It's the company that dictates how money flows around the world. For nearly eight decades, Visa has dominated the market, virtually unchallenged. Top dogs in finance used to be big banks with trillion dollar balance sheets.
No longer. Earlier this month, Visa, a humble payments processor, became the world's most valuable financial services company. In 2023, Visa processed an impressive $14.
8 trillion in total transaction volume over the previous 12 months. By ruthlessly crushing its competition, Visa has managed to become the king of credit cards. In 1928, Amadeo Gianini is the most powerful banker on the west coast.
His bank has recently just achieved an impossible milestone, having $1 billion worth of assets. Bank of America. On the east coast, you have banks like JP Morgan, Citibank, and Chase Bank in close competition.
But on the west coast, Bank of America was the dominant force in a growing market, thanks partly to the unprecedented immigration to California. Gianini now has the money and the power. It is a stark contrast to the humble beginnings from which he clawed his way to the top.
Born into an Italian immigrant family, Amadeo Gianini manages to build a successful career as a grocery merchant. He knows his success is meaningless unless he can also help out his own people, the Italian immigrants. He was the son of humble origins of this first wave of immigration.
Gianini's uniqueness was to be able to understand that Italian immigrants were discriminated against and despised. He therefore stood by them to grow both the Italian-American community and all of California. He was one of the first bankers to lend money to middle class and immigrants.
Before long, Gianini grasps a pivotal truth. Launching his own bank would allow him to lend even more money to his people with greater impact. In 1904, he establishes the Bank of Italy in San Francisco.
His hard work and generosity towards the working class people become the cornerstone of his burgeoning success. His bank was a completely different bank from any other, based on absolute generosity, but above all, on a new vision developed by staying in touch with ordinary people. Gianini seizes the perfect moment, as California surges into its most unprecedented growth era.
As California's economy explodes, Gianini's bank becomes a huge success. By the late 1920s, his bank boasts over $1 billion in assets, and through a series of mergers, it acquires a new name, Bank of America. From the very beginning, Gianini had a singular vision.
He wanted Bank of America to become a financial supermarket that offers all kinds of services to the masses. This meant not just traditional banking services like savings and checking account, but also extending into other areas like mortgage lending, auto loans, insurance, and investment services. By offering loans to the burgeoning middle class consumers, the bank's business flourishes exponentially.
In the following decade, Bank of America's assets soar to over $5 billion, becoming the largest bank in the world. In 1954, S. Clark Beise is elected President of Bank of America.
Long before this moment, Beise has been a dedicated manager, working side by side with Gianini to forge the empire of Bank of America. In the mid-1950s, the bank was one of the largest in the United States, expanding its services and branches nationwide. So as the leader of Bank of America, S.
Clark Beise was a very pragmatic and forward-thinking individual. For Beise, the shadow of his predecessors, especially Gianini, looms large, and he is determined to create a legacy to call his own. Tech-savvy, Beise begins to explore the possibility of a new type of business, as the country witnesses one of its biggest economic booms.
The 1950s in the United States is a decade of post-war prosperity. It's a time when the middle class flourishes, enjoying higher earnings and increased spending power thanks to rising wages and widespread employment. Consumerism is on the rise, fueled by a booming housing market and the widespread availability of new consumer goods like automobiles and household appliances.
Around this time, we saw a huge spike of consumer credit. What does that mean? Customers could buy goods and services without having to pay in advance.
Gas stations introduce gasoline cards, allowing customers to fuel up on credit, and airlines offer their cards to facilitate travel on credit while fostering loyalty. General stores like Sears also issue these cards for purchases in their retail stores. These store cards empower customers to buy goods on credit.
As the new chief executive at Bank of America, S. Clark Beise aims to build a new business for the bank. And one of his managers has the exact plan to realize this vision.
Joseph Williams was born in Newark, New Jersey, attended the University of Pennsylvania, and served as an infantry officer in the U. S. Army during World War II.
After the war, Williams looked for an industry that was growing, and he soon became an employee at Bank of America. As he witnesses the rise of various special purpose cards, Williams sees a need to create a single general purpose card to replace all of them. The value of a single card that could replace all those other forms of credit would be so instantly obvious.
He was among its growing core of middle managers. Prior to the introduction of credit cards, securing a personal loan required a meeting with a loan officer. This method was very time-consuming.
But William has a bold idea. He envisions a card that contains a $300 credit, and freely given to every Bank of America customer. The idea of a one-month grace period, a time during which customers could pay off their balances without facing interest charges, emerged from that research.
As did the idea of charging 18% a year on credit card loans. A figure that would be seemingly set in stone for the next 30 years, even as every other manner of interest rate fluctuated wildly. If this form of credit card works, Bank of America will be able to charge high interest rates, and it has the potential to become a highly profitable business.
And it will also catapult Williams to the pinnacle of the corporate ladder at Bank of America. In September 1958, Bank of America initiates what they call "Fresno Drp. " It is an unprecedented mass mailing campaign.
This was one of the craziest events in banking. He picked a city in California, Fresno, with 250,000 people, and gave each of them a credit card called "BankAmericard. " Approximately 60,000 unsolicited Bank of America credit cards find their way into nearly every household in the city.
This audacious move essentially provides a line of credit without prior applications or approvals for the very first time in the history of banking. The card comes with a $300 credit limit, a one-month grace period, and an 18% annual interest rate. It's a card for every need, usable for various purchases at multiple merchants.
Williams and his group saw that a credit card could be used in two ways. It could be used either as a device offering convenience, as a Diners Club card did, or as a device generating an instant personal loan. With credit cards seemingly materializing from thin air, customers are eager to spend this what appears to be free money.
During the first few weeks, the project seems like a success. Bank of America immediately drops more credit cards to other cities in California, aiming to dominate the market before competitors can catch up. Before launching Bank of America, the bank's typical customers had a delinquency rate of about 4%.
Williams used that as an assumption for the new credit card holders, but what he doesn't know is that the actual delinquency rate skyrockets to a staggering 20%, with nearly one in five customers failing to repay their credit card loans by month's end. Customers and merchants quickly learn to exploit the system, forging signatures and reporting fake transactions. In a short span, Bank of America finds itself hemorrhaging $8.
8 million, an amount scandalous for any bank in the late 1950s. As a result, Joseph Williams is fired. Williams was a tragic figure.
He had the right idea, but his execution didn't match up. The initial launch of Bank of America was a disaster. To recoup losses, the bank begins retracting cards from delinquent customers and enlists collection agencies to pursue outstanding debts and interests.
Despite Fresno drops marketing fiasco, it inadvertently proves a compelling thesis that the majority of people do desire a credit card. A year after launch, BankAmericards slowly begins to recoup its losses, transforming into a profitable enterprise, but the bank soon discovers a revolutionary new way to make money from the credit card. By the mid 1960s, BankAmericard continues to generate profit.
It begins to catch the attention of other banks. To many of its competitors, they realize that they are too late to the game because they don't have the resources to build their own credit card issuing and payment processing system. And after the retirement of S.
Clark Beise, the new man at the helm, Rudolph A. Peterson, is determined to take advantage of this situation. He quickly sees this as an opportunity for a new type of business income.
He realizes that Bank of America could let other banks issue their own credit cards by allowing them to use Bank of America's well-built infrastructure for a fee. Licensing means letting other banks use BankAmericard's system. In the early 1960s, Bank of America begins to allow licensing for other banks to issue cards under the BankAmericard program.
This means that these banks can issue credit cards using the BankAmericard name and, more importantly, let Bank of America handle the transactions, while these banks focus on providing the loans. This licensing model proves to be a resounding success. Within a few years, BankAmericard evolves into one of the most profitable entities in the industry.
But as more banks adopt and issue their credits using BankAmericards, a different kind of problem comes to the surface. Following BankAmericard's launch and explosive popularity, criminals quickly identify a unique opportunity. Instead of robbing the bank outright, criminals break into warehouses and steal BankAmericards cards that are not yet sent to customers.
At the time, the infrastructure for tracking and canceling individual cards was not very efficient as it is now today. The stolen cards were unembossed, meaning that they had not been assigned to specific account holders yet. These criminals then attempt to sell the stolen cards back to the bank, putting the bank in a difficult position.
Credit card theft is a new type of crime. The bank fears that the unauthorized use of stolen credit cards would cost them more than paying the ransom, so they decide to repurchase the cards from the criminals to prevent further misuse. Yet fraud is merely a tip of the iceberg in the myriad of issues faced by Bank ofAmericard and its licensing banks.
Because the vast majority of credit card transactions involve two separate banks. With every transaction, the merchant bank would reimburse the store for every credit card sale it made. Then the merchant bank would send out the sales drafts to the member banks around the country whose customers had made those purchases.
The customers banks in turn would reimburse the merchant bank, taking a fractional amount of the transaction for itself, the interchange fee. Finally, the customers bank would bill the customer for the item. When the customer paid, the transaction was complete.
As transactions continue to surge, the system nears a critical breaking point. If Bank of America card can't find an efficient way to scale, the entire business could crumble. To address this crisis, a man from an unlikely place steps forward with a solution that could change everything.
The man most capable of solving BankAmericard's problem hails from the most improbable origin imaginable, Utah, the Mormon State of America. Growing up on a farm, Dee Hock's childhood is marked by solitude and the love of nature. As a Mormon, Dee Hock develops a lifelong habit of early mornings and hard work.
But he quickly rebels against his faith and his school. Early on I never felt I belonged in that family. My father is very tall and physically oriented and I was somewhat introverted and loved to be alone and wander outside in the fields and I was not close to my father.
We were constantly confronting one another. He was of the school that said there's only one way, one right way to do everything and of course that was his way and I always resented him. He frequently gets into trouble despising classes and preferring the solitude of nature and self-directed studies.
Dee Hock did not like following rules at all. He's the type that would change the world around him rather than changing himself. As a result, after college, Dee Hock struggles to hold onto jobs.
Despite being a high performer, Dee Hock despises office structure and often clashes with his superiors leading to his terminations. By the early 1960s, with a pregnant wife, Hock faces the humbling reality of seeking unemployment support from the government. I had no money in the bank, no friends, no family, just my wife Pearl and I and our two children with the other one on the way.
I was out of work and had no idea what to do. I was having about a depression. The first thing that occurred to us, we were without income and I had these three people to support that I should go and apply for unemployment.
So I drove to the unemployment office. Across the street from it, there was a line of people waiting to get in because it was a time of mild recession and I simply could not get out of the car. I sat there for well over an hour, an hour and a half trying to persuade myself that I was entitled for unemployment compensation, but I just couldn't do it.
I felt that it was contrary to everything I believed in and the work ethic I had acquired. And I had a feeling that if I ever got out of the car and got in that line, something inside me would simply die. After an hour and a half of torment, I had to drive home and explain to a seven month pregnant wife that I couldn't do it.
Dee Hock is determined he will do whatever it takes to succeed and to never let this happen again. It's pretty easy sometimes to feel beaten when you're faced with all those issues and all those problems and they all hit you at the same time. That doesn't mean give up.
He eventually lands an assistant job at the National Bank of Commerce. This time, to provide for his family, he's willing to take on any work necessary. Soon he's asked to perform a task that yet again goes against his beliefs.
It is to help launch a credit card business for his bank. Dee Hock was a very frugal guy and he did not like the idea of credit cards at all. But Dee Hock throws himself into the job, determined to excel.
By 1967, through licensing from Bank of America, the National Bank of Commerce successfully launches its credit card program. The business takes off immediately and Dee Hock quickly earns a promotion to head the credit card operation. By the late 1960s, the credit card industry explodes.
Fueled by American economic prosperity, as a first mover, Bank of America's BankAmericard becomes the leading credit card. But as the business grows, a flaw in the system becomes apparent. Many people discuss advantages as first mover.
It's the first to scale. The first to scale, generally speaking, tends to get the attention from the press, tends to get privilege access to capital, tends to get privilege access to talent. While Bank of America has managed to reduce fraud, the licensing system makes fraud prevention increasingly difficult.
In the 60s, Bank of America's BankAmericard program let different banks give out their cards. This caused a lot of issues with credit card theft. Back then, technology wasn't advanced enough for a wide-scale fraud detection.
So this whole setup made it really tough to deal with fraud issues popping up everywhere. If BankAmericard doesn't address this issue, competitors could exploit it with better systems. To prevent that, Bank of America needs someone to design a system that ensures its credit cards continued dominance.
As a licensee of Bank of America, National Bank of Commerce has a vested interest in the system's success. Dee Hock has recently been promoted to the head of the credit card division, and he immediately proposes forming a committee comprised of all member banks to decisively tackle the problems. He is then appointed as the committee's chairman.
As the head of the committee, Hock is armed with a mission to design a revolutionary system, unlike anything corporate America has ever seen. It is an opportunity for Hock to finally do things his way. He starts by reflecting on his own childhood and the lessons learned from nature.
I saw such a clear distinction even then between nature and human beings. Nature never seemed to have this problem. There was no principal blackbird in a flock.
There was no president tree in the forest. And yet everything was competition and cooperation in nature. The two just seemed constantly blended and coexisting.
But when you move people into an organization of any kind and the divisiveness started, it was either this or that. It was either true or it was false. It was right or it was wrong.
It was either good or it was bad. Hock's ideas are profound. He envisions a self-organizing, self-functioning, and self-governing distributed system.
Wow, he was pretty much envisioning a distributed network system that has a no central governing figure, a decentralized network. And each of the node must agree to follow a set of principles and algorithms and as whole the system will function optimally. To fully unleash the power of his design, Dee Hock proposes forming a new organization, independent from Bank of America.
He calls it National Bank AmeriCard Inc. Remember, credit card networks are merely payment systems. It's the banks that issue credit cards.
So NBI was a payment network that by itself does not issue any debt. While his ideas are innovative, Hock remains unsure whether other member banks will join, especially his biggest partner, Bank of America. It was tough in the beginning.
These people are being asked to put their reputations on the line and join something that they are totally unfamiliar with. I understand their hesitation. With the support of Bank of America, Dee Hock becomes president of this new organization.
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Afraid that the decentralized system proposed by Dee Hock may fail, Bank of America secretly collaborates with American Express to build a nationwide credit card authorization system, controlled solely by them. This revelation comes as a shock to Hock, especially since Bank of America is a key member of the National Bank of America, Inc. If Bank of America and American Express succeed with their new system, it could render Hock's efforts a waste of time and energy.
It's like building two competing highways. It's not good for society and a waste of resources. I felt completely betrayed.
It was contrary to the spirit of the effort to form NBI and could materially affect its success. Bank of America had agreed to join the new organization I designed, but I didn't know at all that it was also working with American Express to undermine my effort. In response to this challenge, Hock and the NBI board make a bold decision.
To break away from the industry-wide effort and build their own proprietary competitive system for electronic authorization and transaction clearance, known as the Bank Authorization System Experimental Base 1. Authorization is necessary to check whether a cardholder's credit card holds sufficient funds and is approved to purchase from a merchant. But what Hock doesn't realize is that the real threat is not American Express.
A new credit system is on the rise, and it is gunning for his business. The mid-1970s present significant economic challenges marked by the oil crisis, high inflation, and economic stagnation, also known as stagflation. In this turbulent period, monetary policies struggle to find a balance between inflation control and economic growth.
But amid these difficulties, the credit card industry experiences rapid growth and evolution. This era paves the way for widespread credit card adoption, shaping modern consumer finance and banking practices. The introduction of Base 1 revolutionized transaction processing, propelling NBI to the forefront of the financial services industry.
Thanks partly to one man, Dee Hock. The business model really is like a money printing machine. It earns money every time someone uses the network for payments, becoming more popular as more people and shops use it, due to network effects.
And on top of that, it's highly scalable because it can easily handle more payments without much effort. But success breeds competition, and a challenger arises, ready to undo all of Dee Hock's achievements. Witnessing the success of NBI and its member banks, other banks in the industry realize the potential of forming their own credit card network.
Master Charge, later known as MasterCard, emerges from a collaboration of regional bank card associations, aiming to create a unified, competitive force in the burgeoning credit card market. To challenge Bank AmeriCard's dominance, Master Charge focuses on expanding its network and increasing its acceptance both domestically and internationally. If Master Charge gains enough momentum, it has the potential to completely overtake Bank AmeriCard as the leading card payment system.
Desperate to protect his creation, Dee Hock makes a tough decision. He rolls out an anti-duality policy, prohibiting his member banks from adopting Master Charge. He hopes that this by-law will prevent his member banks from adopting Master Charge.
But he has no idea what is about to happen. Worthen Bank of Little Rock, Arkansas is a smaller member of NBI. In late 1971, the NBI board adopted the by-law against duality for its members.
Worthen Bank promptly files a lawsuit, alleging antitrust violations and seeking an injunction to block the by-law's implementation. The Worthen Bank of Little Rock, Arkansas had also become a member of Master Charge. They threatened to sue NBI if it adopted a proposed by-law prohibiting duality.
I flew to Little Rock to meet with the President and other senior officers of the Worthen Bank in an effort to persuade them. But unfortunately, we could not agree. The Worthen Bank promptly filed a lawsuit alleging violation of the antitrust laws and asking for an injunction to prevent enforcement of the by-law.
To make matters worse, Hock's decision to forbid its member banks from adopting Master Charge has an unexpected consequence. It gets personal. During the Worthen Bank lawsuit, Dee Hock also faced a lot of personal threats.
He received a lot of abusive messages, even found a cross slashed on his office chair, and he received threatened packages containing a vandalized book from his library. Each day, I had to rise and deal with countless problems. The business had to go on, and responsibilities could not be shoved aside.
I began to slide into depression, that dark, dismal swamp that robs my ability to think or function normally. In the end, Worthen Bank wins the lawsuit, and Dee Hock is forced to lift his ban. And now, his member banks are free to issue both Bank AmeriCard and Master Charge cards.
Despite the legal challenge, N. B. I.
is about to enter one of its highest growing stages ever. Although the 1970s are a troublesome decade for the United States, international travel and trade have risen sharply for the rest of the world, leading to explosive business opportunities for the use of credit cards. By capitalizing on the shift towards a cashless economy and consumer demand for convenience, Bank AmeriCard has become the global leading payment system.
But Dee. Hock realizes that to further simplify its international business, there needs to be a strong and powerful brand. By the mid-1970s, his firm decides to change the name from Bank AmeriCard to Visa.
The Bank AmeriCard is headed for extinction, at least in name. Starting sometime next year, according to National Bank AmeriCard, Inc. , the name of this credit card will be changed all over the world to Visa, a word expected to be universally acceptable.
By the early 1980s, despite facing intense competitions, Visa has achieved significant market share of 60%. By introducing products like Visa Traveler's checks and innovative security features like holograms on cards, its billing soared to $59 billion. As a result, Visa is now one of the most powerful companies in finance.
Dee Hock's thesis has been proven correct. He has built Visa into a thriving, decentralized organization, believing his mission is fulfilled and to further prove that Visa is a unique entity that can do well without him at the helm, he decides it's time to retire. Little does Hock know that within a mere decade, Visa will grow to become a monster, an industry power that will defy everything he stood for.
The credit card industry is on the rise. By the early 1990s, it handles trillions in transactions. Recognizing this lucrative opportunity, many industry titans are eager to capitalize on the trend.
One of them is Phil Purcell. Purcell was a very entrepreneurial from the very beginning. Even as a young man, he was already demonstrating his hustle, selling magazines and working at local dry cleaners on school days.
He always understands business at a very practical level. While working at Sears, Purcell spearheads the launch of Discover. It's a credit card aimed at middle class shoppers.
By the early 1990s, Discover cards are worth $1 billion, positioning the card as a serious contender to Visa and MasterCard. Seeing the threat posed by Discover and other rising credit cards, Visa and MasterCard form an unlikely alliance. Together, they implement policies designed to prevent member banks from adopting competitor cards.
It is a tactic that Visa Inc. has tried once before. Phil Purcell sees them as bullies, and their actions as grossly unfair.
He decides to join American Express in reporting Visa and MasterCard to regulators. Purcell hopes Visa and MasterCard will be punished with hefty fines as reparations to his company. The lawsuit, filed by the Justice Department in Manhattan Federal Court, alleges they limited consumer choice and restrained competition by controlling both associations through the same banks and banning member banks from offering competitors cards like American Express and Discover.
The lawsuit is a huge blow to Visa's business. If they lose, they could potentially lose billions. Visa's troubles are far from over.
Even as the antitrust lawsuit loomed, another major company also set its sights on taking Visa down. In the early 2000s, a group of retailers led by Walmart files a class-action lawsuit against Visa. They allege Visa is using its market dominance to enforce excessive debit card fees and restrict merchants from accepting competitor cards.
The lawsuit claims this limits consumer choice and stifles competition. It's important to understand why Visa became such a monopoly. I think it's because of network effects.
Just like social network companies that came about later, such as Facebook, as more merchants and consumers adopt a payment network, it becomes more convenient and ubiquitous, drawing even more users. This cycle can lead to a dominant market position, potentially creating a monopoly-like status. Mounting legal battles forced Visa to pay billions in settlements to companies like American Express, Discover, and the retailers involved in the class-action suit.
Soon, despite being a virtual money printer, Visa comes dangerously close to running out of cash to pay. As far as Visa's management is concerned, there is only one way out. Huge demand for Visa's record-setting IPO sent the shares surging Wednesday, even as the broader market choked on credit fears again.
The success of the largest US IPO in history and the strong interest from both professional and individual investors turned Visa into a bright spot in an otherwise choppy stock market. Visa's IPO in 2008 shatters US records, raising over $17 billion despite the looming financial crisis. Investors love companies with a monopoly status, Visa's business model was so good, and investors were able to overlook the fact that it was constantly under litigation.
From a decentralized payment network, Visa has become a dominating power in finance. In 2023, Visa has a revenue of $33 billion and a net income of $17 billion. Both increase steadily every year.
With over $12. 3 trillion in payment volumes going through Visa, it is undoubtedly the king of payments. Well shares of Visa hit an all-time high in today's session.
Visa stock has been steadily on the rise since the company's last earnings report, which forecasted a resilient outlook on consumer spending. None of this would have been possible if not for the ingenuity of one man.
