like

nope you are part of NBI exclusively you

don't go join inbank MasterCard and you

also don't go start your own networks or

peel off parts of the network everything

that you are doing in payment card

operations needs to Route into this

network this a big contract to sign

totally again this is why de needed to

paint the picture both to Bank of

America and all the other Banks the

prize is worth it yep and then finally

point four there will be a singular

Universal set of operating and governing

procedures that

much like the US Constitution is

infinitely modifiable by a threshold

vote of all members this is the 80% I

talked about and two also like the US

Constitution to its citizens all members

agree to be bound by its law both now

and as it is so then modified in the

future so like if you're signing up for

this you are signing up for the

regulations and operating procedures as

they exist today and for any any future

changes that come of which you will have

a vote in this is a democracy but you

can't go leave the Democracy right

you're signing up for something that

might change in the future and you don't

get to know today if it's going to

change in the future but at least you

have some say in it that is exactly the

pitch and amazingly even describing this

now having done all the research read

all the books written the script that

we're talking about here I still can't

believe this actually happens d goes on

like a tour across the country he goes

and meets with all the banks Bank of

America helps him out they bring senior

Executives to to help convene you know

meetings with all the banks to persuade

them every single member Bank of the

previous Bank americard franchise

organization every single one of them

signs up for the new organization led by

D not a single person jump ship how many

banks were at this point over 200 wow

isn't that wild I mean once you get to

like 70 or something then it kind of

seems likely that everyone's going to

tip but in those first 20 the fact that

nobody was out is crazy totally and D

writes about this too Bank of America

helped them out they identified the 13

most influential Banks and they convened

the first Summits with them of like hey

what do we got to do to horse trade to

get you guys involved and then you kind

of spiral out from there but yeah every

single one nobody jump ship and when is

this like 1970 is the process starts in

1968 it all wraps up in either 1970 or

1971 H importantly we've talked about

antitrust in doj a bunch here you would

think that this would be setting off

massive alarm bells in Washington and

with the Department of Justice they get

ahead of this so d goes to see them and

he gives the same pitch to the

government he says like look obviously

this is the whole industry all the

competitors in the industry colluding to

work together that's the whole premise

of the

organization but what we can create by

doing this would not be possible

otherwise and it will be so profoundly

useful and important to the American

Consumer and American businesses that it

is worth you letting us do this so they

actually get a letter from the doj

saying like Hall Pass you're good on

this one wow it's just like the

presidential exceptions for the NFL like

an antitrust exemption where yeah we're

amenable to the fact that you're

collabor potentially colluding but it is

actually one of the things that we

believe will make the country better so

go for it America wants both its

football and its credit

cards amazing and that was a key point

in then going and convincing all the

other Banks to sign up for this because

that was one of the first questions they

asked hey if we do this aren't we

inviting the doj on our backs and D is

able to say like nope got the letter

right here we're good wow amazing so

very shortly after this after the

creation of NBI National Bank America

card Inc D in 1972 he's thinking

globally from the get-go he goes and

creates a parallel similar organization

of International Banks using the bank

americard system Visa was Global from

basically day one and it wasn't just

Barclays in the UK it was sumomo 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 were going

to tell this was actually harder to pull

off if you can imagine that than forming

NBI because it really is not clear for

some of these International Banks that

it is better for them to be part of the

global Network than if they could run

the table on their entire country say

you're I don't know I'll pick sumomo

Bank in Japan you have to decide do I

want to buy D's pitch of it's worth it

to me to be a proportional owner of Visa

or I could be the singular dominant

credit card Network in my own country

which is more valuable and for many of

them they'd be right in saying it

actually would be better to be singular

and dominant like you look at China

union pay I mean that is the dominant

way of payments flowing in China that

was for them the right move totally so

once again in selo this all comes to a

head D knows that probably not all of

the International Banks are going agree

to this and some of them are going to go

their own way so he calls you know a

final Summit in Salo they're going to

vote the next morning final vote on

who's going to join the soon to be Visa

Network and who's going to go it on

their own and D gives this nostalgic

speech at the end of dinner saying like

here in Salo looking out at the bay this

is where me and my colleagues we dreamed

up the original vision for what this

could be and it's sad that this won't be

extended to the whole world and a true

global payment monetary system but we're

all gathered here we should celebrate

having accomplished so much and had a

chance at this dream just having the

chance is worth it he's really good with

his debate skills and then he's like so

before we meet one more time tomorrow to

obviously disband this whole Venture and

have the dream just be a memory we have

one more thing for you one more thing he

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 cuff

links that on each of the two cuff links

there is one half of the globe and under

one side it says in Latin studium ad

prosperity

which translates as the will to succeed

and the other side says volas

inum apologies to Latin speakers out

there that I'm butchering that

translates as the grace to

compromise and T explains this all and

somebody from the crowd yells out D you

miserable

bastard because he just pulled on

everybody's heartstrings and like he

gets the votes and the next morning all

the holdouts reverse course they all

join and what you can't make this stuff

up it literally happens the cuff links

are out there you can Google him he did

this so he's basically saying hey

whether you voted for this or not you're

getting to leave with something saying

I'm so great I had the will to

compromise even if you didn't and you

were the reason that you killed it D is

just such a character so the other thing

along these lines that he does which is

just hilarious once this is all set up

this the international part of Visa

becomes first I banko IB

NCO shortly after this they Rebrand the

whole thing into Visa which we'll talk

about in a minute for the board the

board is huge because it's like all the

representatives from every region from

every country there's like 25 people on

the board D holds board meetings all

around the world you know different City

all the time it's a global organization

whatnot he invites the spouses of all

the board members to come to each

location because oh it's a family trip

you know Etc and then he gets the idea

he invites the spouses into the board

meeting itself oh what a nightmare so 25

board members plus their spouses in his

board meeting this means two things one

nothing is going to get done they're 50

people in the room two though he needs

all these people to behave well together

and you know be generous and Gallant

what better way to make sure they're on

their best behavior than to have their

spouse sitting behind them wow so like

are you really going to act like an

in front of not only your spouse

but the spouses of all these other

global bank heads that's so funny I'm G

to start doing that we should have our

wives in the room while we record

definitely not oh amazing amazing I

think neither would join for that

totally no they'd be like

no okay so how does the name Visa come

about how does the sort of joining of

the international and the domestic okay

Visa is so important it's not just a

Rebrand it has to happen once this

international organization is set up

yeah America can't be the name yeah Bank

americard ain't going to work and

importantly as we'll get into in a

little bit this is a huge problem for

American Express too the soon to be Visa

knows if we're really G 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 so D holds a

contest in internally within NBI ianko

to generate a new name and he offers a

$50 prize for the winning entry that is

chosen and as Legend goes there are so

many submissions of the name Visa that

when they finally unveil it D makes a

big deal and writes out a $50 check

check why are they using a check made

out to everyone in the

company which is funny but then they

changed the name to Visa Visa it's the

most incredible name

ever created I mean Nike was so great

this is like even better you cannot have

a better name for what this is it's

interesting it's in English I mean I

guess it makes sense it's the most

spoken language but well no it's not

just in English the name Visa in every

if not almost every language on Earth

and when you're traveling and you need a

visa for a country they call it a Visa

in other languages too that's what it is

but when you are traveling

internationally when you're going

through customs in any country it is

identified as a Visa that is the name

yeah the universality it's sort of a

presumptive close cuz at this point you

know they've got what 3 four 500 Banks

you know and they have 16,000 today it's

quite the presumptive close that it will

be universally accepted everywhere the

way that Visa would imply just every

Dimension the presumptive close the

implication that this is a Global

Network that you can bring your Visa

with you when you're traveling to other

countries and it'll work the actual

definition of the word Visa that is your

entry pass this card is now your entry

pass to Commerce to experiences that it

works everywhere as you said that it's

Universal it's amazing yeah so the Visa

name brand everything there's two more

levels at which it becomes really

important they do something really

really really smart so we talked about

the need for the universality of a mark

and why early inner bank that was a

problem until they standardized on

MasterCard they've got the three bands

the blue white and gold and now they

have a global name but all the

individual Banks the hundreds soon to be

thousands of banks they all want their

own branding on the card too so Visa

says okay here's the operating

regulations every card has to have the

blue white and gold in the middle White

Band Visa logo goes there nothing but

the Visa logo on the top blue band you

can put whatever you want you can put

your own bank logo you Banks get

creative you can do literally whatever

you want Banks start going around they

do Affinity card programs with NFL teams

with Merchants this is how you get the

Southwest card this is how you get the

San Francisco 49ers card this is how you

get the XYZ everything that they're a

bazillion of now so in the blue stripe

on the top of the top third of the card

the banks start co-branding with the

name of their bank and some affinity yep

and this is kind of the Brilliance of

the Visa model they were like it's open

you do whatever you want up there right

that seems good for us we're happy with

that of course it's great the whole goal

is just get more consumers and more

merchants on the network so anything

that's going to do that great while

maintaining the universality of Visa

great we got the middle you got the top

go wild do whatever you want wow and

that's how I end up with bb8 on my uh

card

today amazing maybe the most important

thing though for Visa really pulling

away and becoming at least for many

decades the dominant global payment card

Network the name change ends up becoming

this incredible growth hack because what

happens is there the new operating

regulations now that mandate that all

cards out there all the previous Bank

Amer cards need to be migrated to Visa

cards I think within like 2 years of

this being declared or something

something like that some banks start to

see this as an opportunity to go poach

card holders from other Banks so the

competition within the network obviously

this still exists because consumers now

they know and Visa runs a national

advertising campaign hey your bank of

Marica card is going to switch to Visa

so some banks in a verion of the Fresno

drop they start sending unsolicited

letters to Consumers who are already

Visa Bank America customers with another

bank they're like oh hey it's time to

switch over to your Visa card here's the

application sign up with this nice of

them to at this point in history offer

applications I think a 100 million cards

got dropped in the United States before

the uh government made it illegal to

just start randomly issuing credit to

people without their awareness or asking

for it totally wild but because of this

a whole bunch of consumers start sort of

unconsciously switching the bank that

issu isues their Visa card and then once

this starts happening this kicks off a

total arms race where all the banks in

the network are now like shoot we got to

blanket the whole country and like

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 a system by the

way this is the thing that pushes Visa

ahead of what was I believe then called

Master charge yes the in bank had

changed to Master charge they hadn't yet

turned it to Master Card but in 1976

Master charge was actually bigger they

had 7400 Banks and at this point in

history Visa had about 7,000 Banks

Master charge also had more cardholders

37 million versus Bank America cards 31

million before they changed to Visa so

this despite all the deck chair

rearranging between the member banks it

was great for visa to LEAP ahead of

MasterCard totally so that was number of

member banks Grows by 20% the number of

active card holders in the Visa Network

in this one year Grows by

45% wow isn't that wild so as you say

they blow way past MasterCard thanks to

this they're already way bigger than AMX

because MX is a different customer

segment which we'll talk about in a sec

and this really puts them on the path to

becoming the dominant Global Network

that they are today yeah and it's worth

a moment on AMX here because I would

have thought just like Facebook or

Whatsapp or Google when you have this

sort of winner take all massive Network

effect business that the single

centralized player Network effect would

win why wouldn't AMX win with their

closed loop system where they own the

whole thing end to end and can provide

the most in incredibly custom experience

for everyone on their platform on the

merchant side and on the consumer side

and one of the answers of why this open

loop system beat the closed loop system

is Visa adopts this strategy of the

network of networks they go sign up One

bank that bank can go sign up you know

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 AMX AMX also is a bank themselves

so is highly regulated and they're a

bank by this point in history I believe

on both sides of the transaction so

they're both a card issuing bank and

they are a merchant acquiring bank and

so in terms of scaling internationally

you mentioned their name holds them back

also they have to become a bank in

another country in order to expand to

that country whereas Visa just needs to

go tap a few Banks and say say why don't

you go figure out how to grow for us

there so this network of networks thing

the open loop system well it creates a

little bit more of a clui user

experience because they're sort of the

lowest common denominator of data

getting passed through the network it's

sort of Open Source versus something

that's wholly owned and operated by a

company or a protocol versus fully owned

application anytime that you have

something that's more distributed you're

going to be compromising a little bit on

the user experience because you can't

sort of rule by Fiat when you want to

make a change but it does potentially

come with much better scalability which

is the reason why these and MasterCard

have become the dominant way versus the

Clos Loop systems yep it's also worth

closing the loop on MasterCard here too

I mentioned that the doj eventually came

after both visa and MasterCard and

prevented them from being exclusive

systems that does happen in 1975 and so

this concept of Duality takes hold for

the banks Duality meeting they can

multi-home on both visa and

MasterCard in all the testimony and case

with the doj D is obviously 100% against

this happening he doesn't want his Banks

to be able to join MasterCard 2 but he

also makes the surprisingly correct

argument he's like look this would be a

huge mistake because US Government if

you do this you are going to freeze the

payment networks in the US nobody is

ever going to develop a new competing

open loop payment Network because now

there's no more competitive Vector

between visa and MasterCard we'll all

have the same features banks will be

members of both they're kind of going to

operate in lock step the prices should

be identical for both all this stuff and

the doj is like no no no no we're going

to do it anyway irony of ironies later

in

1988 the doj again sues visa and

MasterCard for being a duopoly and not

competitive enough so D was right d was

right and to this day D has been right

there have been many attempts that we'll

talk about toward the end of this

episode of displacing visa and

Mastercard or inventing new payment

systems and like they never work or they

haven't worked yet great point they're

in the process of

working so great it's probably actually

worth sharing the MX thing so MX tried

this crazy strategy in the 80s and I'm

flashing forward 10 years here but they

would basically cut their interchange

the discount rate that they were

charging Merchant

massively if those Merchants would go

exclusive to AMX and this actually

continued until

1991 for many of their merchants and for

Costco went all the way to 2016 where

they had the exclusive agreement with

AMX and if you were going to use a

credit card at Costco it had to be AMX

but interestingly ven MasterCard cried

foul when uh you know all of their Banks

were multihoming and MX with their

virtue of a slightly different business

model was allowed to go and try to lock

up Merchants to be exclusive to them So

eventually the whole thing kind of

stopped and you know Flash Forward to

today all cards are accepted at

basically all locations yep so this

basically

concludes the full Visa story like how

did this incredible thing happen you

know we've answered D'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 V and D created yeah as

Dave puts it in electronic value

exchange there's a socio technical

aspect to this company and we've talked

about the socio but not the technical

something that is also true and also I

think really underappreciated about Visa

is it's also a technology company and

there is a whole technology story in

parallel with this too that enabled the

Visa we know today to D's question of

where is Visa headquartered and nobody

knowing that it's headquartered in the

Bay Area it's a Silicon Valley company

it was started in the same place and

time as Intel Atari Apple the only thing

that is different about it versus those

other companies is it wasn't funded by

venture capital and it thus didn't make

anybody Rich except the banks who owned

it and thus were already rich but

there's an incredible technology story

yeah great Point all right so what is it

well that's a great question Ben and

before we get into it this is actually

the perfect time to talk about another

great technology company and leader one

of our favorite ones in fact stat Zig

who has also built a tremendously

powerful piece of infrastructure focused

just like visa on reliability as we will

talk about later this episode Visa never

goes down or basically never goes down

and that was a super important part of

their strategy but it is extremely hard

for most companies to achieve this level

of reliability in their technical

infrastructure yep building reliable

infrastructure is a very broad topic

obviously but one easy way to improve

reliability is staged rollouts so a lot

of times what leads to downtime is

unexpected interactions from new

releases which crash a component of your

app or service by rolling out a new

feature in stages first to employees

then to an increasingly broad set of

users you can test for bugs in a

production environment before you

actually launch the feature most

companies don't do this however largely

because unlike say Facebook they don't

have the right tools yep thanks to stat

Sig though it is now super easy to do

this the right way if you're building

software products stat Sig 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 roll out

stattic is a critical part of how

companies including Financial ones like

brex and also like notion launch their

features to hundreds of millions of

users without causing outages or hurting

core metrics yep it's super impressive

so if you're a startup they have a

generous free tier and a special program

for Venture packed companies and if

you're a large Enterprise like those

companies Ben just mentioned they have

transparent and non seat based pricing

acquired community members can take

advantage of a special offer including 5

million free events a month and white

glove onboarding support just go visit

stat.com acquired that's

stats.com

acquired to get started on your

datadriven journey okay so David what

does Visa's technical infrastructure

look like and how did this come to be so

everything we just described up until

now amazing incredible unlikely one in a

million but all it really bought DN Visa

was the opportunity yes to actually

realize what he sold to Bank of America

and the other Banks of a instant global

payment Network that a large percentage

of global Commerce runs on you had to

build a lot of technology to make that

happen and if you asked the question of

D back in 1968 okay let's assume we do

this and we put one of these soon to be

Visa cards in the hand of every consumer

on the planet do they actually want to

use them instead of cash and checks and

the answer to that was probably not

fascinating now they wanted to use them

in specific use cases like Ben you

pointed out when you want to make a 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 Diner Club at AMX 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 yes and

to illustrate we will link this in the

show notes but there is an old TV

segment from 1993 not that old pretty

recent been a really sad news 1993 was

30 years ago we remember it but it's old

now 1993 to today is like the 1950s were

to us when we were kids not good not

good David not good this 1993 tv segment

the news is that Burger King has just

rolled out credit cards that should tell

you a lot Burger King prior to 1993 did

not accept credit cards or at least this

commercial makes it seem that way and

they interview this woman and she says I

think it's pretty sad when you have to

use a credit card when you go to a fast

food restaurant that was a view of

someone just sitting in a Burger King in

1993 and a second guy is interviewed and

says something to the effect of I just

hope it doesn't slow things down cuz you

know they'll have to call New York and

then they'll to do the thing and I just

hope it doesn't slow things down and

it's like the prevailing idea is that

cash is Fast Cash is easy cash is

respectable credit cards are debt what

this woman is saying is really sad if

you need to use debt to buy a burger yes

but even at this point in history it was

viewed as this cumbersome thing rather

than a convenient thing to bust out the

card rather than you know like I

actually think Burger King corporate

crunched the numbers and they were like

gez for the amount of time we spend

handling change we just want to

encourage everyone to be swiping the

card all the time even if they're you

know losing some money on The

Interchange it's crazy that was 1993 I

mean yeah compare that to today and I

mean I don't know about you but I get

pissed when somebody ahead of me in line

starts breaking out cash and coins I'm

like oh my god oh what are you doing so

start us back I think the last time we

checked in on how the settlement worked

was around literally collecting paper

sales drafts and then starting to mail

it around yes so to get from there to

today three major pieces of Technology

needed to be built by Visa one was

transaction

authorizations so when we were talking

about transactions happening earlier and

the person in Burger King was

referencing like oh they got a call to

New York and they got to authorize the

transaction and all that we glossed over

one sort of stop Gap SL bandaid that

visa and other credit card networks

implement around

authorization they didn't actually

authorize every transaction so when you

paid for something with a credit card in

a store all Merchants had what was

called a floor limit and the floor limit

was any transaction over that limit

could not be authorized directly on the

floor and say it was I don't know 50

bucks or something like that anything

paid with a credit card under $50 it was

basically within the Judgment of the

cashier to oh wow say yes no and so

everybody just said yes I mean the

reality was this was the threshold below

which the banks and Visa were willing to

say okay we'll accept a certain amount

of fraud interesting and then above that

limit the cashier had to go call up the

Merchant Bank say hey we got a card here

it's this number somebody'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 card to the card

holder call up the card holder Bank oh

my god get somebody on the horn there

say hey I've got your card holder

Benjamin Gilbert his card number is XYZ

you know 123 can you look up his credit

and you know he wants to buy a $500

refrigerator can you tell me if he's

good for it right and this effectively

would be like have they hit their limit

yet yes have they hit their limit the

issuing bank would go look that up the

person there literally the person talk

on the phone to the person The Merchant

Bank give them the answer the merchant

bank then switches the line back to the

cashier at the store and says like yeah

Ben is good for it or no Ben is not good

for it so you had Banks talking to Banks

people at Merchants talking to people at

their Bank talking to people at the card

holders bank and then reversing the

whole chain but importantly you had a

person at the Merchants Bank calling a

person at the card holders Bank yes

today that is known as as visanet

there's this piece of technology that

sits in the middle that eliminates that

bank-to-bank phone call and so this is a

big part of one of the first things that

Visa builds and that process that we

just described that could take like 20

minutes and it just didn't work outside

of business hours for those Banks so say

you know now that bank of Marica Kart 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 wow

that's crazy not good definitely not

good so dmva know that this is like the

first thing that they have to address in

1971 right after NBI is formed D starts

a project called the bank americard

authorization system experimental or BC

base to build technology to address this

problem

the whole thing actually started rather

inauspiciously because right after all

the approvals came through for D to form

NBI I think it was literally the evening

before the first board meeting Bank of

America comes up to D and they're like

can we take you aside there's something

you need to know oh God that's always

fun before a first board meeting and

they're like well it's kind of hard to

tell you we've been in secret

negotiations with American Express for

months to create a joint Venture

together Bank of America and American

Express that will create an automated

system for transaction authorization for

multiple credit card systems across the

whole country and we're going to do this

so you know D if you want us to remain

part of NBI remember this is Bank of

America the most important part of NBI

oh my God I know you know that part of

the operating agreement is like you know

we can't really operate outside of the

bounds of MBI but this isn't really

outside the bounds of the 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 whoa

so not good and it's true it's not

really like they're issuing new cards or

acquiring new Merchants they're being a

technology provider because they and

American Express both see that hey this

is a really really really valuable piece

of technology h d is of course pissed

but what's he going to do B OFA says

take it or leave it D takes

as D then tells the story Bank of

America and AMX go out and they try and

Pitch the other banks in NBI and in bank

and MasterCard on joining the system but

there's all these problems with it and

they don't know how to build technology

and the whole thing dies on the vine

maybe maybe that might be part of the

story the other thing that happens is

interbank and MasterCard actually get

involved in the project the whole thing

then morphs into a tripartite Consortium

of inbank American Express and 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 so if you

go forward with this we're going to sue

you and they all abandon the project and

this is huge for Visa because this means

they can build it on their own

fascinating so they do the natural thing

at the time I mean these are Bankers

even though they're based in San

Francisco and Silicon Valley these

aren't Tech folks they put out an RFP to

folks like IBM systems integrators you

know the accent of the day to go build

this technology for them go build a

computerized authorization system for

the bank of maricard Visa Network all

the bids come back and of course they

are all way over budget and way over

time so D says well screw it we're going

to do it ourselves how hard can it be

wow so in his very D way he goes and he

recruits the guy from The Firm that

impressed them the most throughout the

bidding process was a firm named TRW and

a guy named Aram tulan d goes back to

him and he's like I like you you come

work for me leave TRW I'm gonna hire you

you build this here in house wow and

I'll give you the resources you come

join us and you'll build out your own

Tech Team here within NBI slva Aram

comes and joins and starts the core of

the Visa Tech Team D gives him 9 months

to build this entire thing from scratch

and to do this involves building a first

Nationwide and then ultimately worldwide

Telecom Network so that the electronic

communication can happen two installing

computer systems in each of the member

banks around the country so that instead

of the banks calling the other Banks you

know this can happen over computers

three training the people at the banks

on how to use these new computer systems

and then four maybe most importantly for

the long run building a new centralized

data center for Visa in the Bay Area and

this becomes the Sano campus you can see

it right off of 101 as you're driving

between San Francisco and Silicon Valley

it is I believe still the headquarters

of Visa today now huge campus in Sano

where they build the data center until I

think next year it's going to go back up

to San Francisco when they finish a new

building that's right I think it's going

to um Mission Bay H so miraculously Aram

and his new tiger Visa Tech team they do

it they do it in nine months and it

works so Dave Sterns writes in his book

about this whole situation and about d d

maintained that if you give computer

people more time they will just consume

it so he always

insisted so it's so true so he always

insisted on shorter projects with

uncompromising

deadlines they will just consume it

they'll just consume it fascinating okay

so they build what becomes visanet in

House at this point you know there's no

internet so it's all just working over

telephone communication yep direct

networking amazing and so they're just

operating the whole network out of this

data center in California yep now

importantly this is only for transaction

authors ations so the cards and the

point of sale have not been digitized

yet that's going to be the final third

piece of the stool of Technology the

Visa builds this is just when a merchant

makes a call to their Bank saying hey is

this card good for this amount this is

then the interbank communication I see

so how does the settlement happen at

this point in history so that's what's

next that's the next big operational

technical problem that Visa needs to

solve is like literally moving the money

when it needs to be moved reconciling

the transactions moving the money

getting everything wrapped up at the end

of the day week month sending out

statements all this stuff you can sort

of think of the first piece that we just

described as the authorization as sort

of the front end of a payment card

system the settlement is the back end

you know the front end piece consumed a

lot of phone time and people the backend

piece consumed a lot of paper and time

too maybe more time but like a lot of

paper cuz you're effectively mailing

checks and even more

perniciously as the network grew and at

this point in time soon Tob Visa is

growing

explosively the complexity of this

settlement piece also grows sort of

exponentially every new bank node that

you add into the system now has to

interact with all the other bank nodes

and so like this is a hard computer

science problem it's an nsquared problem

well it's a problem that is easily

solved by computers but when you're

doing all this manually with paper this

is a big big problem N squared is much

worse when you're doing it with paper

than with computers yes so what you

really need to do this efficiently to

bring it all the way back to the

beginning of the episode is a clearing

house you need an automated Clearing

House and this is unbelievable a few

people had referenced this to us as we

were doing the research but I kind of

forgot about it till the end when I got

to this point and I was like holy crap

Visa Builds an automated Clearing House

for themselves to do settlement

electronically over the network they end

up calling this project base two After

Base one which was the first thing doing

authorizations this happens at the exact

same time and place as when the Federal

Reserve is building their own a system

for checks you know automated Clearing

House a 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 that is

wild now I've never read anything I

couldn't find anything I've never heard

anybody say that they like talked 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 this same place the same

time solving the same problem solving

the same problem which again the problem

is this gigantic list of a whole bunch

of transactions just happened people

just agreed to make them happen and now

we need to settle up at the end of the

day and if you paid me a 100 bucks 500

times and I paid you a 100 bucks 400

times what is the net that actually

needs to get transferred and that is a

far more efficient way you know batching

them up is a far more efficient way than

transferring the money back and forth

every single time but still can be a

complicated problem especially when you

have thousands of banks on each side of

that equation it really is like the

exact same problem that both of these

teams are solving and with the same

users the same Banks it's totally wild

once base 2 is done and again it also

happens in less than a year that it's

live and up and running average

settlement time for transactions on the

Visa Network go from taking a week on

average to happening in batch overnight

every single night every transaction on

the network settled every single night

so the speed is super important this has

lots of implications for float amongst

the banks you know like some good some

bad between the banks between the

merchants the issuing bank right if

you're the one that owes the money you

kind of want the payment to take more

time yes exactly exactly also

importantly this is from Dave's book it

ends up saving about $15 million in

labor and postage costs to the banks by

automating this just in year one wow and

imagine if this were done manually today

it wouldn't be possible to do this

manually today no you needed the

Technology Solutions that they've put in

place to enable the Commerce scale that

flows on this network today yep it is

also during this project that one of the

most famous Visa Tech Team stories in

history happens this is a good one this

is in Dave's book so one of the guys I

think he was working on base one and

then maybe got transferred into base 2

he is thinking about the system and

reliability is so important you know

this network can't go down he's like huh

we actually have a

pretty serious vulnerability in this

system so he goes to CD and I mean the

whole Visa organization I think is like

less than 50 people at this point in

time wow just wild and he's like d you

know all this technology we're building

you know we've got authorizations

running we're in the middle of getting

settlement running like the whole Visa

Network now depends on this technology

we're providing the service off of one

computer in one data center which is

made out of wood and sits on a hillside

that has dry grass right by a freeway

below a parking lot that is perched on a

cliff and we're also about a mile from

the San Andreas

fault so you know we really want to

think about having some sort of

redundant parallel site uh data center

out there and uh d uh it his very D way

he thinks about it he's like all right

let me think about this over the weekend

he comes back on Monday and he's like

all right you're right thought about it

you now have a new job your job is to

solve this problem 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 6 months months and invent the

technology to keep these things

synchronized so they are actually

redundant yes so now D is not technical

enough to uh talk about that but this is

super important up until this point in

time state-of-the-art in the sort of

fledgeling data center world was yes to

have redundant other location backups

but the way that it was typically done

was you had your primary data center

that operated at full capacity all the

time the backups were just like cold

storage they were like dormant backups

that only were there to come online if

you had to fail over from the primary

system Visa though and the Visa Tech

Team they're like you know if we're

going to go through all this trouble and

expense of building another data center

let's use it let's use it so they re

architected base one and completed

architecting base 2 to run concurrently

across multiple data centers as like

shared operations running across

multiple data centers which I think may

have been either the first or one of the

first examples of that ever happening

wow totally wild right I don't know that

it was the first but it was definitely

not state-of-the-art before this whole

data center world was still pretty new

and Visa definitely like through

Ingenuity invented a way to do this it's

fascinating and of course this is now

how every data center in the world runs

today pretty amazing so that was Data

Center Innovation which sort of happens

in concert with settlement digitization

the third Big Leg of the technology

stool that Visa builds is finally

digitizing the point of the transaction

itself and that requires both figuring

out some way to make the cards digital

or capable of being read in a digital

Manner and digitizing the point of sale

terminal in the merchants those verone

you know traditionally they had a huge

market share well this is when verone

gets built there was no verone before

this Yep this is huge this is the Holy

Grail the base one authorization system

that was still only for transactions

above the floor limits at the merchant

so you know above 50 bucks or 100 bucks

or whatever it replaced the need for

phone call

but it didn't digitize the transactions

themselves so this is actually every

transaction now is running digitally for

authorization over the network exactly

not only authorization but just think

about all the things that happen

digitally around transactions the data

you know everything this is the

beginning of it all so the first step to

doing this as we mentioned is digitizing

the cards and that really meant making

them machine

so this the cards were just pieces of

plastic with embossed numers on them

like you had to say or type the numbers

into something and the nice thing about

the embossing is that if you run a shun

shun on it a Zip Zap with the uh the Zip

Zap or the card imprint reader you

actually can get the numbers off of it

without writing it down yourself that

was a huge productivity gain when they

launched the sort of imprint reader

machines yep so 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 City

Bank had financed a proprietary magnetic

solution that they were trying to push

on the industry there I think they a

bunch of law suits and didn't they try

to like hack the magnetic stripe and

then they did just to prove that like

the proprietary thing would have been

more secure yes but it was proprietary

so Visa's like Hey we're not going to

pay you City Bank skiff on everything

that we do here we take AIP

exactly so they standardize on the mag

stripe for the cards The Next Step then

is they have to create a digital point

of sale terminal now this is pretty far

outside the scope of what visa itself

could do like Mass produce a small

inexpensive piece of Hardware that needs

to get distributed to millions of

merchants around the globe that is

outside their circle of competence yes

we mentioned earlier and you alluded to

this is when verone takes off so what

visa does is they create a spec they're

like this is the spec of what we kind of

need to be created and they invite

different technology vendors to bid on

it verone ends up becoming the large

dominant I actually don't know what

their market share was or is I think

they had like two-thirds of the market

at Peak yeah and it's pretty crazy they

come up with this sub

$500 device that can sit pretty easily

on a merchant countertop that already

has a bunch of other stuff on it and not

a lot of space and get it distributed

and uh installed at all these Merchants

now the merchants didn't exactly want

this thing necessarily but the way Visa

incentivized them to get it is they gave

Merchants who used it a discount on

transaction fees I think for a period of

time for transactions that happen

digitally over the digital Network I see

if you use this instead of the Zip Zap

you'll get cheaper fees yep exactly

which that business model carries

through to today I mean the way that you

charge a card massively affects the

interchange that gets charged whether

it's keyed in with numbers or whether

it's swiped or whether it's an

e-commerce transaction totally one

really fun piece of implementation uh

detail around this just like with base

one and authorization where Visa had to

build out a telecommunications Network

amongst all the banks now Visa needs a

telecommunications Network amongst all

the merchants around the whole world the

country and the world that's a another

whole step change that's like single-

digit millions of nodes yes so what are

they going to do for the pilot program

they work with one of the big Telecom

vendors and essentially like build it

out themselves we're now in the 1980s

here but they realized during this that

there's this new fledgling kind of

consumer networking service out there

called you

serve and for folks who either weren't

alive in the US at this time or not

Americans comp you serve was like an AOL

competitor in the early days of the

internet I think they invented the GIF

oh I think that might be right yeah yep

so as a consumer you would pay a monthly

fee to comp you serve or AOL or whatever

and it would be your internet service

provider but also like your email and

you know your portal to the web it was a

proprietary internet so they somehow get

in tou touch with CompuServe and they

realize 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

compus serve network capacity to send

their digital transactions from Merchant

point of sale Terminals and I think this

goes on for like years

that's crazy I had no idea that's

fascinating totally wild normally you

run into the problem where with spare

capacity where like the time where

people want your extra capacity is when

you have none so it's kind of amazing to

find two complimentary use cases for the

same infrastructure that when one is

waxing the other's waning yeah pretty

cool so now finally with this third step

all the pieces of the transaction are

digitized computerized fully implemented

as part of the network this has a huge

impact on cutting down fraud so like

tons of fraud was happening below the

floor limits you know if you're charging

a $5 transaction to a card it's just not

worth it to the banks and visa to like

figure out whether that's fraudulent or

not now because it's all digital and

instant they can figure out whether

that's fraudulent or not H so during the

pilot Banks and Merchants that were

participating in this program reduced

chargebacks to the system by 82%

relative to what was happening before so

just like a massive amount of fraud gets

eliminated which actually should totally

justify a lower interchange if you're

not paying for all the fraud in the

system then the system should cost less

to run absolutely in many ways that hey

we're going to you know reward you with

lower Interchange to install these

terminals like at the end of the day

Visa probably could have maintained

maintained a margin and all the banks

could have maintained a profit margin

and not lost any margin percentage cuz

just implementing this technology

lowered the cost of running the whole

thing yep two other results from now

having all parts of the system

aggregated

digitally one this is what enables the

modern payments world we know today you

walk up to a terminal you double click

your Apple watch or you insert a card or

you tap a whatever and it just works and

it gets authorized and you get your

thing immediately this is the backbone

to all that being possible two though

for Visa as a company and Visa as a

business they are now fully digital they

can scale infinitely with essentially

zero marginal cost yes we will later

talk about what a astonishing Financial

profile this business has but for now

just know that at this point they got to

stop spending money and they got to only

make every dollar after this basically

fell to the bottom line yes this unlocks

just like an unfathomably good business

model before this some element of adding

scale into the system required manual

labor now it's all just ones and zeros

now the toll booth is fully built it is

a high functioning toll booth yeah it's

a immovable to it's digitized it doesn't

no longer has a human sitting there H

they've got the pass system or whatever

yep well David catch us up to today I

will give us a bunch of information

about the business today some changes to

the business model and then we can go

into analysis but before that I know

there's obviously the IPO event that we

want to talk about in 2008 and sort of

how the structure of the whole thing

changed but I think you've got a

marketing thing that you want to talk

about too yeah there's one more really

fun marketing piece that I want to come

back to before we we move on to today

and that's the Olympics a lot of people

probably everybody listening now knows

Visa is associated with the Olympics

they're probably the most associated

brand other than

NBC but that's only in America NBC

doesn't mean anything around the globe

Visa is the Olympics everywhere so this

happens right around the same time as

the digitization of point of sale in the

cards it's

1986 the Olympics

for the first time they are going around

to companies and offering a global

Olympic sponsorship this is just like

the NFL episode before this you could

sponsor the Olympics in specific

countries you could sponsor whatever

broadcast whatever television radio was

covering the Olympics in certain

countries you could have Billboards and

whatnot but you couldn't do a global

sponsorship and there's no event like

the Olympics that could really do this I

mean certainly not the Super Bowl not

even the World Cup you're missing a

large part of America like this is the

only thing where you're going to reach

everybody in the world and up until this

point one of the 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 to try and sign them up to

take this Marquee Global sponsorship

slot they think it's a no-brainer they

give AMX a sweetheart introductory offer

deal you're the first people we going to

$14

million AMX declines whoa so they had

their bite at the Apple and they missed

it a couple years before this right as

the Visa Empire was being completed with

the full digitization of the network D

ends up getting getting oued from the

company I think you know if he were

still alive today he would probably

agree with the characterization that D

was one of the most amazing zero to1

entrepreneurs in history not so much a

on to nend kind of guy especially when

the industry in which you 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 ends up

with d leaving the company in

1984 after this happens Visa brings on a

new Global Chief marketing officer a guy

named John Bennett who came from 20

years at American Express so he and his

team see that AMX has passed on this new

amazing Global opportunity with the

Olympics they're also formulating the

new Visa marketing strategy up until

that point the marketing strategy had

been mostly generate category awareness

for consumers around the world to the

extent we competed with anybody we

competed with Master Card so we

positioned against them John comes in

and he's like no no no no the path to

Victory here is not positioning against

MasterCard the path to Victory is

positioning against American Express not

because we want to kill American Express

we don't actually care we're way way way

bigger than American Express but we need

Global ubiquity and adoption and people

to get comfortable with using Visa and

using credit cards remember there's

still this social stigma that woman in

1993 in Burger King who's like oh it's

sad if you're using debt to buy a

hamburger which is so interesting

because a signature piece of the bank

Amer card since it launched was that it

is actually a charge card where at the

end of the first month you have the

option to turn it into a loan but I have

never allowed Ed that option I hold

these things called credit cards but

that's a misnomer I've never once used

any credit right and if this were

certainly 1986 and still 1993 you would

not feel that way you might feel that

way about your American Express card but

you wouldn't feel that way about your

Visa card right although I should say

it's probably false to say I've never

used any credit the bank does float you

the money for a month but they have a

one-month grace period where you have no

interest yes you are using debt you're

just not paying interest yes which you

know hey that's a great thing to do

that's an amazing gift that these banks

give the world it's the American way so

jna just started the strategy is use

American Express to eliminate the stigma

around visa and by association paint

MasterCard as having that stigma because

we're not even bothering to talk about

them so how do we go after American

Express well the network is much smaller

the American Express Merchant Network at

the time was about 25% the size of Visas

so they design a whole marketing

campaign around going after American

Express And the tagline of the campaign

you know they show these exotic locals

that the type of customers who would be

using American Express that they would

be dining at these restaurants or going

to these events or going on these

vacations in the end folks who are of

our similar age probably remember

exactly the words here if you go there

remember to take your Visa card because

they don't take American Express so

great and then the second tagline to it

was Visa it's everywhere you want to be

so the Olympics come up after MX

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 this is just for the right

to be a global sponsor of the

Olympics they pull the trigger they

become the founding like Global Olympic

sponsor

they spend another $23 million in media

for the 1988 Olympics so $40 million in

total on one Global event well two

there's the summer and the Winter

Olympics but like one year of global

events that's about $110 million in

today's dollars yeah wild way more than

they spent on any of the technology

projects that we were just talking about

I mean yeah R&D costs money but go to

market costs more yeah what's the line

uh first time Founders focus on

technology second time Founders focus on

distribution yep and then the real

kicker they of course become the

exclusive payment provider at the

Olympics so everybody now coming to the

Olympics which is like a lot of people

from around the world that are going to

the Olympics the only payment card

provider accepted there is Visa so

they're trading all these people that

are going 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

which that's not that big a deal because

there's not that many people that go

relative to the people that see the

media and understand the brand

Association of course of course but the

reason we're talking about this hey 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 AMX 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 MX

they use their Visa cards and they're

proud of it love it so David take us to

the IPO this thing was an

organization that was owned but not with

stock a for-profit non-stock membership

organization right and now they're an

enormously profitable public company so

how did we get from there to here yep

just about a half a trillion dollar

market cap so the precipitating event

wasn't actually the banks trying to get

greedy and monetize their asset although

they did monetize the asset they were

monetizing it just fine the way that

they currently owned it yes the profits

being spit out of the system were just

fine in 2005 there finally was another

huge Anti-Trust lawsuit I think against

both visa and MasterCard it actually is

a class action lawsuit oh that the

merchants brought and they basically got

fully fed up with interchange and you

know every 10 years or so there's some

meaningful Merchant push to try to

change interchange and they either do it

in Congress or they do it in a class

action case you know there's a variety

of different ways and this particular

class action suit in 2005 is still

running today and the numbers have

mostly been figured out of how much Visa

will owe from a 2012 ruling that then

got appealed so it's sort of still going

on but basically there was a lot of

uncertainty in the 2005 and six time

frame of gez what's the liability here

going to be and MasterCard had gone

public and did not sort through this

issue at all they just said oh we're

going public and shareholders yep

there's lots of uncertainty in our

future and like we'll see but buy our

stock and that as you can imagine did

not go well at all and so as they're

getting ready to go public for lots of

reasons basically it was time they

wanted to have some liquid currency that

floated for Acquisitions they had to be

competitive with MasterCard who was

going public AMX was already public you

know you can reward and retain Talent

easier there's just like lots of reasons

why you would want this thing to be sort

of a standalone entity especially at

this point in history and what they had

to do was they created these B shares

and they isolated all the liability from

this class action suit to the B shares

so while MasterCard had a pretty flubbed

IPO Visa had a great IPO because they

said whatever the courts rule the banks

who own the B shares the pre-existing

shareholders will own all that liability

and all the a shares the new people who

are coming in as owners of the company

will be protected oh that's awesome I

didn't realize that in the research it

finally happens in 2008 Visa goes public

right as the financial crisis is

starting which obviously wasn't planned

but ends up being great for the banks

and probably for Visa too it becomes the

largest US IPO in history up to that

point they raised $8 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 it prints money why

would you want to raise capital in

delute that $18 billion was secondary

selling to the banks that owned the

company which I think for many of them

proved to be a total Lifeline through

the financial crisis that helped them

survive yep I mean now Visa is owned

mostly by big institutional shareholders

the vanguards and fidelities of the

world and the banks are much smaller

shareholders well at this point Visa's

market cap is significantly larger than

any of its former member banks it's wild

I mean dhawk basically was right that's

the tldr on this is this thing this

information Network that doesn't have to

take on any of the risk of any of these

transactions it's purely about

connecting buyers to Sellers and moving

information back and forth has proven to

be maybe the best business model ever

and let's go through the shape of the

business today and listeners you can

decide so David and I have made passing

references to the idea that this is this

ludicrously cash generative business and

I think it's time to actually examine

interchange fees today how they've

changed over time how they flow who

benefits what's visas cut all of that so

you can kind of understand it so Visa's

business bottle the first thing to know

is almost nothing hasang changed since

the 80s to today on how the transactions

work so the authorization flow is

exactly the same as it was where all the

oth flows Upstream the merchant runs the

card checks with their Bank who checks

with visanet who checks with the issuers

bank is this account in good standing to

make this transaction or not and once

they get the yes then the response flows

all the way back down the chain in the

order that ultimately the flow of funds

will happen later on

and you know within milliseconds

unbelievably short period of time no

matter where you are in the world no

matter what currency you are transacting

in your transaction can happen pretty

unbelievable amazing that within seconds

you can know for certain that someone is

vouching for the customer's money and

paying in full well nearly in full minus

a merchant discount rate so what is this

Merchant discount rate there are a few

things at play here there are

interchange fees and those interchange

fees go to the issuing Bank there are

assessment fees or network fees and that

Network fee goes to Visa Mastercard Etc

and then there are Payment Processing

fees and those go to the acquiring Bank

the bank that acquired the merchant this

is the Merchants Bank and the technology

provider of whatever they're using to

process their payment so three fees

interchange Network fees Payment

Processing fees here's what those could

look like and again I say could because

they are different in every scenario

there's a very long PDF on Visa's

website that is available with every

different concoction you could imagine

so here's an example of a large Merchant

in the United States so no foreign

transaction accepting a credit card it

is obviously different whether we're

talking debit smaller Merchants but

large Merchant Us credit card the

merchant is charged a 2% discount off

the sale price so it was a $100 pair of

shoes you're now make a $98 and what

happens to that 2% so that 2% The Lion

Share of it is The Interchange the

1.6% that goes to the bank that issued

the card to the card holder to the

consumer right so when everybody on the

planet is marketing credit card offers

to you they get the Lion's Share of The

Interchange so they actually have a lot

to play with in customer acquisition for

their cards because they make the Lion

Share of the transaction The Interchange

there's a lot of costs in there too

because they Bear all the fraud risk

there's a lot of things they got to do

but you know they get most of the money

a small amount on the order of like 0 2%

or uh 20 bips for you finance people out

there goes to the bank that acquired the

merchant this could be Chase ferve Wells

Fargo this is you know the Merchants

Bank it is important to know this may

also get split with a technology

provider so sometimes the financial

institution directly has technology that

you can use but other times the checkout

terminal or software that you're using

is not actually the financial

institution behind it so that 0 2% can

kind of get split between the financial

institution and the technology provider

and those are folks like First Data and

stuff like that right yes 0.15 to 0.2%

goes to the network this number is

actually quite hard to find you read

Visa's entire annual report and you're

like wait but what part of the split do

you actually get and it's because they

get it in a variety of different ways I

would say I don't know if the Visa

people would tell you this is

intentionally obus skated or if it just

ends up being kind of obus skated but

it's not super easy to figure this out

so Visa let's round it to 0. 2% gets 20

cents of that $100 shoe sale but the

cool thing about their 20 cents is

there's basically no variable costs yes

it's not dealing with fraud it's not

moving heavy data around I mean

Merchants are allowed to have a 20

character name in Visa's Network like

this is tiny amounts of data stack as

much metadata as you want on top of that

we are not shipping around huge payloads

here there is not like Nvidia chips that

need to run in these data centers to do

any crazy llm processing like this is

just shipping very small pieces of

information around the payload size of

the data has remained infantes small

relative to the amount that technology

has progressed this. 2% the 20 cents on

the $100 transaction very low variable

costs associated with that so A few

caveats on this debit is significantly

Less in most cases and often thanks to

regulatory reasons and the logic here is

nobody's actually taking any risk to

extend credit so Banks should not get to

make a bunch of money on debit it's

literally just moving money out of your

account and into the merchants account

so debit cards are going to be less

smaller Merchants often pay closer to 3%

than 2% because they're just doing lower

volume and for these small businesses

the acquiring Bank actually has to do a

lot more work think about how difficult

it is to Market a credit card to an

individual while small businesses kind

of behave like individuals so because

the acquiring Bank actually has to do a

lot more work and incur costs they get

to make more money so there's sort of

this very interesting thing that has

happened where interchange is

intentionally quite flexible this is a

Playbook theme that I want to pull

forward this business is probably the

greatest masterclass in the entire world

on incentive alignment and I was talking

with Lisa Ellis at moff at Nathanson who

sort of woke me up to this idea The

Interchange pool has an Elegance to it

since the money never actually gets sent

to the merchant the network and its

partner Banks or constituent Banks can

kind of figure out exactly how it should

flow in each of these particular types

of transactions it's an envelope of

value that the whole ecosystem can sort

of play with and I think that's an

important thing to realize about

interchange is that it's intentionally

flexible yep which brings up you know an

obvious point that we perhaps didn't

highlight as specifically as we should

have earlier this network is actually a

five five-sided system there's the

consumer that is buying something

there's the merchant that is selling

that something to them there's the Visa

Network in the middle that's the third

party but then there also are the fourth

and the fifth parties which are the

banks for each of the consumer the

issuing bank and the merchant The

Merchant Bank so this sort of envelope

of value concept makes sense because

those three parties in the middle visa

and the two Banks they need to split up

the value and depending on who is doing

what work it should be split different

ways and Visa has created these products

where you know it's not just a Visa card

you might get a Visa signature or a Visa

signature business or a Visa I don't

even know what they are but they

basically have said why don't we come up

with other types of Visa cards that just

have higher interchange and Merchants

are like what do you mean just have

higher interchange your new product is

you charge me more and Visa says well

the cool thing about higher interchange

is that there's more money in the

envelope to play with to reward other

constituents in the transaction and so

let's say we want to tell the issuing

Bank hey for this tier this Visa

signature you actually get more money

well then they turn around and say cool

I'm going to go and I'm going to give

better rewards to hire spending you know

more creditworthy customers and then

visas argument back to the merchant is

well hey because we're actually taking

more money on this fancier card you're

getting access to customers that we've

now brought onto our Network who are

much better customers that you really

want to have at your establishment and

so it's this very interesting again

envelope of value I think is the way to

describe it where you know I'm sure the

merchants wish they could be more a part

of the decision process but it does

theoretically enable incentives to be

spread around that benefit everyone in

the ecosystem Y and for merchants of

scale today they're cut in on this too

right there's the Alaska Airlines

mileage card there's the Costco card

like Merchants are able to by working

with banks be part of this discussion

too if you're have a certain size right

in the olden days you know if you were

the Affinity logo that got printed in

the top stripe the way that works today

is you have a special deal with the

issuing Bank where you're going to say

hey we're going to help you get more

Card members by putting our logo on the

card and so even though often times

we're the merchant well actually what

we're doing is we're helping you

distribute cards on the issuing side and

maybe there's cool things we can do when

those cards are spent at our

establishment where we give extra

rewards but it's effectively marketing

channel for the issuing Bank so they get

to split some of those economics and I

guess at the absolute very highest

levels of scale you have something like

the Amazon and JP Morgan Chase

relationship where JP Morgan Chase is

the merchant bank and JP Morgan Chase is

one of the largest issuing banks for

cards in the world and so the Amazon

Chase credit card that I have and I do

all my shopping on Amazon with and all

my shopping at Whole Foods with is able

to give me 5% cash Back Rewards so

Amazon or 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 and so thus that's how

they're able to do so much special stuff

they can control so much that envelope

of value yes it is worth pointing out

the system today is pretty tough to

change absent government intervention

consumers who spend the most love the

system the way that it is a huge amount

of the fees that Merchants pay come back

to these consumers in the form of

rewards so the issuers and the networks

end up with the consumer as their

advocate for the system as it exists

today and meanwhile no retailer owns

enough of the total transactions to

actually go invent their own better

system so when Merchants have tried to

go and get consumers to go direct and

give them their bank account information

typically consumers won't do it unless

they get some very high number percent

back and that's actually more expensive

than The Interchange the way that you

end up having to pay your consumers in

order to change their behavior away from

credit cards that they love the rewards

so much on is to do something

non-economic like you have to believe

that there's some long-term benefit to

doing it yeah and famously Walmart and

Target too I think have been trying to

do this for years and years and years

and they never can make it work nope and

the reason is basically like no one can

ever figure out how to incentivize all

the parties that need to change Behavior

enough to change the behavior and the

merchant in most cases is really the

only party that is not thrilled with

this Arrangement totally I mean the most

negative way someone could paint the

ecosystem as it exists today is that the

whole credit card system is a widescale

bribe of the American Consumer to like

extort the world's retailers using the

retailers own money but that is like a

very cynical way to view it yeah I mean

I guess you could take that one step

further and say consumers actually do

bear the brunt of it because Merchants

will just raise their prices to

compensate for it so that's a strong

argument there's been independent

research firms that have looked into

this and basically determine that this

is a reverse Robin Hood scenario that

the wealthiest consumers are the ones

who have rewards cards and because all

the goods are marked up to accommodate

interchange right no matter who's buying

the goods are marked up right if you

aren't someone that has a rewards-based

credit card then your stuff just got

more expensive and so the research firm

that uh looked into this actually I

think it was the fed the Federal Reserve

Bank of Boston determined that on

average each year a household that uses

cash to pay for things pays

$149 inflated prices cuz all prices no

matter how you pay have to go up in

order to make it so that paying in cash

and cards is equivalent because in Most

states it's actually illegal to charge a

meaningful premium to people who are

using credit cards so on average a cash

using household pays

$149 effectively in subsidy yes but a

card using household receives $1,100 in

value $1,100 I mean I guess that makes

sense I think about the value of the

rewards I get every year it's on average

what is it 2% of everything you put on

your card yeah which I mean it's

especially us running a business like

yeah we put a lot of stuff on cards

right that is the other argument that

this is like kind of net bad for the

world is that it's regressive in who it

rewards and who it penalizes the other

reason why it's really hard to change

the system is this whole thing is a

chicken of the egg problem I mean every

two-sided Marketplace is a chicken of

the egg problem Bank Amer card solved

this when there were no regulations by

dropping 65,000 credit lines on

unwitting Americans and you can't do

that now so how do you bootstrap one

side of the marketplace when you can't

do something like a drop and they were

in a unique position at that moment in

time in California where they had such

large market share of both consumers and

Merchants that they could kind of

effectively create this network

themselves right so what you're

basically relying on now is some sort of

extrinsic Paradigm Shift probably a

technology paradigm shift that enables a

new entrant to bootstrap one side of the

marketplace in one way or the other to

create a new system and without a new

paradigm emerging this is the system i'

say a new paradigm or the government

intervention this kind of is the system

that we've made our bed and we're stuck

with for good and for bad yep I mean I

love my rewards cards right and look at

all of the economic value that it

created by enabling e-commerce it is

truly astonishing that without UPS to

ship packages and without credit cards

to let us pay for things on the internet

like it just wouldn't have happened it's

trillions of dollars of transactions in

the economy that would not exist so the

arguments to Merchants are look people

spend more when they use a card there's

a broader range of buyers that use a

card uh very cool feature of these

credit card and debit cards is there's

guaranteed payment with no risk there's

instant authorization for this consumer

wants this thing now they could return

it but you know for sure that they're

good for the money and you're going to

get the money very soon when they walk

out the door which that wouldn't happen

in checks there's a cost to checks right

if you're going to accept a check from

somebody there's a strong element of

trust that you have to have with that

individual or entity yep and if you're

saying you better come in here bearing

cash or a cashier's check you're going

to have way fewer customers not to

mention like there's totally a cost of

facilitating cash you know it's one

thing for a coffee shop but let's say

you run a running shoe store and

everything you sell is $150 to

$250 there's a pretty meaningful amount

of cash that piles up in your

establishment and so you need to make

sure that you have security or like you

know let's pick an even higher ticket

item thing like a jewelry store you need

security you need to move that cash

somewhere you need to like make time to

go to the bank to deposit it totally the

operational overhead associated with

that there is a value to providing

payment and there is a cost to whatever

the payment method is and so am I saying

that the cost is 3% or in the old days

5% or 7% no absolutely not but there

certainly is some cost no matter what

form of payment is used absolutely so

the business today what does Visa look

like well last year Visa processed $14

trillion of volume through their Network

which is a almost meaninglessly large

number how do you even think about that

one fun way to think about that that

calculated is if you start from 1971 the

First full year that the bank americard

network was liberated from Bank of

America the growth in payment volume on

the network since then has been

17.3% compounded annually for 51 years

oh my God wild it turns out the world

eventually did want to pay with

frictionless fast and often credit

extending methods yep wow 17% compounded

for 51 years yeah I mean this is like

Berkshire levels of compounding that is

happening here yep and it's not like you

know people may think oh 17% like oh I'd

have seen irrs greater than that have

you seen them greater than that over 51

years right not many of those it's

amazing the number of transactions they

processed last year was over 190 billion

so that is 27 transactions per person on

Earth including young children every

single year hey man young children

require a lot of Commerce let me tell

you so I hear there are 4.1 billion Visa

cards in circulation their net revenue

is $29

billion

29 that's up from 22 billion 2 years ago

so there's an interesting thing that I

didn't really realize with Visa which is

it's had a hell of a decade yeah in my

head Visa has been this steady state

thing in the world as has MasterCard but

the last decade has been the story of

Visa's incredible dominance in revenue

and transactions and volume it's just

actually true that a lot of their growth

has been recent in the last decade their

value added services this is an

interesting thing that I want to come

back to was 6 billion so look at their

overall Revenue number of 9 billion

their value added Services is 6 billion

we'll talk about what that means the

most shocking thing about the business

is they have 50% net income margins so

of the 30ish billion that they made in

Revenue their net income was 15 yeah

this is absurd all the picture we

painted in the whole story it was all

building toward that climax of they have

created something with essentially zero

marginal costs in perhaps the largest

market out there certainly one of them

Global Commerce both e and

non-commerce and as Visa would argue

both consumer but also B2B Commerce yeah

50% net income margins on 30 billion in

Revenue there it is and you might say so

wait if they have 50% net income margins

what is their gross margin because is it

SAS level good at

85% their gross margins are

98% unreal there are no variable costs

in this business there are no costs of

goods sold unreal it's crazy so I think

with 50% net income margins this is

literally the most profitable Large

Scale Company in the world I don't know

of any other businesses of this size or

even like five or 10 times smaller that

have over a 50% net income margin

including MasterCard which is 43% and

just to throw some numbers out for

people that are like not you know

looking at financial statements all the

time Microsoft 34% net income margins

Microsoft sells software they ship bits

Apple 25% they have an incredibly marked

up product that is differentiated wildly

by brand 25% net income margins Google

Google has a monopoly in a market of

information what are the costs and

involved in that business 21% net income

margins wow I would have thought Google

would be higher as we were talking in my

mind I was like well Google's probably

the only one that can come close but wow

Microsoft is higher I didn't realize

that yeah it's nuts it's nuts they do

have 27,000 employees in some ways it

feels like an oddly large number and in

other ways it feels small but I think we

should talk about that in the context of

the value added Services interestingly

there is another company that we have

talked about recently on required that

does $30 billion in revenue and has

27,000 employees do you know what it is

David that would be Nvidia yeah it's a

weirdly Mirror Image even Nvidia doesn't

have gross margins like

Visa it is the ultimate solution I think

that is the takeaway yes Visa does 707

million transactions per day that is

8600 transactions per second every

second throughout the year

so a big takeaway should be like my God

they have built high throughput

infrastructure globally that's a

unbelievably impressive thing with

almost no downtime it is

99.999% uptime which I'm not a site

reliability engineer but I think that is

59s which is wild I mean you hear about

AWS going down more frequently than you

hear about Visa going down totally

that's 16,000 banks in 200 countries

they have six data centers distributed

across the world world it's kind of

amazing it's only six to be honest with

that kind of reliability and up time you

know related to that though you raised a

good point earlier the data Envelope as

opposed to the value envelope although I

guess it is sort of the same is also not

that large relative to the importance

and the value right this is not YouTube

yeah the transactions themselves in part

because this was all architected in the

70s right that is definitely why yeah

lots of people in this ecosystem would

love it if you could send entire

receipts in machine readable form across

this network you can't we're stuck with

a lowest common denominator protocol

that we're shipping very crude pieces of

information across yep I will say there

are other people that are participants

in this ecosystem that are perfectly

fine with it having almost no

information or minimal information going

across it an example of which is the

banks the banks don't want to be sharing

any of this information that could put

them at a strategic disadvantage your

bank knows your name knows your social

security number knows your address Visa

I'm running transactions across their

Network all the time all it knows is my

card number it has no notion of identity

isn't that crazy I didn't realize that

yeah that is crazy and the banks like

that because then the banks get to say

no no no this is my customer Visa we

will use your network because it is the

way that I need to accomplish something

for my customer but I'm not just going

to like turn customer to your customer

why would I do that and one of the

things we didn't talk about in the story

because it was long enough as is is the

whole debit card struggle obviously

debit cards are a big part and debit

transactions a big part of the Visa

Network today but when Visa first tried

to introduce them this was one of the

things that led to De Hawks ouster H 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 trying to reach your hand

across from being in service of us into

competing with us uh-uh and obviously

debit cards did eventually become part

of the system but not in the way that

you know it was looking like d initially

wanted them to it's pretty fascinating

that debit came later 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 it's a debit card with a lot

of benefits right and obviously like I

get to keep the money for 30 more days

so it's not quite the same thing but

debit is a simpler product so it's so

interesting that debit came decades

after credit cards on the Visa Network

you would think they would have started

with debit but of course they couldn't

have started with debit the banks would

never have gone for that right that was

the domain of the banks and actually

there was a big fight between visa and

all the ATM networks and D wanted your

Visa card to also be your ATM card makes

sense right like why would you have

different cards mine is today they

basically are now but for many many

years they weren't and they certainly

weren't back in dday right and I think

part of the reason why debit cards were

sort of like forced into existence was

that consumers basically demanded it

where they were like look if I can pay

with a card for this high value purchase

and I don't want to use credit 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 cash is there not something like a

credit card but doesn't extend me alone

so in closing on the numbers today this

is the important number to know and one

that may make you uncomfortable but I'm

curious how this lands for you David us

Merchants paid an estimated 93 billion

in visa and MasterCard credit card fees

last year according to the Nelson report

in Industry publication that 93 billion

was up from 33 billion in 2012 wow

that's a lot more billions that's a lot

more billions so we've talked a lot here

about The Interchange and how Visa makes

money in the transaction I will say half

of Americans carry a credit card balance

which is absolutely brutal since those

interest rates right now are around 22%

o 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-user laws like no one was allowed

to make us serious loans and North

Dakota was the first to drop them and

that's why all the banks issued all

their card programs out of North Dakota

because you could do things like have

22% loans made to Consumers and have

that be entirely fine so that's the sad

history of why your credit cards always

get mailed from there and there's no

denying that is really sad and

unfortunate on the Consumer Debt side of

all this you know on the fee side on the

one hand I'm tempted to say like oh

obviously tripling the amount of fees

that Merchants are paying for credit

card processing over 10 years like

that's ridiculous but transaction value

has meaningfully gone up too like grow

volume is way up yes transaction value

but also I have to imagine a big part of

that is share of Commerce that's

happening as e-commerce versus

traditional Commerce the credit card

networks really are providing a huge

amount of value to e-commerce as you

were saying earlier they are to physical

Commerce too nobody wants to pay with

cash or check anymore these days but

like e-commerce there's no other way

that that can happen so does it makes

sense that the credit card networks and

their Associated parties take more value

in that world I think so yeah there's

been downward pressure on interchange

for a long time I think industry average

right now is down around 2.24 which is

you know compelling considering we

started at 7% right that downward

pressure has been

easy to give on by visa for things like

in-person transactions with card present

but for a lot of their super high margin

online transactions where the growth is

that's where they decide oh actually we

have a really high interchange for that

area so Visa is sort of a master of

packaging figuring out you know how can

we take some things and sort of make

them more affordable to our merchants or

give them away for free while also

figuring out how can we sort of move

things around or invent new products

that are super high margin that give us

a lot of room to run in the future yep

and it makes sense just do the thought

exercise right let's say you're a

physical Merchant and you decide to walk

away from visa and all the credit card

networks say you're only cash or check I

mean you probably are committing suicide

as a business but like you could operate

if you're providing enough value like

ATMs exist you know you can operate

there's plenty of cash only bars yeah

exactly bars great example if you're on

the internet and you say I'm walking

away from the credit card companies you

are literally committing suicide right I

mean you could use PayPal I guess but

you're paying just as much for that yeah

totally unless you are literally getting

people to type in their account and

routing numbers you are paying credit

card like fees to accept payments on the

internet yep it's worth sharing so while

we're in the revenue streams here the

money that card issue ERS make only a

minority of it is actually from The

Interchange and keep in mind the card

issuers are the ones that make that 1.6%

the bulk of the transaction most of the

money that card issuers make is from

interest payments right I mean they're

Banks that's the thing all the way back

to the beginning of the episode what was

the motivation for Bank of America in

the early days it was turbocharge my

banking operations what is your banking

operation it's take in deposits make

loans with them make money on the

interest rates on those loans nothing

has changed in the banking industry

totally visas incentives are more

transactions because we want more 0.2%

and the issuers incentives are carry a

balance because that's where we make

most of our money yes because even

though they're getting the Lion Share of

the transaction fee that's going all

right back to the consumer in the form

of rewards and anti-fraud measures and

other value added services that they

have to buy from Visa probably a good

time to introduce that 6 billion that

Visa is doing in value added services

that is all brand new high margin

products that they've sort of invented

in the last 10 years or so that they're

trying to sell to Merchants high margin

product there's no higher margin product

than the core product right brand new

also high margin products right

Merchants Banks they're basically trying

to sell products to people in the

ecosystem anti- fraud analytics and it's

working very well they're making a lot

of money on that and they view that as a

high growth area in the future too but

again it's a little bit of like shifting

things around in the same picture like

look there's downward pressure on

interchange and we can demonstrate to

you that interchange is going down oh

but we have this great product that is

helpful and basically necessary that you

also should buy and there's a lot of

that going

on all right so that basically covers

the high level stats on the business

today so that we can go into analysis

and you can have a general shape of the

uh business we're talking about but you

know 11th largest company in the world

valued at half a trillion dollars round

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

mindblowing they get to keep half of

that after taxes at the end of the day

that's wild there's actual cash in the

bank right this is not iata this is net

income crazy all right David power does

that sound good to you oh let's talk

power all right so listeners this is

where we talk through Hamilton helmer's

seven Powers framework which which is

trying to figure out what is it about

this particular business that enables it

to achieve persistent differential

returns and be more profitable than

their closest competitor and do so

sustainably it's an interesting one here

this is a lot like the Lockheed Martin

episode where I'm actually not sure we

can apply the formal definition where we

say like what enables them to be more

profitable than MasterCard cuz together

they're like this government enabled

duopoly and the way that we did this in

the 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

entrance and I think that's the right

thing to do here with visa and

MasterCard 2 at the end of the day visa

and MasterCard have basically no

sustainable competitive advantage over

each other it's just operational

excellence who's slightly more clever on

the bets they're willing to make for

these value added services or next

product lines so yeah I think the one

area where there is difference between

them and is 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 upm Market in perception

and partnering with the Olympics it's

funny even though it's a commodity like

them and MasterCard are commodity they

somehow position themselves as more

premium well sugar water is a commodity

too that's why brand matters in these

markets but you're literally never

making I guess it's for the banks

because consumers are never making a

buying decision on whether it's Visa or

Mastercard that is not how you decide

what card to get well the brand is like

the Intel inside it's an ingredient

brand so yes the banks make the decision

but really the consumers make the

decision because if consumers have a

preference for Visa over MasterCard

they'll demand it from the banks no

they're just not differentiated enough

to demand it I just so don't see that

any consumer ever has sway there I got

the chase SA fire reserve card 5 years

ago because it was by far the best

rewards card for the type of thing that

I spend money on as probably with half

of our audience and I think it's a VISA

infinite which I'm sure is one of their

High fee things which is why they can

pass on so many rewards I think today

that's true but I do think based on the

research and this may be too biased

towards Visa but I think Visa did

accelerate past MasterCard and I think

there was a strong brand element of that

I think it's more equal today yeah it's

interesting it's funny how it used to

feel more like you were getting a Visa

card that was somehow like powered by a

bank and now it feels more like you are

getting a custom proprietary product

that a bank invented for you that

happens to either say Visa or Mastercard

on it yes totally agree or a merchant I

mean when you have the Alaska card you

feel like you have the Alaska card

you're like sorry there's a bank behind

this and like oh is it Visa or Master

Card I don't know I don't care it's the

Alaska card yep I think there's totally

also a story that's beyond the scope of

this episode but how Banks and in

particular Chase eight American

Express's customer base over the last

set of years yeah I mean in part that's

just bad strategy on amx's part that you

know eventually it was going to happen

that they would not be the scale player

being a closed loop Network you're just

going to be a more Niche player and so

how do you win as a niche player you

need to retain your highest value

customers and your highest margin

customers well they miss the

generational transfer I think they did

retain their highest value highest

margin customers I think those customers

are just 80 years old now yeah it's true

I think there are less affluent people

in our generation who have amx's versus

the premium products from Banks or

Merchants yep okay so visa and

MasterCard together which of the seven

powers do they have today and if you

want to also do the analysis which did

they have early days and I will start I

think there's an easy no-brainer that

you have scale economies any investment

that Visa or Mastercard make get

amortized across 16,000 member banks

across 4 billion cards across half the

humans on the planet or whatever it is I

mean just good luck competing with any

fixed cost investment that Visa is going

to make it'll pay back instantly if it

works to the extent that they can roll

it out to any tiny fraction of their

customer base it's just so huge that it

fits the scale economies thing where you

know if Netflix goes and buys a piece of

content they can pay more for it because

they can show it to more people Visa is

the exact same thing with all of their

fixed R&D costs tell me if you think

otherwise on this I think there's

basically like a law of economic nature

that if your gross margins exceed call

it 75

80% and you are of a certain Revenue

scale threshold like our gross margins

exceed 75 80% but like we're a two

person company with a you know di

Minimus amount of Revenue in the global

economy but say you're you know in the

billions of dollars of Revenue scale you

must have scale economy power right it's

almost stupid to say this one because

it's like okay yeah but that's actually

not what gives the business that's not

what's so special about it the network

economies are what's so special about it

yes of course of course yeah but yeah

you must you simply must if you have

those margins at that Revenue scale have

scale economies right that's a great

Point okay explain to us the network

economies well I mean this is even

better than the classic two-sided

Network this is the classic five-sided

Network effect where you have an

amplifier on each side because you have

the banks going and using all of their

scale to amplify your own go to market

motion yep I think this is also true

with network economies and Network Power

the more participants in a network the

greater complexity grows and the harder

it is to actually pull off the networ

Network there's plenty of single-sided

networks like Facebook is a single sided

Network at least on the user based side

there's advertisers You could argue

that's a second side but everybody's the

same node in the network then there's

two-sided networks like Airbnb is the

classic one you know something like that

there are three-sided networks out there

probably some four and clearly this is

an example of a five-sided network but

as you add sides to the network the

number of successful examples goes like

way way way way way down because it's

just so hard right cuz they're way hard

to pull off but they're so locked in

once they're in yes and I think this

whole story that we told of how

incredibly freaking hard and unlikely it

was that this

happened means that you have a

five-sided Network effect business and

it's basically

unbreakable yeah totally agree on

network economies I don't think there's

much process power I don't think there's

really any switching costs I mean in

fact that's probably a bare case to any

Card Company today is that 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 is Pops at the

top of my wallet I think there's almost

no switching costs anywhere really

because when any of these banks have

their contract up they just go and talk

to visa and MasterCard and say who gives

me a better deal because you guys are

both the same this is true after the

first antitrust lawsuit when Duality was

introduced and Banks could multi-home

before then yes after then zero

well yeah I mean before then there's

interesting analysis to do between visa

and MasterCard now there is none Y which

is exactly what dhawk predicted yep but

yeah is there switching cost between the

Visa Mastercard oligopoly and someone

else I suppose yes there isn't another

option yep like if you were a bank that

wanted to issue a bunch of cards that

weren't Visa or MasterCard I mean I

guess there's discover no that's a

closed loop Network too oh yeah right

they are their own bank yep pretty

interesting nobody else counter

positioning the last one none now I

think right you almost can't have it as

an incumbent right but there was

incredible counter positioning back in

the day with Bank of America they were

the only institution in America that

could pull this off that could absorb

the losses that had minimum viable

customer base on the consumer side and

on the merchant side that had the

Dynamics that they did within California

that even though New York was still

bigger as a state Market was so

fragmented there that none of the banks

had enough power to pull this off they

were literally the only one who could do

this yep it's absolutely right all right

I think that's it for power yep Playbook

let's do it the first one is this

business is a toll booth and toll booths

make for great businesses especially

when everyone has to drive on your road

or the road next to yours and both of

them charge the same toll well put I'm

going to do my best Charlie Munger I

have nothing to add on that that

one there you go the next one that I

think is pretty interesting is Visa so I

read their whole annual report they have

a narrative around these new things that

they're launching especially the value

added Services being good for consumers

and everything that is good for

consumers often for security and privacy

is also good for Visa that is sort of

the Playbook that Visa runs as they

figure out what is something that we can

sort of advertise as a benefit to you

that also helps us either increase

number of transactions margin or lock in

and that is the way to analyze their

entire product Suite you hear something

is launched you're like okay why which

of those three needles is it moving for

them that's my main one I've got more

analysis to do in bearbull but uh what

do you have the two that jump out to me

are one just like our NFL episode just

like our Benchmark episodes communist

capitalism yes the best example yes a it

is the best example of communist

capitalism certainly that we've ever

studied probably in the world hard to

imagine one better and two it's like a

special breed of communist capitalism

you're going to laugh at this that I

force out is democratic communist

capitalism the ultimate irony right it's

this idea of like yes it's capitalism

it's competitors banding together to

create more value than they could alone

but this is at a massive scale like with

Benchmark it's five partners with the

NFL it's 30 32 teams something like that

yeah this is our whole Global Financial

infrastructure that has decided to do

this together right this is thousands of

banks that have decided to do this

together it is its own separate class of

this I think way way way harder to pull

off than like yeah Ben you know you and

me together like acquired as communist

capitalism for sure if we were starting

a capital firm with three of our friends

could we pull it off with five people

sure could we pull this off with 200

banks no right especially when you're

not starting from scratch I mean the 200

banks that they pulled it off with they

all had a agreement in place where they

owned a franchise and you had to go to

them and say you have to forfeit your

franchise and instead sign this other

agreement it's like you're not starting

from zero you're starting from negative

and Bank of America the franchise or had

to go to them and say hey you're going

to Forfeit the whole asset that's a

great Point totally so that's one and

then the other twoo you know I think

it's the twin stories of innovation here

which you know really hat tip to Dave

Stern for tipping us off on here the

socio technical Innovation the

organizational stuff the Communist

capitalism the Democratic capitalism

everything we're talking about

incredible also the technology story

here incredible neither of which because

of this weird nature of who owned it and

how it was set up people really

understood but both of which are just

world class incredible stories yeah

super true and right here in Silicon

Valley who would have thought a success

story out of Silicon Valley they've

gotten so beat up over the last few

years they really deserve this nice uh

but that's what I find so funny nobody

knows that this is a Silicon Valley

company do you ever like run into Visa

people hanging out around San Francisco

exceedingly rarely H well I take that

back in the tech and Venture Capital

World exceedingly rarely in the corner

of San Francisco that very much exists

which is the old money Finance you know

the legacy of Bank of America absolutely

in that world and Jenny's in that world

because those are the folks who are on

the board of the ballet who are the

patrons who are the donors the longtime

chairman of the board of the ballet was

the CEO of Visa USA for many years like

there are a lot of Visa people in that

world here it's funny though that like

you would think it would have bled more

into the Silicon Valley world but it

really hasn't you would think every tech

company would love to be Visa the

financial profile of Visa's business is

more Tech than any of the tech companies

it is what they all wish they could have

yes it's fascinating all right you want

to do value creation value capture yes

so originally interchange was supposed

to cover the cost of operating the

network creating a trusted system

preventing fraud offering Innovation

every few years to improve the system

and with the incredible profit margin

that Visa makes today not to mention

whatever the card issuing Banks make it

is very clear that the market has

evolved such that these players can

charge more in a transaction than is

necessary to cover their costs and like

I'm not sitting here demonizing anyone

who doesn't use Cost Plus pricing I am a

capitalist I fully embrace the idea that

a business can and should achieve

pricing power if it can position itself

to do so in a market we're looking for

high gross margins to invested right

exactly but it's interesting that

because of the multi-layer network

effect David that you brought up in the

power section it is not easy and

potentially impossible for the free

market to do its thing and have some new

player that actually applies margin

pressure here the free market is clearly

not playing out and other than a big

Technology Innovation that shifts the

Paradigm in a huge way these

entities have massively optimize their

costs and continued to scale in a huge

way such that they just get to capture

way more value than it costs them to

create yep seeming indefinitely there's

a lot more to talk about in bearb there

yes I mean the worst place that this

kind of shows up is the couple percent

plus 30 cents that kind of feels small

yeah the 30 cents is really pernicious

it's pernicious especially for uh small

transaction items so like coffee shops

there's an example of a piece that we'll

link to in the episode sources of a uh

coffee roaster and shop where their line

item of what they had to pay in Payment

Processing fees is actually larger than

what they paid for beans wow that's

crazy even large retailers that run at

pretty thin margins it is often the case

that their EA is the same size as their

card processing fees I mean anytime

where your average transaction value is

less than 10 bucks that 30 cents is a

killer that's where the 30 cents kills

you but anytime that you are a low

margin business which many retailers are

if you're discount counter if you're a

Walmart you're paying 2 3% of the whole

transaction but when you look at the

margin profile the way that that gets

Amplified is that you're paying 15% or

more of your available gross margin on

that item so the only place where this

doesn't kill you is if you're a high

gross margin High ticket item business

that's when you can be like eh card fees

whatever but if you're selling too high

priced of goods then you often get into

a scenario where you know you are doing

less frequent transactions more

considered purchases and you can go

around the system this is a bare case on

Visa is are they ever going to

participate in real estate or cars or no

not at these interchange rates why would

anyone ever Buckle to pay these sorts of

things for things that cost $ thousand

doll or more yeah well before we go into

bar and bware I know you and we have a

lot to talk about what could potentially

disrupt visa and MasterCard I I think it

is worth just one minute on the value

creation side of this and I really think

you hit the nail on the head a while

back when you said

e-commerce yes all that other stuff we

were just talking about the 30 cents you

know everything that is a lot of value

capture there's a lot of value capture

that Visa is doing in MasterCard 2 on

the other hand I don't think Ecommerce

really would have happened you know

alone there's plenty of other value

creation out there too lots and lots and

lots but let's just take e-commerce I

feel like this is Passover like you know

that would have been enough e-commerce

would have been

enough cuz I don't think it would have

happened without credit cards or at

least it would have been many years

behind because you needed to sort of

invent some new mechanism to enable

payments over the Internet Y and yeah

you know 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 yeah that's a

good point which by the way PayPal is on

a shockingly large number of websites

today PayPal has a lot of Market power

because they they have penetrated

America they are deep in terms of

people's preferred payment method which

was something I've been kind of blind to

really oh I missed that in the research

that's quite surprising to me yeah well

that leads us right into Baron bull yeah

PayPal is an especially interesting

company right now because they're

strategically pretty well positioned but

they're going through a leadership

transition and so you don't actually

know what the new strategy is going to

be yet yeah okay barar and ball let's do

it well okay bear and before I actually

go into it a tongue and cheek joke is if

they ever get to stop making the insane

margins that they do on FX transactions

that's the ultimate be case it's

something like a hundred times the

margin that they make on domestic ones

wow if you look at how Visa breaks out

segments you're like oh my God the

international transactions are

ludicrously profitable whenever they

have to do a currency conversion so

that's like worth knowing when you're

trying to understand the shape of the

business is the more International the

better for them but my real bease is

that their business model has basically

always been tied to the digitization of

consumer payments ever since they rolled

out the three key Technologies you were

talking about David I mean at this point

in global history which is kind of

amazing we're finally here over 50% of

consumer payments to Merchants go on

cards now it took forever to get here 40

years or something like that 50 years

but we will start decelerating because

we've already shifted more than half the

payments to happen on cards right we're

on the back half of the adoption curve

right so that is this Tailwind that has

been with Visa forever like anytime you

could come up with any bease it was

always just trumped by the idea that

well more people are going to do digital

transactions so they're just going to

outrun any headwinds in their way that

will start to slow it's not like Visa's

Core Business revenue is going to like

Flatline or decline or anything like

that but they will have less of the

growth Tailwind from this amazing

secular thing that's been happening

which is people shifting payments to

cards and digital methods you know as

the years progress yep my next one is

closed loop systems like alipay and 10

cense ecosystem to the extent that super

apps actually happened in the US the way

that they did in China we would be

telling a very different story I mean

the amount of volume that flows in the

mobile ecosystem there that is not a

part of the credit card ecosystem I

actually don't know if it could have

happened here but the rise of that is

super dangerous and people often will

cite like well the Starbucks app is a

very good example of people using a

digital wallet that's native to a

retailer here how many people do you

know that reload their Starbucks app

with their direct checking account

routing an account number everyone

actually loads it using a credit card

totally that is not bad for them at all

it only becomes bad for them if they

actually get disintermediated where a

bank and a merchant go direct to the

Merchant's consumer and manage to

initiate a payment flow digitally that

doesn't involve a card Network yep the

two things I would want to investigate

on the could what happened in China

happen here one just the build out of

infrastructure happened more

concurrently in China like payments

infrastructure is already built out here

technology infrastructure got built out

afterwards whereas It All Happened Al

together in

China two though maybe more important is

just the government influence right I

doubt the Chinese government wanted visa

and you know ostensibly American

corporation powering their payments

there's actually this really interesting

weird deal that got cut between China

union pay and Visa where yes yes if you

use a cup card in China cup it uses the

cup rails but if you go internationally

where like there is no China union pay

terminal at you know my local coffee

shop here in Seattle if you were to

travel here and swipe it it runs on Visa

but they sort of have the national

security benefit and the economic

benefit of four people in China

transacting in China that runs on

china-owned payment rails yeah which you

know I mean I guess that is an

Associated bease right China in and of

itself and could other governments

around the world start adopting similar

postures yep the next one is similar but

a little bit different realtime payment

networks are starting to become a thing

the instant Bank transfers that these

provide are not exactly a payment system

it lacks a lot of the features that you

would need for payments like the ability

to refund is a prominent one like when

you just initiate a bank transfer

there's no sort of insurance around the

charge back or a refund or anything like

that but you could build payment type

features on top of it and real-time

payments are starting to become a thing

in a lot of countries so in the US of

course we have fed now but the adoption

of that is slow because there's not a

fed mandate for it to happen the way

that it has happened in other countries

in Brazil pix P has had very fast uptake

UPI in India is another one the UK has

something called faster payments and

this can get especially scary for visa

when these start working across

geographies like Singapore and India

have already linked theirs up and so

that is a method of transferring money

between countries that has nothing to do

with Visa and that's I'm sure something

they're keeping a very close eye on and

trying to figure out is there a way that

we can become the real-time payment

system that governments decide that

their country should adopt and you know

I mean technology and infrastructure and

ecosystem is getting built on this

obviously around the world and here too

me great friends of the show modern

treasury like they are enabling a lot of

this totally yeah apple I just think is

like a general be case here but here's

my sort of specific implementation

specifically Apple pay right yeah so on

a Apple pay transaction I'm pretty sure

Apple makes about as much as Visa does

because they stack an extra 15 basis

points on top of the other three fees

that we talked about the one to go to

the issuer the one to go to the

Merchants Bank and the one to go to Visa

itself and so if Apple has convinced

Merchants that it's fine to lose another

15 basis points on every transaction

because it's so freaking convenient that

users get to tap their phone or their

watch that is just step one in an

equation here's the like really extreme

Apple payment bull case if Apple were to

have payment terminals then they could

totally run all of those Apple pay

payments on their own network as it

happens right now you need to have a

card issued by a bank that likely is

issued on Visa or Mastercard or AMX or

discover and then it goes over those

payment rails Apple just puts a little

charge on top of it and then it's the

same way any other transaction happens

but if I were to Apple pay with my Apple

card at an apple point of sale why would

that ever need to run on Visa's Network

and so Apple doesn't make point of sale

Hardware today but if they were to

acquire square or if they were to do

something way out of their DNA and go

acquire like verone or a legacy provider

they could create their own closed loop

Network where they're Act the payment

method and the merchants technology

provider y I actually don't even think

they need to do that I mean they're

apple right they just use iPads and they

would have as part of Apple pay they

would have Apple pay for merchant

software that would be on the iPads no

that's too hard that adoption curve

sucks I think they would pay the what's

squares market cap or blocks like 30

billion or something right now Apple

could totally just go buy block and do

this overnight and light up all the

existing Merchants M yeah true true like

what else are you going to do with 250

billion of cash yep I mean maybe they

would try but apple is not going to be

in the business of directly having a

Salesforce to sign up all these

Merchants I don't think agreed I have a

Counterpoint to that but I'll save it

for the bull Side Of The Ledger here

okay I mean the other thing the lighter

weight thing on Apple is even if they

don't try to build their own Clos Loop

thing who really cares what's in your

wallet when your wallet is your phone

for consumers now if you're using your

phone in your head your payment method

is your phone and it's like the card

underneath it is not terribly important

other than the fact that you need to

remember to autopay it and like ideally

it has the one with the best rewards and

that's not what most people are thinking

because I think actually the majority of

people don't have rewards based credit

cards but they loaded some card in there

they kind of forgot about it and they

pay and apple is actually the

means of payment not the card even

though it's flowing over their rails

consumers don't think of it that way y

so I don't know exactly how that will

manifest in chiseling away at Visa's

value but it certainly is fair to say

that the card Network and the card

issuer have less of a role in the

consumer's mind than they used to based

on the fact that we now have mobile

payments yep and Apple pay and Google

pay along with it are I think

by like many many many orders of

magnitude the most

successful quasi alternative payment

systems that have actually gotten

install bases right Google pay is very

popular too yeah yeah yeah but like what

else I mean there've been other

alternative Payment Systems over the

years and none of them match at least

domestically in the US Apple and Google

p yep so my tldr on the be case is the

core business matures so that hwind

lessons the uh debit networks get sort

of chipped away at more rails emerge for

each use case that sort of again has

further chipping away at their available

use cases even if not the actual ones

that they're using today but the ones

that they could go tackle in the future

might get eaten by other people and they

spend a bunch of wasted money trying to

figure it out but I don't know those are

the best bare cases I can come up with

and the funniest thing is when I asked

we'll thank a bunch of people at the end

of the show that we had conversations

with when we would ask people hey what's

your Baron Bull on Visa basically

everyone just gave us a be case cuz

they're like the bull case is obvious

yeah totally and I think the obvious

bull case is this is just an incredibly

powerful Network effect that's 50 years

in the making and his five-sided and

Lord knows I can't think of any other

five-sided Network effects riding a

secular increasing Market yeah riding a

secular wave and nobody has ever broken

it and past performance is a strong

indicator of future performance in this

domain yep the correlat to that too is

lots of people have had lots of similar

bear cases that they've said five years

ago 10 years ago and like none of those

things have come true Visa has just

continued to grow at you know low double

digit percent growth every single year

or I guess to your calculation of 177%

over 51 years people in the past have

said many of these be cases but uh have

never come true so that's kind of the

most obvious here are the few that are

most evident to me that are sort of

potentials on top of their core business

because it is true that interchange is

facing downward pressure I mean we

talked about all the way from 7% down to

two and change and so they do these

interesting other things one benefit to

them of digital payments we talked about

the potential drawback with apple being

able to maybe disintermediate in some

way that's not exactly clear yet is

tokenization so the way that Apple pay

works is that your card doesn't actually

get sent to the merchant your card

number none of the identifying

information on there goes instead your

card gets tokenized and a token

representing your card does which is as

Visa will tell you amazing for security

and privacy what it also does is allows

them to create more proprietary services

in the old card number system there was

a lot more flexibility in what a

merchant and their payment processor

could actually do with the literal

information on the card they could

choose what network to run it on there

was sort of more optionality with it

when you had the raw information and now

Visa is like hey we got your token do

you want us to do any of the cool token

Based Services that we have with it and

like those are high margin for us and so

that's sort of the tokenization is good

for them they now have more digital

tokens than card credentials that's been

growing really fast it doubled last year

their sort of tokens on their Network so

so you know 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 you

know long-term margins and layering

products later on other bull cases so

this is like my favorite one from there

remember the Nvidia slide of the

trillion dollar uh Tam y so here's

Visa's version payments all of payments

is about $200 trillion of volume and

cards are only $20 trillion so here

we've been playing in this tiny little

fraction of the available market and

there's a few things that they call out

that they want to move into that B2B

payments is about 120 trillion if they

can access it B2B Commerce is actually

just much larger than b Toc Commerce if

you think about the amount of money that

flows over invoices that are uh paid via

a or wire Visa I think is intensely

aware that they're not going to take 2

and half% in change on a company

invoicing another company for a million

dooll Services provided thing but you

know there are elements of B2B that do

have interchange I mean if you're issued

a ramp or brex card and you go swipe

that that's a B2B transaction so they're

very excited about addressing B2B both

in their further push in cards but also

developing B2B specific products that

have more appropriate monetization

models and then they also we've been

talking a lot about consumer to business

like when I decide to pay for something

at a business if you flip that business

to consumer that is a$ 30 trillion Tam

or a$ 30 trillion volume addressable

opportunity and you can think of that as

like uh insurance company needs to like

pay a payout after a car insurance and

they need to make that happen fast or uh

refunds let's say you never bought

anything but a company still needs to

send you some money or like uber needs

to pay their drivers this sort of thing

is there's a whole buiness business

they've created called Visa direct which

is the business to Consumer push based

payments which is a kind of a new foray

for them and then the last one is just

expansion of crossb payments if they can

do more International transactions that

is hugely hugely profitable so those are

my uh that is me trying to Faithfully

represent the bull case that Visa paints

for their shareholders because David

these bull cases are so easy you should

read the annual report the whole thing's

a bull case yeah

right one other additional I said I was

going to add on bull case sort of as a

resp response to the apple and by

association Google bease you know pretty

much everybody we talk to pointed out as

the number one most obvious be case for

Visa right now is Apple and Google and

the incredible progress and inroads that

they have made into rails and

transactions but as you say all those

transactions are still just tokenized

Visa Mastercard cards right it's a bull

case today yeah it's a bull case today

you know there may be Nuance that I'm

missing here but if you play out how

let's say apple decides okay we want to

go after Visa I'm not sure how Apple

could actually do that really without

becoming a bank themselves you know yeah

MX is a closed loop system it's a bank

discover is closed loop system it's a

bank does Apple want to be a bank well

they could become like a stripe yeah I

guess so or like a square they're the

technology providers and they have

Merchant acquirer Banks behind

them yeah sure they could do that

Apple's finance and fintech operations

do not exist in a vacuum is Apple going

to take on the risk to the Apple

franchise of all the regulation and

scrutiny that comes from that it depends

Apple will eventually saturate their

market and they are looking for what the

next Frontier is and2 200 trillion

dollars of volume moving around the

global economy I think yes absolutely

and so I'm not saying this won't happen

but Tim Cook board level discussion on

this right let's play out the dhawk

thought exercise Apple succeeds they do

it they eat Visa Visa's market cap is

now added to Apple's market cap great

Apple's market cap just grew by

25% well I think they have to think that

they can improve something they won't go

into this unless they think they can

improve both the user experience and

create a Better Business out of it great

Point great point and they will I mean

the Vision Pro will come out and we'll

have to see if that is the future or not

but post that like they're going to do a

car or they're going to go into payments

right they got to keep going after

bigger and bigger markets you're right

you're right the Cute Apple that we know

of years past is gone and we just have

to think about like what would a good

Capital allocator do with their

strategic position true I'm not making

the argument that they's still the Cute

Apple I'm just saying like I think

actually entering this Arena introduces

a significant am of risk to the whole

franch that they have to weigh in a way

that some of these other markets don't

yep that's super true okay I have one

trivia thing for you before carve outs

you may already know this but did you

know that you can get a Bank America

card today I did not is it like a

branded Visa product from Bank of

America it is a branded product from

Bank of America available on Bank of

america.com there's no annual fee click

on their website to apply now

and the Beautiful irony that will tie a

bow on this whole episode is the bank

americard credit card by Bank of America

runs on MasterCards at

work well as you s started to set that

up I was like I know where you're going

with this I know where you're going with

this interbank for the win we'll link to

it in the show notes get yourself a Bank

America card and run your transactions

over mastercard's beautiful Stellar

Network wow unbelievable that is

hilarious what a great place to leave

the story there can't be that many

people that are applying for this thing

and you would think that viso would try

to go get this deal done just for

Nostalgia purposes that's a crime

against internet and business history

what a story man H truly okay carve outs

carve outs mine is available on Netflix

it is a show called I think you should

leave I have not laughed this hard in a

long time each episode's like 15 minutes

it's like three comedy sketches with a

guy named Tim Robinson is sort of the

brains behind it and is in many of the

episodes oh we were talking about this

at our drinks in New York yes 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 6 minutes in actually the

whole episode's good but the skits 2 and

three are the uh truly unbelievable ones

but it's just he's so outlandish and so

I don't know it's like everything that

sketch comedy should be in the absolute

highest production value you could

possibly imagine shot very convincingly

I think using the same cinematographer

but using a completely different set of

lenses lighting sets post- production

such that everything that they're trying

to emulate whether it's a game show or a

dating show or a commercial feels like

the appropriate thing that they're

trying to emulate it's just really good

ah it's amazing I have to check it out

my carve out is a book I think this is

my first fun fiction in a while mistborn

by Brandon Sanderson it is a awesome

fantasy novel the first in the series

but you can read it as a standalone too

it's been out for a long time and has

many many passionate fans out there it

was recommended to me by great friend of

the show guy PNE the founder of sneak

last time we got together which was

super fun sneak is an amazing very large

cyber security company that I'm sure

many of you know about focused on

developers right yeah developer security

you see their Billboards all up and down

101 here and Francisco but yeah he

recommended it to me a while back and it

took me a while to get to it you know

toddler parenting but I read it I

thought it was awesome Jenny read it she

loved she's of course now done the whole

series because she's a voracious reader

the World building the magical system

all the core fantasy elements are really

great the political Intrigue highly

recommend awesome well we definitely

have a few thank yous on this one uh

huge thank you to Dave Sterns for

spending the time with us and recanting

his academic thesis and it was just

awesome reading the book I have a

personal thank you to a good friend of

mine Jason Pate of plaid very helpful to

get just general high level thoughts on

payments industry thank you to Lisa

Ellis from Moffet Nathanson Lisa did an

amazing interview with Ben Thompson a

few weeks back if you are a tech

subscriber that is totally worth reading

and I prefer listening so go listen to

that after I read that I shot her an

email and I was like we're about to do

Visa I would love to talk to you about

some of this so 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 idon who is a

former product person from stripe our

huge thanks to blinkist stat Sig and

cruso click the link in the show notes

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check out aq2 in particular our next

episode it is not out yet is going to be

a follow-up to this episode on Visa our

buddy garv from Thrive capital is

joining us for a follow-up to analyze

the payments landscape today and gorov

has spent his entire career as a founder

and investor in fintech companies and he

actually gave a talk on the history of

credit cards that we used for research

in this episode so check out aq2 search

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[Music]

huh