Visa (Audio)

Ben Gilbert 0:00 It's funny, when we picked this episode, I was like, "Oh, this is gonna be pretty down the middle and easy." And then, of course, as we get into the research, as always, it's like, "Oh, nope, big story here." [chuckles]

David Rosenthal 0:09 Yep, there's always a story.

Speaker 0:11 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. Who got the truth?

Ben Gilbert 0:28 Welcome to Season 13, Episode 4 of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert.

David Rosenthal 0:36 I'm David Rosenthal.

Ben Gilbert 0:38 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, MasterCard, 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.

David Rosenthal 2:20 This is such an insane story. I can't believe we're all the way in season 13, and we haven't talked about this company yet. But as we will get into, it's always been overlooked and underrated.

Ben Gilbert 2:30 Well, perhaps not underrated the last decade or so. If you listeners want to know every time an episode drops, you can sign up for email updates at acquired.fm/email. Two new fun things: one, emails now include little hints and some teasers about what next episode will be. So if you wanna play the guessing game, sign up at acquired.fm/email, and the emails have another new feature. We are including follow-ups from previous episodes when we learn new things from you after release. Come talk about this episode with us after listening at acquired.fm/slack, and if you want more from David and I outside of these big, long, main Acquired episodes, check out ACQ2, our interviews on a second podcast feed. 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?

David Rosenthal 3:28 Well, we are starting, actually, with a big thank you to Dave Stearns, author of what is undeniably the very best book on Visa and its history, Electronic Value Exchange. 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.

Ben Gilbert 3:46 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.

David Rosenthal 3:55 Correct.

Ben Gilbert 3:56 All right, take us back in time.

David Rosenthal 3:59 So Dee Hock, 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, in his kinda 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 then he would say, "How did this company start?" No hands. "Who runs it and who governs it?" No hands. "Where is it headquartered?" No hands. It's just 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 Dee's time know the answer to these questions, but not many.

Ben Gilbert 4:56 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.

David Rosenthal 5:03 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 1958 in Fresno, California, with the drop.

Ben Gilbert 5:21 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 it is Chapter One: 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."

David Rosenthal 5:39 Yep. [chuckles] And the rest of the world has no idea.

Ben Gilbert 5:43 Yep.

David Rosenthal 5:44 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.

Ben Gilbert 6:07 ... 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.

David Rosenthal 6:15 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 sixty-five thousand customers in the city of Fresno, completely unsolicited. Now, a couple things about this. One, it's wild. I think the Fresno population at this point in time was, like, maybe two hundred, two hundred and fifty thousand 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.

Ben Gilbert 7:06 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."

David Rosenthal 7:25 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, B of A was the biggest bank in America in the 1950s, but it was not like all the other big banks at the time. It was a consumer bank. The other large and influential banks in America back then were, 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 Stanleys, et cetera, of the world came to be. For the most part, consumer banks were kinda backwater, small. There was no way to aggregate enough customers that you could get big enough.

Ben Gilbert 8:38 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 these 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.

David Rosenthal 9:16 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 of A was doing tons and tons and tons of small, little, and disparate consumer loans and lending, so obviously, mortgages and car loans, like, those still exist today, but they were doing, like, washing machine loans.

Ben Gilbert 9:57 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 a time, you would sit down with the bank manager, and he would authorize you to go spend a hundred and fifty dollars 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.

David Rosenthal 10:22 Yeah, and for specific items, to, like, go buy a refrigerator.

Ben Gilbert 10:26 Wild.

David Rosenthal 10:26 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 BankAmericard.

Ben Gilbert 10:57 Beautiful name.

David Rosenthal 10:57 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 had 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.

Ben Gilbert 11:48 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.

David Rosenthal 12:11 Totally. So problem number one, you didn't get all the money. [chuckles]

Ben Gilbert 12:15 Right.

David Rosenthal 12:16 Problem number two, also a 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.

Ben Gilbert 12:31 Yeah, and until ACH, 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 $6 and 8 cents. Okay, next check. Oh, I owe you $4 and 20 cents." And it was this crazy system of individual couriers bringing checks from the person who, uh, gave it to the merchant for the merchant to go and track down the money and bring the money back.

David Rosenthal 13:05 Totally. And spoiler alert, ACH doesn't get developed in the US until the 1970s.

Ben Gilbert 13:11 Wow!

David Rosenthal 13:12 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.

Ben Gilbert 13:48 Really?

David Rosenthal 13:49 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'd go inside and be like, "Oh, we have an account here," and they'd just write down what it was, and then at the end of the month, I assume my dad would go give them some money.

Ben Gilbert 14:05 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."

David Rosenthal 14:13 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 at all the branches of a given brand. So, like, the gas stations get into this in a big way. Standard Oil gets into this in a big way.

Ben Gilbert 14:33 Yes!

David Rosenthal 14:33 There are lots of Standard stations across the country. You can have an account that works at all Standard stations.

Ben Gilbert 14:40 Yep. In 1939, Standard Oil of Indiana sent 250,000 unsolicited cards directly to all of their customers.

David Rosenthal 14:49 Yeah, making the Fresno drop look like a- [chuckles] ... uh, drop in the bucket, shall we say?

Ben Gilbert 14:53 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.

David Rosenthal 15:04 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 charge account system that we could share."

Ben Gilbert 15:32 And just literally to simplify the back office as the first value proposition here.

David Rosenthal 15:36 Yep, and for consumers, that's also pretty awesome because do you really wanna 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 wanna be?

Ben Gilbert 15:51 Yes, and not to mention, on top of this, there is the 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 gonna buy some goods, I'll pay you back later," but it turns out they had run up a tab all over town and weren't paying their bills anywhere. Now, with this idea of a shared card, you actually can have a shared notion of who a consumer is across locations and across different retailers.

David Rosenthal 16:19 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, a thousand participants here, like, are individual merchants equipped to manage a network like this? No, they don't have the resources to do this.

Ben Gilbert 17:07 Right. So you have to spin up some kind of, like, shared organization that all the merchants are pooling their capital into in order to run the network on behalf of all of the merchants. It gets messy.

David Rosenthal 17:17 Or there could be an independent third party, for-profit network that does this, and this is when Diners Club and American Express arrive on the scene. So Diners Club was first, and people might know and have heard of Diners Club. It still exists today. It's like a sub-brand of Discover.

Ben Gilbert 17:36 Totally.

David Rosenthal 17:37 There's a very famous, legendary origin story behind Diners 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 McNamara is hosting a lavish 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 payphone. He calls his wife at home on Long Island. She speeds into the city with enough cash in time-... to pay the bill for the dinner, and, you know, face is saved, his reputation as a erudite businessman is preserved. And then afterwards, you know, he's, like, talking to his wife. He's like, "Oh, there's gotta 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."

Ben Gilbert 18:40 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.

David Rosenthal 19:15 I think there are two really important points here. One, you said, "I pay it." I don't pay it, my company pays it [laughing] You know? I don't care. Two, the most important point, I get to look super awesome 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.

Ben Gilbert 19:35 And just to start tracking a certain number here, when we were talking about checks earlier that were getting a discount, and even in this era of early Diners Club, early American Express, we're talking about a five to seven percent discount of what actually got remitted ultimately to the restaurant or the retailer versus what the bill was originally that the consumer authorized.

David Rosenthal 19:58 So all that's a very nice story, except-

Ben Gilbert 20:00 [chuckles]

David Rosenthal 20:00 ... it's completely fabricated. [laughing] 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 like Harvard and Facebook because restaurants in Manhattan, they're competitive with one another, but it's not exclusive competition. This isn't JCPenney's versus Macy's. No restauranteur 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.

Ben Gilbert 20:43 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 gonna be, like, the top five percent of your customers, sure, you want some kind of exclusive relationship, and you wanna maximize the dollar value you can get out of them. But for your casual fans who like your business but aren't necessarily exclusively gonna use your business, you should figure out some kind of bundling system that makes you work with complements 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.

David Rosenthal 21:20 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 'cause they're gonna do that anyway. It's crazy! Like you said, Diners Club is able to charge restaurants and other merchants, they expand to hotels, you know, airlines, anything that a business person, traveler would need, seven percent of the [chuckles] gross bill. You know, merchants complain about three percent today. Seven percent, 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 cardholders, 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.

Ben Gilbert 22:05 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 a 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.

David Rosenthal 22:36 And Diners Club would ultimately fade, although it grows to over a million members, it goes national, it gets acquired by Citibank, then sold to Discover in 2008. As we said, still a brand today. But it's basically impossible to create a independent, from-the-ground-up network of this at the time because you were just talking about the operational cost of running this thing. Think about the merchant and customer acquisition costs. Nobody knew what Diners 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 of the market, which, of course, brings us to the brand you're all probably thinking about here, American Express.

Ben Gilbert 23:35 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.

David Rosenthal 23:46 Yep, and so as you might remember from our Berkshire Hathaway series a couple years ago, Amex, at this point in time, was primarily a traveler's checks business.

Ben Gilbert 23:56 That's how they started, right?

David Rosenthal 23:57 Well, actually, no. They started in 1850. This is amazing. Do you know who started American Express? This is a version of Dee Hock holding up the Visa card.

Ben Gilbert 24:05 Ooh, [exhales] no, I don't.

David Rosenthal 24:07 I did not either until doing research for this episode. It was started by a group of people, two of the most prominent-

Ben Gilbert 24:13 Oh!

David Rosenthal 24:13 ... among whom were-

Ben Gilbert 24:14 Wells and Fargo.

David Rosenthal 24:15 Henry Wells-

Ben Gilbert 24:16 Yes

David Rosenthal 24:16 ... and William Fargo. [chuckles]

Ben Gilbert 24:17 Amazing.

David Rosenthal 24:18 Totally amazing. Man, 1850.... The Wild West, different time.

Ben Gilbert 24:23 It was something like they started American Express, but then had a conflict, and so they left, and they started Wells Fargo after that?

David Rosenthal 24:31 Yeah, something like that. The infrastructure of America was getting built out, so American Express, called American Express, it was an express mail company. It was like the Pony Express.

Ben Gilbert 24:39 Mm.

David Rosenthal 24:39 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.

Ben Gilbert 24:49 It's amazing. And I think it's fascinating that Wells Fargo came after Amex. Like, you think Wells Fargo as this old-timey foundation of America. American Express is even older than that!

David Rosenthal 25:00 So Amex, by this point in time, had become a traveler's checks primarily. That was their primary business. As we talked about on the Berkshire episode, that was a freaking awesome business, partially because traveler's checks, you know, they made good money. You would buy a $100 traveler's check and pay Amex a little fee or whatever, but the float and the breakage, like, there's traveler's checks out there today that are 50, 100 years old that have never been cashed, and Amex has just been sitting on that cash for [chuckles] decades, investing it. What an amazing business.

Ben Gilbert 25:32 Okay, so Amex observes Diners Club and says, "Hey, we need to get into this, and we actually have an ability to get into this fast."

David Rosenthal 25:40 And they actually try to buy Diners Club-

Ben Gilbert 25:42 Ah.

David Rosenthal 25:42 -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, Diners Club." So just within, like, a year, maybe even two, from when Amex launches their charge card, you know, business traveler program, they sign up 700,000 members, which is almost as much as Diners Club had signed up, you know, many years of working on it.

Ben Gilbert 26:22 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-it-ness was happening directly from retailers before or by organizations that represented retailers and restaurants, and so now you sort of have not a bank, but a bank-like entity that is starting to say, "Oh, this could be an interesting business."

David Rosenthal 26:50 So this brings us right back to Fresno in 1958 because the timelines match up exactly. This is crazy. Amex launched their charge card program in 1958. B of A sees what's happening. They, of course, had seen everything else going on in the industry before. They understand the transformative power that this can have for their scaled consumer banking business in California, and they're like, "Okay, the time is right. Let's do credit cards. Let's go to Fresno." But hopefully, as we've painted the picture, their motivation and Diners Club and Amex and even the merchants' and retailers' motivations are very different. B of A 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 gonna be huge operational savings for the bank if they can pull this off. Two, though, the bigger opportunity for B of A 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.

Ben Gilbert 28:10 So this is where B of A, informed by their previous business model of lending to consumers, really paves the path of what credit cards would become today. Often, in the past, before the BankAmericard, what would happen is you'd have this charge card, not a credit card, and the bill would arrive at the end of the month, and then you would pay it. The innovation baked into the BankAmericard is they say, "Well, after the 30 days, you can get your statement, you can pay it in full, or you can roll it into a loan, 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.

David Rosenthal 28:53 And it was already happening at B of A. 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.

Ben Gilbert 29:06 This product is the combination of three things: the charge card that had been happening over in Diners Club, Amex, the gas stations, the retailer land, then the second pillar is 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 a hodgepodge of retailers, but now this is issued by your bank. The big takeaway for BankAmericard is it really bundled two different things together. One was convenience, and the other is credit.

David Rosenthal 29:43 And there's one more really, really important subpoint here to what this loan is, and it relates to the banks and why this is so powerful for B of A and for all banks. Think back to the old way that B of A was doing this. A California, you know, homeowner wants to go buy a new refrigerator. They walk into a B of A, 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 of A gives them the money. The money is now out of B of A's hands. It's out the door. The consumer then goes to the merchant 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 of A's hands yet. They get to keep the money!

Ben Gilbert 30:38 Right. A transaction has been authorized, but yes, they get to keep the money.

David Rosenthal 30:43 And 'cause we're talking about California here, there is a very high likelihood chance, and I think at the beginning, I suspect a one hundred percent chance, that the merchant also banks with B of A. So that money is [chuckles] never leaving Bank of America's hands, which frees up more capital, which frees up flow, which is just like the B of A management must have been besides themselves with glee about this.

Ben Gilbert 31:07 Well, in theory, if they manage 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-

David Rosenthal 31:16 That's exactly where we're going

Ben Gilbert 31:17 ... When you mail sixty-five thousand cards indiscriminately with the same credit limit to every single customer and say, "Have at it, guys," and this is a brand-new consumer behavior that they've heard about or they might have witnessed in one form or another, but now they have a bona fide ChargePlus credit card sitting in their hands, uh, you're gonna lose a lot of money at first.

David Rosenthal 31:38 Yeah, because there's another more pernicious way that this type of lending is different than the previous type of lending that B of A was doing: it's unsecured. If you give a customer a loan to go buy the refrigerator, you don't wanna go repossess the refrigerator, but push comes to shove, you can go repossess the refrigerator. This whole consumer credit card land is unsecured lending.

Ben Gilbert 32:01 So you probably shouldn't apply the assumptions about your loss ratios from secured lending to unsecured lending, but that is exactly what happened.

David Rosenthal 32:10 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, sixty-five thousand unsolicited cards go out to unsuspecting consumers. Fraud is out of control. Twenty million dollars of fraud within the first pilot program. Twenty-two percent 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.

Ben Gilbert 32:47 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 loan shark, for that matter. There isn't another Western country that has relied so heavily on consumer credit. Between 1958 and 1990, there was never a year where the amount of outstanding consumer debt wasn't higher than the year before. Years later, a Bank of America executive could look back on his lifetime in the credit card industry and say proudly, 'Consumer credit built this country.' Whatever one's feelings about personal debt, it is difficult to disagree with this assertion." 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 gonna be better than today.

David Rosenthal 34:37 Such a good point. As long as growth is happening in an economy, a society, industry, whatever, you should absolutely use capital to fuel into that growth.

Ben Gilbert 34:49 Yep, and that may not be true on an individual basis, but it is absolutely true on a societal basis.

David Rosenthal 34:55 Yep. So back to what I was saying about why B of A is so important. B of A can absorb this loss. No other consumer bank at the time, if they had seen twenty million dollars of losses in, like, a set of months, they would've pulled the rip cord immediately. B of A, though, they can absorb this loss, no problem, and they know if we can make this work, this is gonna transform our business. So rather than pulling the rip cord, they expand. They roll it out quickly across the whole rest of California. Over the next year, all within the first year, they sign up twenty thousand merchants in California, and get this: Do you know how many cardholders they sign up in that first year?

Ben Gilbert 35:39 No.

David Rosenthal 35:39 Two million California cardholders signed up using the card in the first year. It took Diners Club years to get to a million. Amex was so proud in the first year or two, they get to seven hundred thousand. B of A 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.

Ben Gilbert 36:07 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.

David Rosenthal 36:23 Yep, and it's even more than that. As we said, this really was a big innovation. Like, it wasn't just that they-... Copy Diners Club or anything else. Like, they were adding credit to this. This was a huge innovation.

Ben Gilbert 36:34 Yep.

David Rosenthal 36:35 So by 1961, year three of the program, they're able to get fraud under control enough that the whole program is profitable.

Ben Gilbert 36:43 But they keep that under their hats.

David Rosenthal 36:45 Yes, yes. They don't want anybody else to know about this.

Ben Gilbert 36:47 So there's been all these newspaper articles about all this money that B of A is losing. So many banks that had been thinking about launching a similar program abandoned it, 'cause they were like, "Oh, man, we thought this was gonna work, but clearly it's not working for B of A." So people were shutting down their efforts. There was rumors that another bank was gonna launch in LA, in San Francisco, and B of A had actually rushed theirs to market to go be sooner than these other banks that actually never ended up launching, because the market perception was that it was such a gigantic failure. Here's a crazy stat: From 1960 to 1966, so this whole era is actually a profitable era for B of A, but no one else knows it, there were only 10 new credit cards introduced in the entire United States, because they did such a good job keeping what became a cash gusher for them quiet. But 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.

David Rosenthal 37:51 Yes, and it is specifically 1966 when the secret gets out, because phase two of Bank of America's grand master plan here gets unveiled, which is maybe worth a quick setup. As we said, this was transformative for their business in California, but they're the biggest bank in America, 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 'cause 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 BankAmericard Service Organization with the express purpose of licensing out the BankAmericard program and network to banks across the country, across all 50 states, and this is the seed of Visa.

Ben Gilbert 38:52 But listeners, before we talk about how the BankAmericard Licensing Association morphs into Visa, now is the perfect time to tell you about one of our favorite companies, Blinkist, and their new parent company, GoOne, where David and I are proud angel investors.

David Rosenthal 39:08 Yes. Blinkist, as you know, takes books and condenses them into the most important points, so you can read or listen to the summaries. It's great if your job, unlike ours, isn't just to sit around and read books all day-

Ben Gilbert 39:18 [laughing]

David Rosenthal 39:19 ... but you still want the amazing insights. So as Blinkist has been doing throughout the season, they are creating Blinks of our research books for each episode and making them available to you all for free. You can find our material for this episode, including Dave's awesome book and Dee Hock's memoir, One From Many, at blinkist.com/visa.

Ben Gilbert 39:39 Yep, and they have also created something very cool that I never thought anyone would ask for from us. They created a page that represents David and my bookshelves. So if you want to read our favorite books broadly, having nothing to do with this episode, but, like, literally what's behind me on that bookshelf that I feel are kind of our trophies from all the episodes that we have researched, you can go to blinkist.com/acquired and look at Ben and David's bookshelf, and you can get those for free. So beyond that, Blinkist is always giving Acquired listeners an exclusive 50% discount on all their premium content, which is really great stuff, all these summaries and especially the audio summaries of really important books.

David Rosenthal 40:18 Yeah. So many of you may be wondering: Why is Blinkist giving such an awesome deal to the Acquired community? I don't say that tongue in cheek, it really is. The reason is that GoOne, where we're investors and which acquired them this year, is an amazing corporate learning and development content platform, that if you're a L&D manager, a team lead, or a founder, which obviously many of you are, you should absolutely go check out. GoOne is the one subscription, one billing, one-stop shop to get literally all of the content that you need for your workforce at companies. So this is HR trainings, specific skill set development classes, everything you need across your whole company. They're the leader in the space. They're just an awesome company that you should definitely work with if you are not already.

Ben Gilbert 41:03 Yep. Our huge thanks to Blinkist and GoOne. Go take advantage of all this free content by clicking the link in the show notes. Okay, David, so how do we get to Visa? You have been telling me about the BankAmericard from Bank of America, and I opened this show saying Visa's not a bank, and Visa doesn't have direct relationships. It's this big, indirect thing where they work with other banks. This is a big mismatch.

David Rosenthal 41:28 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 BankAmericard and turned it into Visa, and that is Dee Hock. So here we are in 1966. B of A now starts going around to all the other consumer banks in other states and selling them on joining the network as BankAmericard licensees, and the deal is that you pay B of A a $25,000 franchise fee to get your franchise [chuckles] of the BankAmericard.

Ben Gilbert 42:10 [chuckles]

David Rosenthal 42:10 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, I get it. The executives must have just been throwing party after party, because, A, this whole thing turbocharged their own business. B, now they're like, "Oh, we're gonna make [chuckles] all the other consumer banks in the country essentially into like serfs on our kingdom here."

Ben Gilbert 42:35 ... 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.

David Rosenthal 43:05 It was also an intensely, like, private thing, kind of taboo thing, right? Because 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.

Ben Gilbert 43:19 Right. It's 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's 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."

David Rosenthal 43:45 Well, the bad assumption was that other banks would consent to basically being serfs in their kingdom.

Ben Gilbert 43:52 Yes.

David Rosenthal 43:53 But at the outset, these other banks see the power, and now that B of A is telling them of what this has done for B of A, 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 B of A offers exclusivity to banks in geographic areas, too, to start. That eventually, of course, gets dropped, but it does tempt a lot of people. So within two years, by 1968, a couple hundred banks have signed up. There are six million cardholders across the country and beyond the country. Actually, Barclays Bank in the UK had signed up to be a franchisee of BankAmericard back in the day.

Ben Gilbert 44:34 Whoa! What year is this?

David Rosenthal 44:36 This is, like, in the, you know, mid-'60s.

Ben Gilbert 44:39 Whoa, that's way earlier than I realized for international expansion.

David Rosenthal 44:42 Yeah, it was already out of the US, 'cause the system is a great system, but as this expands beyond B of A, it becomes clear that a bunch of stuff that were either just assumptions or ways of business within B of A or things they didn't have to worry about ain't gonna scale to hundreds of banks, all fifty 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 BankAmericard 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 cardholder, and the bank of the merchant, and B of A controlled both sides. Once they expand the network and let other banks in, all of a sudden, that's almost never the case.

Ben Gilbert 45:39 Right. You know, B of A 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.

David Rosenthal 45:57 Yep. So B of A 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 B of A.

Ben Gilbert 46:13 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.

David Rosenthal 46:23 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.

Ben Gilbert 46:43 Yeah, and this is the first moment that we start to see a departure from what American Express was doing. The original BankAmericard was very similar to American Express and Diners Club, where they were closed-loop systems. It was a bank that issued a card to be used at a payment terminal that all stayed within the bank's closed-loop network. And now, with this new BankAmericard licensee 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 cardholder, and one bank on another side, and we're gonna enable those systems to talk to each other, but they're not the same party. This is open-loop now."

David Rosenthal 47:23 So this interchange thing, all of the other banks that are now signing up to become, you know, B of A franchisees for the BankAmericard system, they come to B of A, and they're like, "Hey, this whole thing is a problem. Bank of America isn't providing any service to do this." There are also all these costs that these other banks-

Ben Gilbert 47:41 Oh

David Rosenthal 47:42 ... are incurring because they need to figure out this interchange thing.

Ben Gilbert 47:45 Oh, so the problem they're experiencing is like, "Hey, Bank of America, how did you build all the technology-

David Rosenthal 47:51 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."

Ben Gilbert 48:00 Right. We're closed loop.

David Rosenthal 48:01 So I don't know. You guys figure it out. This sounds like a you problem, not a me problem.

Ben Gilbert 48:07 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?"

David Rosenthal 48:14 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 franchisees 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."

Ben Gilbert 48:29 I see. So it's like, you know, you buy a McDonald's franchise, and they ship you some Golden Arches, and they're like, "Good luck figuring out how to make cheeseburgers."

David Rosenthal 48:36 That is exactly right.

Ben Gilbert 48:37 [chuckles] Okay.

David Rosenthal 48:39 Now, to be somewhat fair to Bank of America here-... The golden arches are worth a lot. The BankAmericard, three colored bands, the blue, white, and gold, are also worth an incredible amount here.

Ben Gilbert 48:54 And of course, the ability to actually be on the network that sends those payments, right?

David Rosenthal 48:59 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 of Americard, and some of them are like, "No, I'm not gonna do that," some of the ones who do become franchisees, well, really all the ones who do become franchisees become very frustrated. Of course, people are gonna 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.

Ben Gilbert 49:44 Ba-na-na!

David Rosenthal 49:45 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 gonna work, even though it actually might work 'cause it's part of the MasterCard Interbank Network.

Ben Gilbert 50:24 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 Oneworld? I don't- I still don't even know what the-

David Rosenthal 50:37 Oneworld, yeah.

Ben Gilbert 50:38 Yeah.

David Rosenthal 50:39 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 gonna be accepted, unless they all have the same brand and mark.

Ben Gilbert 50:57 It's so funny, this is the original problem of Diners Club, too, 'cause 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 [chuckles] if the card would be accepted at the restaurant you're at.

David Rosenthal 51:15 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 franchisees are buying from Bank of America, and what Bank of America is like, "Hey, this is what we're selling you. It has value, it's access to the network," but the network is homogenous. It all is the BankAmericard name, brand, and importantly, mark. So what are the colors of Visa? I'm sure everybody listening, probably around the world, knows this. It's blue, white, and gold.

Ben Gilbert 51:42 Which is the hills of California, right?

David Rosenthal 51:44 There's this amazing origin story to this. It's super reminiscent to the Windows XP Bliss wallpaper, you know, that is-

Ben Gilbert 51:50 Ah

David Rosenthal 51:51 ... the most viewed photo in the world, you know, the hills, and it's actually in Sonoma, California.

Ben Gilbert 51:56 Huh.

David Rosenthal 51:56 So the story is, the B of A team, when they were first rolling out the program, the guy tasked with card design, he lived in Pleasanton, California, in the East Bay, uh, 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, [chuckles] and the hill is covered with beautiful, golden-colored California poppies in bloom. He rushes back inside, he paints an abstracted version of his beautiful hillside. Voila, the three bands, blue, white, gold, BankAmericard, Visa.

Ben Gilbert 52:37 And this would go on to be incredibly valuable to plaster on your storefront and say, "We accept BankAmericard here," and that just means your sales are gonna 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.

David Rosenthal 52:57 It's so wild that today, you know, we would think, "Oh, what's a moat? 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?

Ben Gilbert 53:19 Yep.

David Rosenthal 53:20 So from B of A's perspective, they're like, "Yeah, we did all the work. We created this. This is what you are franchising from us. Take it or leave it." From the franchisee's perspective, as we were talking about, they're like, "You gave us a marketing program. How do we run this damn thing?"

Ben Gilbert 53:36 Okay, so they got this marketing program. How did it literally work? 'Cause this is pre-magnetic stripe.

David Rosenthal 53:42 Yeah, there's no technology here.

Ben Gilbert 53:43 I mean, this is literally like, "Cool, I've become a Bank of America licensee. What transactions does that let me do, and how does that happen?"

David Rosenthal 53:50 So the banks, they have to resort [chuckles] 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.

Ben Gilbert 54:02 The bank would go sign up a merchant in their local town.

David Rosenthal 54:04 Yep, and the banks would take the sales drafts from their merchants that the merchants had brought to them, and then they would go, kinda individually decentralized, mail around the country to the issuing banks, the cardholder 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.

Ben Gilbert 54:40 Really?

David Rosenthal 54:40 It was just whatever they negotiated with one another.

Ben Gilbert 54:42 ... So the sales drafts get handed to the licensee. 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 BankAmericard. 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 gonna get my, you know, ninety-three cents on the dollar or whatever." So then the bank is responsible probably?

David Rosenthal 55:25 Yeah, so the merchant bank, that acquiring bank.

Ben Gilbert 55:27 Mails all those, effectively invoices, to all the other banks-

David Rosenthal 55:32 That the people who bought the goods there to their banks with their cards, and there was no standardized discount.

Ben Gilbert 55:39 Ah, this is ludicrously expensive.

David Rosenthal 55:41 Totally! I mean, it's chaos. People are so pissed, and again, B of A's like, "Yeah, whatever."

Ben Gilbert 55:47 "Yeah, whatever. For us, we just moved a few numbers internally. We actually didn't have to do any of this."

David Rosenthal 55:51 "And you all are paying us now money, so, like, our empire dreams are coming true." [chuckles]

Ben Gilbert 55:56 Wow.

David Rosenthal 55:57 This is maybe painting Bank of America in too 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 BankAmericard had been operating for a couple years internally to B of A 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, et cetera.

Ben Gilbert 56:23 Right.

David Rosenthal 56:24 So all of these tensions come to a head in October 1968, when the licensees, all the franchisees of Bank of America, all these other banks across the country, 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 gotta fix this." B of A says, "Okay, fine. We'll all get together in Columbus, Ohio."

Ben Gilbert 56:52 Really? No way!

David Rosenthal 56:52 In the middle of the country. You didn't know this?

Ben Gilbert 56:54 No.

David Rosenthal 56:54 Oh, amazing. I thought you knew this. Yeah, Columbus, Ohio. Ohio State.

Ben Gilbert 56:58 Oh, wow. Amazing.

David Rosenthal 57:00 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. B of A sends two, like, mid-level marketing managers to go face the angry mob.

Ben Gilbert 57:26 [laughing]

David Rosenthal 57:26 None of the senior executives from B of A could be bothered enough to go deal with this-

Ben Gilbert 57:31 Wow

David Rosenthal 57:32 ... which just says everything. And these poor guys who show up, I mean, they are literally facing, like, pitchforks. The franchisees are incensed, and they're incensed both 'cause the situation sucks, and they're like, "Goddamn it, B of A, take us seriously. You have meddled in our entire businesses. This is in chaos. Like, we gotta fix this." So what do these two poor B of A guys do? Right before lunch on the second day, they're like: "Yo, we gotta save our skins. We gotta get out of here. Let's do the smart thing to make sure that everybody gets placated, but nothing actually happens," 'cause they don't have any authorization from Bank of America to do anything. They're just, uh, people sent to face the mob. "Let's appoint a committee- [laughing]

Ben Gilbert 58:19 [laughing]

David Rosenthal 58:19 -of licensees 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 B of A headquarters, and we'll listen to their problems." [chuckles]

Ben Gilbert 58:34 Wow.

David Rosenthal 58:35 But unfortunately for their goals, their very narrow goals, that particular morning, but very, very fortunately for all involved, the franchisees, the world, consumers-

Ben Gilbert 58:48 In the long term, at least.

David Rosenthal 58:49 In the long term, and also Bank of America in the long term, one of the people that gets put on that committee is the BankAmericard franchisee program manager from a small bank in Seattle, the Seattle National Bank of Commerce, which would go on to become Rainier Bank, and then, ironically, do you know what happened to Rainier Bank? You can't make this stuff up.

Ben Gilbert 59:14 No, I don't, but I can guess where this is going.

David Rosenthal 59:16 Yep. Once interstate banking regulations get loosened up, they get acquired by Bank of America, of course, in the 1990s. [laughing] But for the moment, the person running their BankAmericard franchisee program is one Dee Hock, and I think you could really say on this day, the founder of Visa.

Ben Gilbert 59:40 And one of the most interesting characters in anything we've ever studied because he's not a tycoon the way that most of these people are.

David Rosenthal 59:50 No, and we're gonna talk much more about Dee 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, Dee has gotten put on this committee. He goes up to the two B of A guys, and he's like, "Hey, rather than us just putting together a list of grievances and reporting back to you at B of A, what if instead, we do examine all the problems in this system, but what if we ourselves, this committee, we design and propose a new way of operating the whole thing?" And after some convincing, the B of A guys are like, "Eh, 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 gonna come of this.

Ben Gilbert 1:00:50 Yep.

David Rosenthal 1:00:51 ... So the whole summit reconvenes after lunch, and Dee 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 B of A, 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 'cause they wanted to get out of there, go back home, and away from this disaster of a meeting. They all get on planes. They all leave, most of them probably thinking that nothing is ever gonna come of this. Certainly, the B of A guys thinking nothing is ever gonna come of this. But Dee kind of thinks he just got authorization to go create Visa.

Ben Gilbert 1:01:43 Whole new system, and he has no power at this point, but he kind of thinks he does. And listeners, now is a great time to tell you about our next favorite company, Crusoe.

David Rosenthal 1:01:55 Yes, Crusoe, as you know by now, is a cloud provider specifically built for AI workloads powered by clean energy. Today, right in theme with Visa, we are talking about reliability and some of those details of Crusoe's infrastructure. So by this point, you know that their cloud is run on wasted, stranded, or clean energy, and they can provide significantly better performance for your dollar than traditional cloud providers.

Ben Gilbert 1:02:19 So how do they do it? It is a little bit more than just saying they put data centers next to natural gas flares or stranded energy from wind turbines. I mean, that insight alone has value, but this is insanely difficult to pull off, to build this multi-tenant architecture at scale and implement things like InfiniBand with rail optimization. So here are some of the things that Crusoe's team has had to do and why it required people with backgrounds in data centers, oil fields, utilities, networking, software, and manufacturing all working together to do it. So one, they have to trench high-bandwidth fiber themselves, and as you might imagine, putting a data center in a remote location, that is not just magically next to an ISP that you get to plug it into and have redundancy. Two, rugged infrastructure. Not only do they need to custom-design the data center architecture to let customers eke out every ounce of performance, it also needs to work in these locations. They initially worked with external vendors, but they've now started something called Crusoe Industries, which manufactures a majority of their mobile and modular data centers and electrical equipment themselves. And three is operations. Things go wrong out in the field, especially in remote locations, and Crusoe has a fault-tolerant organization that is able to plan for the maintenance and repairs and manage the failures when they do inevitably happen. So the team has deep data center operations expertise to ensure that customer AI workloads operate seamlessly when minimal disruption, and they really do plan for these things to happen and have great redundancy in place.

David Rosenthal 1:03:49 It's so cool. I mean, ultimately, this results in a huge win-win. They take what is otherwise a huge amount of energy waste and environmental harm, and they use it to power massive AI workloads. How could you do any better?

Ben Gilbert 1:04:00 If you, your company, or your portfolio companies could use lower-cost, more performant infrastructure for your AI workloads, go to crusoecloud.com/acquired, C-R-U-S-O-E cloud.com/acquired, or click the link in the show notes. Okay, so David, Dee Hock thinks he's got a mandate to go change things up in a big way and create some big, crazy, new proposal.

David Rosenthal 1:04:21 [chuckles] Yeah, and he's not wrong. [chuckles] Uh, fortune favors the bold, you know, might you say?

Ben Gilbert 1:04:27 Yes.

David Rosenthal 1:04:28 So to say a few more words about why this is so hard to organize this group of now competing banks to collaborate with one another, you've got multiple banks in the same state that are part of this system. Let's take Illinois again, just stick with this. You've got a bunch of banks in Illinois that are now all part of the BankAmericard payment network, which is intimately linked with their banking operations. If I'm any one of those banks, I would wanna say, like, "Hey, no, I wanna be the only bank in Illinois doing this," and, "Okay, maybe there are a few others here with me, but I sure as hell wanna 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 cardholders in the system as possible, and the merchants obviously want as many cardholders as possible, and the cardholders obviously want as many merchants as possible. That means that you need all the banks because you need all the merchants, you need all the customers, you need all the banks.

Ben Gilbert 1:05:27 And you basically want it to happen as fast as possible. So maybe if you only allow, you know, twenty percent of the banks in America or twenty percent 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 wanna take on a second banking relationship. They already have one. They're good.

David Rosenthal 1:05:50 Totally. This is a classic two-sided network. You wanna race to get ubiquity as fast as possible on both sides of the network.

Ben Gilbert 1:05:57 Yep.

David Rosenthal 1:05:58 So as Dee goes off and reflects on all this, he realizes that the fundamental problem is you've got this huge and diverse set of banks that both directly compete with one another, but also, if they're gonna make this thing actually work, they need to collaborate and work together. [chuckles] And that sounds like a really, really, really difficult problem to solve. Even if you could do that, how are you gonna get the DOJ to let you do that? Antitrust is gonna be an issue here for sure. But, you know, and this is Dee, 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 in the world what it has done for Bank of America.... But even more than that, though, Bank of America was trying to stretch here. They got greedy to a certain extent in franchising this out to other banks. But other banks signed up for this, 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.

Ben Gilbert 1:07:26 And frankly, all powered by the fact that this is what consumers want.

David Rosenthal 1:07:29 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 Dee is thinking big from the beginning, to be part of this, and you could power this global payments and credit network, and you were allowed to take a fee on the transaction volume for doing that, the value that you would unlock and generate, it beggars the imagination to think about what this could be.

Ben Gilbert 1:08:12 And if we could grow the pie enough, would BofA be comfortable not owning the whole thing? That's the bottom line here.

David Rosenthal 1:08:19 So there's this great passage from him in his book, One from Many. He says, "Any organization that could guarantee, transport, and settle transactions in the form of arranged electronic particles," that's what he calls digital information-

Ben Gilbert 1:08:32 Amazing

David Rosenthal 1:08:33 ... "twenty-four hours a day, seven 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 unimaginable complex of diverse institutions and individuals." This is the opportunity, and this is what he essentially takes to Bank of America. And now we've got to say a

David Rosenthal 1:09:33 few words about Dee, because this situation is nuts. Dee is a banker. He is running the BankAmericard franchise program at what would become Rainier 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 associate's degree. He bounced around in a bunch of random consumer finance jobs on the West Coast, all of which he got fired from because he's too insubordinate. He, now walking into the boardroom in Bank of America, which is what he's gonna do, and standing toe-to-toe with the vice chairman of Bank of America and saying, "I think you should give me the BankAmericard program [laughing] 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.

Ben Gilbert 1:10:39 Fortune favors the bold.

David Rosenthal 1:10:40 Fortune favors the bold.

Ben Gilbert 1:10:42 Importantly, though, fortune favors the bold who have done the work to figure out how to align incentives such that a logical person will think through and come to the same conclusion he has.

David Rosenthal 1:10:52 And this is the thing, Dee 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 associate's 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." [laughing] I mean, Dee basically is the prototypical Silicon Valley founder. He's just a generation too early and in the wrong industry.

Ben Gilbert 1:11:54 I once had a Silicon Valley founder give a talk at a startup week, and I ran ten, twelve years ago, who said, "Until your company shuts down, you are just in the act of succeeding."

David Rosenthal 1:12:03 Totally. [chuckles] I mean, cut from the same cloth-

Ben Gilbert 1:12:07 Yep

David Rosenthal 1:12:07 ... right down to every single stitch. There's one other important aspect to Dee that I think we should highlight here that enables him and all of Visa to succeed, and that's that he's about as far from the man and image of J.P. 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 Dee's just gone into B of A 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!

Ben Gilbert 1:13:27 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, BankAmericards?

David Rosenthal 1:13:38 Yep. Totally incredible that Dee actually convinces Bank of America to do this. Nobody in the world would have thought that this could happen. But now the work is 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 gotta 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 B of A. B of A, he's trying to get them to give him the asset. With the other banks, he actually needs to get them to change their behavior. He needs to be able to go to, say, the couple banks in Illinois that are existing franchisees of the BankAmericard system and say, "Hey, the new regulations, the new operating laws for this organization are gonna be all the banks in Illinois can join, and we actively want to go convince all of your competitors to come join this system."

Ben Gilbert 1:14:41 I see. So he's basically coming to them with a waiver and saying, "I want you to waive your exclusivity to some territory, because in our new construct here where we're all working together, you and everyone else is agreeing that it's good for the value of us all if we waive our exclusivity."

David Rosenthal 1:14:58 You know what this is like? This is like back in our NFL episode-

Ben Gilbert 1:15:02 Yes, that's exactly right

David Rosenthal 1:15:03 ... when the NFL started negotiating national television rights collectively as an organization.

Ben Gilbert 1:15:09 Yep.

David Rosenthal 1:15:09 A bunch of the individual teams hated that, 'cause they were like, "If I'm the Jets, I'm making more money in my New York Metro area doing my own TV deals than I'm gonna get as a share from you, the NFL, of a national deal." But in the long run, it was absolutely the right decision and value accretive to everybody, including the Jets, that the NFL centralized this.

Ben Gilbert 1:15:30 You'd rather be the Jets with their proportional share of the $14 billion a year TV deal that the NFL has today than, uh, whatever their very fat contract was alone in the, what, the '60s, '70s?

David Rosenthal 1:15:43 Totally. It is exactly the same thing here. Okay, so how's this whole thing gonna work? Dee and a few of his other fellow committee members, they go to Sausalito, California, just north of San Francisco, just across the Golden Gate Bridge, and they do an off-site for a couple days at a hotel in Sausalito, and there they come up with a number of operating regulations, guidelines for this hypothetical new entity, four of which we're gonna talk about here that are super critical. One, ownership of this new organization that's gonna be called National BankAmericard Inc, the new owner of the BankAmericard program, is going to be in the form of irrevocable, non-transferable rights of participation. So you're not gonna own stock in this thing. There's no equity. The way that you have ownership, and the percentage ownership that you have in the network, is by participating in it and the amount of volume that you are contributing to the network.

Ben Gilbert 1:16:47 Oh, interesting.

David Rosenthal 1:16:49 So this means a couple things. One, it's sort of like a 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, "Ooh, this is valuable now, I'm gonna 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.

Ben Gilbert 1:17:16 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.

David Rosenthal 1:17:31 You're making the assumption that this is a cost-only organization. You're forgetting the fact that it is one of the greatest business models and revenue generators- [laughs]

Ben Gilbert 1:17:40 [laughs]

David Rosenthal 1:17:41 ... of all time. [laughs] You are contributing 17% of the volume to this. You are entitled to 17% of the profits-

Ben Gilbert 1:17:47 I see

David Rosenthal 1:17:47 ... that we are extracting from the merchants and the cardholders.

Ben Gilbert 1:17:51 Yep. Because this is the natural business model of interchange, to do the exact same things that was being done with the sales drafts, where you 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, uh, 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.

David Rosenthal 1:18:16 Yep, exactly. So the actual legal structure that Dee and his fellow committee members land on for this is a for-profit, non-stock, membership corporation.

Ben Gilbert 1:18:28 That is a mouthful.

David Rosenthal 1:18:29 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.

Ben Gilbert 1:18:44 Hmm.

David Rosenthal 1:18:45 And that was to get around banks selling their interest. So you don't participate in it, you don't own it.

Ben Gilbert 1:18:51 So say it one more time. It is a for-profit...

David Rosenthal 1:18:54 A for-profit, non-stock, membership corporation. Your ownership is your membership.

Ben Gilbert 1:19:02 ... fascinating.

David Rosenthal 1:19:03 It's like a co-op. It's like REI or something like that.

Ben Gilbert 1:19:06 Yeah, yeah.

David Rosenthal 1:19:06 The way that Dee describes it to all the other banks is, it is a reverse holding company. The parent entity is owned by the subordinate members, as opposed to the top-level holding company owning all the subordinates.

Ben Gilbert 1:19:18 There's actually another NFL analogy here. The NFL doesn't own the teams, the team owners own the NFL.

David Rosenthal 1:19:24 Yes, but the NFL sets all the regulations for how the game is played, and all the teams submit to it.

Ben Gilbert 1:19:30 That's actually probably the best analogy for Visa, is the NFL league organization.

David Rosenthal 1:19:35 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.

Ben Gilbert 1:20:21 Wow! You could imagine nothing happening if everybody has the right to do that.

David Rosenthal 1:20:26 Well, they set the threshold at 80% for anything to happen. [chuckles]

Ben Gilbert 1:20:29 I see.

David Rosenthal 1:20:29 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.

Ben Gilbert 1:20:36 Fascinating.

David Rosenthal 1:20:37 Which, in practice, just gives Dee all of the control and power [laughs] of the company-

Ben Gilbert 1:20:43 Hmm

David Rosenthal 1:20:43 ... 'cause everybody's gonna listen to him as the CEO. Point three, we've basically already discussed, and that is that the mission of this organization is to facilitate cooperation and trust among competing institutions to grow the BankAmericard payment network larger than any one institution could on its own, which is the pitch he gave to Bank of America leadership. Also, though, this is 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 main network.

Ben Gilbert 1:21:24 I see. So none of these banks are members of Interbank at this point. These banks are exclusively members of whatever the heck Visa's predecessor name is.

David Rosenthal 1:21:35 National BankAmericard Inc.

Ben Gilbert 1:21:38 National BankAmericard Inc.

David Rosenthal 1:21:39 Yes. At this point in time, a antitrust lawsuit would change that very shortly. [chuckles]

Ben Gilbert 1:21:44 I see.

David Rosenthal 1:21:45 But at this point in time, it's like, "Nope, you are part of NBI exclusively. You don't go join Interbank, MasterCard, and you also don't go start your own networks or peel off parts of the network. Everything that you are doing in payment card operations needs to route into-

Ben Gilbert 1:22:02 Hmm

David Rosenthal 1:22:03 ... this network."

Ben Gilbert 1:22:04 That's a big contract to sign.

David Rosenthal 1:22:05 Totally! Again, this is why Dee needed to paint the picture, both to Bank of America and all the other banks. The prize is worth it.

Ben Gilbert 1:22:13 Yep.

David Rosenthal 1:22:14 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 future changes that come, of which you will have a vote in. This is a democracy, but you can't go leave the democracy. [chuckles]

Ben Gilbert 1:23:01 Right. You're signing up for something that might change in the future, and you don't get to know today if it's gonna change in the future, but at least you have some say in it.

David Rosenthal 1:23:07 That is exactly the pitch, and amazingly, e- even describing this now, having done all the research, read all the books, written the script that we're talking about here, I still can't believe this actually happens. Dee goes on, like, a tour across the country. He goes and meets with all the banks. Bank of America helps him out. They bring senior executives, too, to help convene, you know, meetings with all the banks to persuade them. Every single member bank of the previous BankAmericard franchisee organization, every single one of them signs up for the new organization led by Dee. Not a single person jumped ship.

Ben Gilbert 1:23:47 How many banks were at this point?

David Rosenthal 1:23:48 Over 200.

Ben Gilbert 1:23:49 Wow!

David Rosenthal 1:23:50 Isn't that wild?

Ben Gilbert 1:23:52 I mean, once you get to, like, 70 or something, then it kinda seems likely that everyone's gonna tip. But in those first 20, the fact that nobody was out is crazy.

David Rosenthal 1:24:01 Totally, and Dee writes about this, too. Bank of America helped him out. They identified the 13 most influential banks, and they convened the first summits with them of, like, "Hey, what do we gotta do to horse trade to get you guys involved?"

Ben Gilbert 1:24:15 Wow.

David Rosenthal 1:24:15 And then you kinda spiral out from there. But yeah, every single one, nobody jumped ship.

Ben Gilbert 1:24:20 And when is this? Like, 1970-ish?

David Rosenthal 1:24:22 The process starts in 1968. It all wraps up in either 1970 or 1971.

Ben Gilbert 1:24:27 Hmm.

David Rosenthal 1:24:28 Importantly, we've talked about antitrust and DOJ a bunch here. You would think that this would be setting off massive alarm bells in Washington [chuckles] and with the Department of Justice. They get ahead of this. So Dee 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.

Ben Gilbert 1:25:14 Wow!

David Rosenthal 1:25:15 Yeah.

Ben Gilbert 1:25:15 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 collaborating, potentially colluding, but it is actually one of the things that we believe will make the country better, so go for it.

David Rosenthal 1:25:28 America wants both its football and its credit cards. [laughing] Amazing. And that was a key point in then going and convincing all the other banks to sign up for this, 'cause that was one of the first questions they asked: "Hey, if we do this, aren't we inviting the DOJ on our backs?" And Dee is able to say, like, "Nope, got the letter right here. We're good."

Ben Gilbert 1:25:48 Wow, amazing.

David Rosenthal 1:25:50 So very shortly after this, after the creation of NBI, National BankAmericard Inc., Dee, in 1972, he's thinking globally from the get-go. He goes and creates a parallel, similar organization of international banks using the BankAmericard system. Visa was global from basically day one, and it wasn't just Barclays in the UK, it was Sumitomo Bank in Japan, it was other banks throughout Europe, it was Canada, it was Latin America. We won't go into all the detail here, except one amazing story we're gonna 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 Sumitomo Bank in Japan. You have to decide, do I wanna buy Dee's pitch of it's worth it to me to be a proportional owner of Visa, or I could be the singular dominant credit card network in my own country? Which is more valuable?

Ben Gilbert 1:27:00 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 UnionPay, I mean, that is the dominant way of payments flowing in China. That was, for them, the right move.

David Rosenthal 1:27:12 Totally. So once again, in Sausalito, this all comes to a head. Dee knows that probably not all of the international banks are gonna agree to this, and some of them are gonna go their own way. So he calls, you know, a final summit in Sausalito. They're gonna vote the next morning, final vote, on who's gonna join the soon-to-be Visa network and who's gonna go it on their own. And Dee gives this nostalgic speech at the end of dinner saying, like, "Here in Sausalito, 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 in 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." [chuckles] 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's like Steve Jobs. "A small gift of appreciation for you giving your valuable time and effort as part of this global undertaking. Please take this little box out from under your seats." Everybody takes a little box out from under their seat. They unwrap it, and inside are a pair of pure gold cufflinks, that on each of the two cufflinks, there is one half of the globe, and under one side it says, in Latin, "Studium ad prosperadam," which translates as "The will to succeed," and the other side says, "Voluntas in conveniendum." Apologies to Latin speakers out there, that I'm butchering that. Translates as "The grace to compromise." [laughing] And Dee explains this all, and somebody from the crowd yells out, "Dee, you miserable bastard!" [laughing] Because he just pulled on everybody's heartstrings.

Ben Gilbert 1:29:18 Oh.

David Rosenthal 1:29:18 And, like, he gets the votes! And the next morning, all the holdouts reverse course, they all join, and-

Ben Gilbert 1:29:25 What?

David Rosenthal 1:29:26 You can't make this stuff up. It literally happens. The cufflinks are out there. You can Google them. He did this.

Ben Gilbert 1:29:31 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 are the reason that you killed it."

David Rosenthal 1:29:42 Dee 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 Ibanco, I-B-A-N-C-O. 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, twenty-five people on the board. Dee 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. He's, "Oh, it's a family trip," you know, et cetera. And then he gets the idea, he invites the spouses into the board meeting itself.

Ben Gilbert 1:30:29 Oh, what a nightmare. [laughing]

David Rosenthal 1:30:31 So twenty-five board members, plus their spouses, in his board meeting. This means two things: one, nothing is gonna get done. There are fifty 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? [chuckles]

Ben Gilbert 1:30:50 Wow!

David Rosenthal 1:30:51 So, like, are you really gonna act like an asshole in front of not only your spouse, but the spouses of all these other global bank heads?

Ben Gilbert 1:30:58 That's so funny. I'm gonna start doing that.

David Rosenthal 1:31:01 We should have our wives in the room while we record. [chuckles]

Ben Gilbert 1:31:03 Definitely not.

David Rosenthal 1:31:05 Oh, amazing. Amazing.

Ben Gilbert 1:31:06 I think neither would join for that.

David Rosenthal 1:31:08 Totally, no. They'd be like, "No way."

Ben Gilbert 1:31:09 [laughing] Okay, so how does the name Visa come about? How does the sort of joining of the international and the domestic...

David Rosenthal 1:31:16 Okay.... Visa is so important. It's not just a rebrand. It has to happen once this international organization is set up.

Ben Gilbert 1:31:25 Yeah, America can't be in the name.

David Rosenthal 1:31:26 Yeah, BankAmericard ain't gonna 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 gonna 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 Dee holds a contest internally within NBI/I Banco to generate a new name, and he offers a $50 prize for the winning entry [chuckles] that is chosen, and as legend goes, there are so many submissions of the name Visa that when they finally unveil it, Dee makes a big deal and writes out a $50 check. Check? Why are they using a check? Made out to everyone in the company. [laughing]

Ben Gilbert 1:32:14 [laughing]

David Rosenthal 1:32:15 Which is funny, but then they change 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.

Ben Gilbert 1:32:30 It's interesting it's in English. I mean, I guess it makes sense. It's the most spoken language, but-

David Rosenthal 1:32:34 Well, no, it's not just in English. The name Visa in every, if not almost every language, on Earth-

Ben Gilbert 1:32:40 And when you're traveling, and you need a visa for a country, they call it a visa in other languages, too?

David Rosenthal 1:32:44 That's what it is. But when you are traveling internationally, when you're going through customs in any country, it is identified as a visa. That is the name.

Ben Gilbert 1:32:52 Yeah, the universality, it's sort of a presumptive close 'cause at this point, you know, they've got, what, three, four, five hundred 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, uh, Visa would imply.

David Rosenthal 1:33:06 Uh, 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 it is your entry pass, this card is now your entry pass to commerce, to experiences, that it works everywhere, as you said, that it's universal. It's amazing.

Ben Gilbert 1:33:30 Yeah.

David Rosenthal 1:33:31 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 Interbank, 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 there are a bazillion of now.

Ben Gilbert 1:34:43 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.

David Rosenthal 1:34:51 Yep, and this is kind of the brilliance of the Visa model. They were like, "It's open. You can do whatever you want up there."

Ben Gilbert 1:34:58 Right, that seems good for us. We're happy with that.

David Rosenthal 1:35:00 Of course, it's great! The whole goal is just get more consumers and more merchants on the network, so anything that's gonna do that, great, while maintaining the universality of Visa, great. We got the middle. You got the top. Go wild. Do whatever you want.

Ben Gilbert 1:35:15 Wow, and that's how I end up with BB-8 on my, uh, card today.

David Rosenthal 1:35:19 [laughing] Amazing.

Ben Gilbert 1:35:20 [laughing]

David Rosenthal 1:35:21 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 are the new operating regulations now that mandate that all cards out there, all the previous BankAmericards, need to be migrated to Visa cards, I think within, like, two years of this being declared or something like that. Some banks start to see this as an opportunity to go poach cardholders 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 BankAmericard is gonna switch to Visa." So some banks, in a version of the Fresno drop, they start sending unsolicited letters to consumers who are already Visa BankAmericard customers with another bank. They're like, "Oh, hey, it's time to switch over to your Visa card. Here's the application. Sign up with this."

Ben Gilbert 1:36:29 Nice of them to, at this point in history, offer applications. I think 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.

David Rosenthal 1:36:42 Totally wild, but because of this, a whole bunch of consumers start sort of unconsciously switching the bank that issues 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 gotta 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%, 'cause everybody who's not in the system now is like, "I gotta get in the Visa system."

Ben Gilbert 1:37:22 By the way, this is the thing that pushes Visa ahead of what was, I believe, then called Master Charge?

David Rosenthal 1:37:29 Yes.

Ben Gilbert 1:37:29 The Interbank had changed to Master Charge. They hadn't yet turned it to MasterCard, but in 1976, Master Charge was actually bigger. They had 7,400 banks, and at this point in history, Visa had about 7,000 banks. Master Charge also had more cardholders, 37 million versus BankAmericard's 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.

David Rosenthal 1:37:57 Totally. So that was number of member banks grows by 20%. The number of active cardholders in the Visa network in this one year grows by 45%.

Ben Gilbert 1:38:06 Wow!

David Rosenthal 1:38:07 Isn't that wild? So, as you say, they blow way past MasterCard, thanks to this. They're already way bigger than Amex, because Amex is a different customer segment, which we'll talk about in a sec, and this really puts them on the path to becoming the dominant global network that they are today.

Ben Gilbert 1:38:25 Yeah, and it's worth a moment on Amex 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 Amex win with their closed-loop system, where they own the whole thing end to end and can provide the most incredibly custom experience for everyone on their platform, on the merchant side and on the consumer side? 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 Amex. Amex 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, "Why don't you go figure out how to grow for us there?" So this network of networks thing, the open-loop system, while it creates a little bit more of a kludgy user experience because there's 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 gonna be compromising a little bit on the user experience because you can't sort of rule by fiat when you wanna make a change, but it does potentially come with much better scalability, which is the reason why Visa and MasterCard have become the dominant way versus the closed-loop systems.

David Rosenthal 1:40:33 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 meaning they can multi-home on both Visa and MasterCard. In all the testimony and case with the DOJ, Dee is obviously 100% against this happening. He doesn't want his banks to be able to join MasterCard, too, but he also makes the surprisingly correct argument. He's like: "Look, this would be a huge mistake, because, US government, if you do this, you are going to freeze the payment networks in the US. Nobody is ever gonna 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 kinda gonna operate in lockstep."

Ben Gilbert 1:41:33 The prices should be identical for both.

David Rosenthal 1:41:36 All this stuff, and the DOJ is like, "No, no, no, no, we're gonna do it anyway." Irony of ironies, later, in 1988, the DOJ again sues Visa and MasterCard for being a duopoly [chuckles] and not competitive enough. So Dee was right, Dee was right.

Ben Gilbert 1:41:51 And to this day, Dee has been right. There have been many attempts that we'll talk about toward the end of this episode of displacing Visa and MasterCard or inventing new payment systems, and, like, they never work, or they haven't worked yet.

David Rosenthal 1:42:03 Great point. They're in the process of working. [laughing]

Ben Gilbert 1:42:06 [laughing]

David Rosenthal 1:42:07 So great.

Ben Gilbert 1:42:08 It's probably actually worth sharing the Amex thing. So Amex tried this crazy strategy in the '80s, and now I'm flashing forward ten years here, but they [chuckles] would basically cut their interchange, the discount rate that they were charging merchants, massively if those merchants would go exclusive to Amex. And this actually continued until 1991 for many of their merchants, [chuckles] and for Costco, went all the way to 2016, where they had the exclusive agreement with, uh, Amex, and if you were gonna use a credit card at Costco, it had to be Amex. But interestingly, Visa and MasterCard cried foul when, uh, you know, all of their banks were multi-homing, and Amex, with their virtue of a slightly different business model, was allowed to go and try to lock up merchants to be exclusive to them. So eventually, the whole thing kinda stopped and, you know, flash forward to today, all cards are accepted at basically all locations.

David Rosenthal 1:43:02 Yep. So this basically concludes the full Visa story. Like, how did this incredible thing happen? You know, we've answered Dee's questions. Who owns this? Who runs it? How did it start? We could end the episode here, but we've actually really only told you half the story.... What we've told you is all the incredible business, organizational, social, human behavior innovations that Visa Inc. created.

Ben Gilbert 1:43:35 Yeah, as Dave puts it in Electronic Value Exchange, there's a sociotechnical aspect to this company, and we've talked about the socio, but not the technical.

David Rosenthal 1:43:44 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 Dee's question of where is Visa headquartered and nobody knowing that, it's headquartered in the Bay Area. It's a Silicon Valley company. It was started in the same place 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.

Ben Gilbert 1:44:28 Yeah, great point. All right, so what is it?

David Rosenthal 1:44:30 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, Statsig.

Ben Gilbert 1:44:42 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.

David Rosenthal 1:45:03 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.

Ben Gilbert 1:45:35 Yep. Thanks to Statsig, though, it is now super easy to do this the right way. If you're building software products, Statsig is the one-stop platform you need for feature flagging, product experimentation, and analytics. The product just works. It makes it super easy to roll out features in stages and provides data on the impact at every stage of the rollout. Statsig is a critical part of how companies, including financial ones like Brex and also like Notion, launch their features to hundreds of millions of users without causing outages or hurting core metrics.

David Rosenthal 1:46:08 Yep, it's super impressive. So if you're a startup, they have a generous free tier and a special program for venture-backed 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 five million free events a month and white glove onboarding support. Just go visit statsig.com/acquired. That's S-T-A-T-S-I-G.com/acquired to get started on your data-driven journey.

Ben Gilbert 1:46:38 Okay, so David, what does Visa's technical infrastructure look like, and how did this come to be?

David Rosenthal 1:46:44 So everything we just described up until now, amazing, incredible, unlikely, one in a million, but all it really bought Dee and Visa was the opportunity-

Ben Gilbert 1:46:59 Yes

David Rosenthal 1:46:59 ... 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 Dee back in nineteen sixty-eight, "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.

Ben Gilbert 1:47:43 Fascinating.

David Rosenthal 1:47:44 Now, they wanted to use them in specific use cases. Like Ben, you pointed out, when you wanna make a credit purchase, when you wanna essentially do what installment financing was before, when you have any number of XYZ other set of factors, in the case of Diners Club and Amex, when you wanna impress your colleagues and your business partners. There were use cases, but it wasn't like it is today, where obviously you're gonna use your credit card, which is probably a Visa and maybe a MasterCard, to pay for everything that you do everywhere instantly.

Ben Gilbert 1:48:17 Yes, and to illustrate, we will link this in the show notes, but there is an old TV segment from nineteen ninety-three, not that old, pretty recent-

David Rosenthal 1:48:27 Ben, I've really sad news. Nineteen ninety-three was thirty years ago. [chuckles]

Ben Gilbert 1:48:32 Yeah.

David Rosenthal 1:48:32 We remember it-

Ben Gilbert 1:48:33 I know, right?

David Rosenthal 1:48:33 ... but it's old now. Nineteen ninety-three to today is like the nineteen fifties were to us when we were kids.

Ben Gilbert 1:48:39 Not good. Not good, David.

David Rosenthal 1:48:41 Not good. [chuckles]

Ben Gilbert 1:48:42 This nineteen ninety-three TV segment, the news is that Burger King has just rolled out credit cards. That should tell you a lot. Burger King, prior to nineteen ninety-three, 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 nineteen ninety-three, and a second guy is interviewed and says something to the effect of, "I just hope it doesn't slow things down, 'cause, you know, they'll have to call New York, and then they'll have 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-

David Rosenthal 1:49:28 Cash is respectable. Credit cards are debt. What this woman is saying, "It's really sad if you need to use debt to buy a burger."

Ben Gilbert 1:49:35 ... 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, "Geez, for the amount of time we spend handling change, we just wanna encourage everyone to be swiping the card all the time, even if they're, you know, losing some money on the interchange."

David Rosenthal 1:49:54 It's crazy. That was 1993. I mean-

Ben Gilbert 1:49:57 Yeah.

David Rosenthal 1:49:58 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!"

Ben Gilbert 1:50:06 Ugh, 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.

David Rosenthal 1:50:17 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 to call to New York, and they got to authorize the transaction," and all that, we glossed over one sort of stopgap slash band-aid that Visa and other credit card networks implemented 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, fifty bucks or something like that. Anything paid with a credit card under fifty dollars, it was basically within the judgment of the cashier to-

Ben Gilbert 1:51:19 Oh, wow

David Rosenthal 1:51:19 ... say yes or no. [chuckles] 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."

Ben Gilbert 1:51:31 Interesting.

David Rosenthal 1:51:31 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 to the cardholder, call up the cardholder bank-

Ben Gilbert 1:51:53 Oh, my God.

David Rosenthal 1:51:54 -get somebody on the horn there, say, "Hey, I've got your cardholder, Benjamin Gilbert. His card number is XYZ, you know, one, two, three. Can you look up his credit? And, you know, he wants to buy a five-hundred-dollar refrigerator. Can you tell me if he's good for it?"

Ben Gilbert 1:52:10 Right. And this effectively would be like, have they hit their limit yet?

David Rosenthal 1:52:13 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 at 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."

Ben Gilbert 1:52:29 So you had banks talking to banks?

David Rosenthal 1:52:32 People at merchants talking to people at their bank, talking to people at the cardholder's bank, and then reversing the whole chain.

Ben Gilbert 1:52:40 But importantly, you had a person at the merchant's bank calling a person at the cardholder's bank.

David Rosenthal 1:52:47 Yes.

Ben Gilbert 1:52:48 Today, that is known as VisaNet. There's this piece of technology [chuckles] that sits in the middle that eliminates that bank-to-bank phone call.

David Rosenthal 1:52:55 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, twenty minutes, and it just didn't work outside of business hours-

Ben Gilbert 1:53:06 Wow

David Rosenthal 1:53:06 ... for those banks. So say, you know, now that Bank of America card is nationwide, soon to be international, imagine you're trying to buy something in Japan, and the Japanese merchant bank calls your cardholder bank back in America, "Closed for business." Just no way for that transaction to happen.

Ben Gilbert 1:53:26 Wow! That's crazy.

David Rosenthal 1:53:28 Not good. Definitely not good. So Dee and Visa know that this is, like, the first thing that they have to address. In 1971, right after NBI is formed, Dee starts a project called the BankAmericard Authorization System Experimental, or BASE, BASE, to build technology to address this problem. The whole thing actually started rather inauspiciously because right after all the approvals came through for Dee to form NBI, I think it was literally the evening before the first board meeting, Bank of America comes up to Dee, and they're like: "Can we take you aside? There's something you need to know."

Ben Gilbert 1:54:08 [chuckles] Oh, God. That's always fun before a first board meeting.

David Rosenthal 1:54:11 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 gonna do this, so, you know, Dee, if you want us to remain part of NBI..." Remember, this is Bank of America, the most important part of NBI.

Ben Gilbert 1:54:41 Oh, my God!

David Rosenthal 1:54:43 "I know you know that part of the operating agreement is, like, you know, we can't really operate outside of the bounds of NBI, but this isn't really outside the bounds of the NBI. This is a separate thing. This is authorization systems. We're gonna do this, and if you say we can't do this, we're out."

Ben Gilbert 1:54:57 Whoa!

David Rosenthal 1:54:58 So not good.

Ben Gilbert 1:55:00 And it's true. It's not really like they're issuing new cards or acquiring new merchants. They're being a technology provider.

David Rosenthal 1:55:08 Because they and American Express both see that, hey, this is a really, really, really valuable piece of technology. [chuckles]

Ben Gilbert 1:55:14 Hmm.

David Rosenthal 1:55:14 Dee is, of course, pissed, but what's he gonna do? B of A says, "Take it or leave it." Dee takes it. As Dee then tells the story, Bank of America and Amex go out, and they try and pitch the other banks in NBI and Interbank 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 Interbank, 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-

Ben Gilbert 1:56:02 Ha.

David Rosenthal 1:56:02 -collusion and anti-competitive behavior, so if you go forward with this, we're gonna sue you," and then they all abandon the project. And this is huge for Visa because this means they can build it on their own.

Ben Gilbert 1:56:15 Fascinating.

David Rosenthal 1:56:16 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 Accentures of the day, to go build this technology for them, go build a computerized authorization system for the BankAmericard Visa network. All the bids come back, and of course, they are all way over budget and way over time, so Dee says, "Well, screw it. We're gonna do it ourselves. How hard can it be?"

Ben Gilbert 1:56:49 Wow!

David Rosenthal 1:56:50 So in his very Dee way, he goes, and he recruits the guy from the firm that impressed them the most throughout the bidding process. It was a firm named TRW and a guy named Aram Tatulian. Dee 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."

Ben Gilbert 1:57:12 Wow.

David Rosenthal 1:57:13 "And I'll give you the resources. You come join us, and you'll build out your own tech team here within NBI/Visa." Aram comes and joins and starts the core of the Visa tech team. Dee gives him nine 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 San Mateo campus. You can see it right off of one oh one as you're driving between San Francisco and Silicon Valley. It is, I believe, still the headquarters of Visa today now. Huge campus in San Mateo, where they built the data center.

Ben Gilbert 1:58:16 Until I think next year, it's gonna go back up to San Francisco when they finish a new building.

David Rosenthal 1:58:20 That's right. I think it's going to, um, Mission Bay.

Ben Gilbert 1:58:23 Hmm.

David Rosenthal 1:58:24 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 Dee. "Dee maintained that if you give computer people more time, they will just consume it." So he always insisted- [laughing]

Ben Gilbert 1:58:46 [laughing] So-- It's so true.

David Rosenthal 1:58:47 So he always insisted on shorter projects with uncompromising deadlines. [chuckles]

Ben Gilbert 1:58:54 They will just consume it.

David Rosenthal 1:58:55 They'll just consume it.

Ben Gilbert 1:58:57 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.

David Rosenthal 1:59:07 Yep, direct networking.

Ben Gilbert 1:59:08 Amazing, and so they're just operating the whole network out of this data center in California?

David Rosenthal 1:59:14 Yep. Now, importantly, this is only for transaction authorizations, so the cards and the point of sale have not been digitized yet. That's gonna be the final third piece of the stool of technology that Visa builds. This is just when a merchant makes a call to their bank saying, "Hey, is this card good for this amount?" This is then the interbank communication.

Ben Gilbert 1:59:40 I see. So how does the settlement happen at this point in history?

David Rosenthal 1:59:43 So that's what's next. That's the next big operational, technical problem that Visa needs to solve.

Ben Gilbert 1:59:49 It's, like, literally moving the money when it needs to be moved.

David Rosenthal 1:59:52 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 could 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 back end piece consumed a lot of paper and time, too. Maybe more time, but, like, a lot of paper.

Ben Gilbert 2:00:22 'Cause you're effectively mailing checks.

David Rosenthal 2:00:24 And even more perniciously, as the network grew, and at this point in time, soon-to-be Visa is growing explosively, the complexity of this settlement piece also grows 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.

Ben Gilbert 2:00:50 It's an N-squared problem.

David Rosenthal 2:00:51 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.

Ben Gilbert 2:00:59 N squared is much worse when you're doing it with paper than with computers.

David Rosenthal 2:01:02 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 clearinghouse. You need an automated clearinghouse, 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 clearinghouse 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 ACH system for checks, you know, automated clearing house, ACH-

Ben Gilbert 2:01:52 Yeah

David Rosenthal 2:01:52 - everything in the banking system. That was built by the San Francisco branch of the Federal Reserve in the exact same years-

Ben Gilbert 2:01:59 Whoa!

David Rosenthal 2:01:59 - in the '70s, when Visa was building their own essentially automated clearing house system.

Ben Gilbert 2:02:05 That is wild.

David Rosenthal 2:02:06 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. The same place, the same time.

Ben Gilbert 2:02:20 Solving the same problem.

David Rosenthal 2:02:21 Solving the same problem.

Ben Gilbert 2:02:23 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 100 bucks 500 times, and I paid you 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.

David Rosenthal 2:02:57 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 Two 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 banks.

Ben Gilbert 2:03:35 Right, if you're the one that owes the money, you kind of want the payment to take more time.

David Rosenthal 2:03:38 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.

Ben Gilbert 2:03:52 Wow.

David Rosenthal 2:03:53 And imagine if this were done manually today. It wouldn't be possible to do this manually today.

Ben Gilbert 2:03:58 No. You needed the technology solutions that they've put in place to enable the commerce scale that flows on this network today.

David Rosenthal 2:04:04 Yep. It is also during this project that one of the most famous Visa tech team stories in history happens. [chuckles]

Ben Gilbert 2:04:15 This is a good one.

David Rosenthal 2:04:16 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 Two, he is thinking about the system, and reliability is so important, you know, this network can't go down, and he's like, "Huh, we actually have a pretty serious vulnerability in this system." So he goes to see Dee, and, I mean, the whole Visa organization, I think, is, like, less than 50 people at this point in time.

Ben Gilbert 2:04:46 Wow.

David Rosenthal 2:04:46 Just wild. And he's like, "Dee, 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." [laughing]

Ben Gilbert 2:05:16 [laughing]

David Rosenthal 2:05:17 "So, you know, we really might want to think about having some sort of redundant parallel site, a data center out there." And, uh, Dee, uh, in his very Dee 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 six months."

Ben Gilbert 2:05:49 And invent the technology to keep these things synchronized, so they are actually redundant.

David Rosenthal 2:05:55 Yes. So now, Dee 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 fledgling data center world was, yes, to have redundant other location backups, but the way that it was typically done was you had your primary data center that operated at full capacity all the time. The backups were just, 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 gonna go through all this trouble and expense of building another data center-

Ben Gilbert 2:06:37 Let's use it.

David Rosenthal 2:06:38 - let's use it!" So they re-architected Base One and completed architecting Base Two 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.

Ben Gilbert 2:07:01 Wow.

David Rosenthal 2:07:02 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.

Ben Gilbert 2:07:17 Fascinating.

David Rosenthal 2:07:18 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.

Ben Gilbert 2:07:54 Those Verifone, you know, traditionally, they had a huge market share.

David Rosenthal 2:07:58 Well, this is when Verifone gets built. There was no Verifone before this.

Ben Gilbert 2:08:03 Yep.

David Rosenthal 2:08:04 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 calls, but it didn't digitize the transactions themselves.

Ben Gilbert 2:08:23 So this is actually every transaction now is running digitally for authorization over the network.

David Rosenthal 2:08:29 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-readable. So before this, the cards were just pieces of plastic with embossed numbers on them. Like, you had to say or type the numbers into something.

Ben Gilbert 2:08:56 And the nice thing about the embossing is that if you run a shunk-shunk on it-

David Rosenthal 2:09:00 A zip zap.

Ben Gilbert 2:09:01 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.

David Rosenthal 2:09:14 Yep. So Visa makes the decision. They end up going with the magstripe technology. This is the magnetic strip on the back of, still to this day, almost everybody's cards out there. There's a whole bunch of drama around this. Citibank had financed a proprietary magnetic solution that they were trying to push on the industry, that I think there are a bunch of lawsuits.

Ben Gilbert 2:09:35 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?

David Rosenthal 2:09:42 Yes, but it was proprietary, so Visa's like: "Hey, we're not gonna pay you, Citibank, a skiff on everything that we do here. W- we take the skiff."

Ben Gilbert 2:09:49 You pay us a skiff on everything. [laughing]

David Rosenthal 2:09:50 You pay us a skiff. [laughing] Exactly. Uh, so they standardize on the magstripe 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.

Ben Gilbert 2:10:15 That is outside their circle of competence.

David Rosenthal 2:10:17 Yes. We mentioned earlier, and you alluded to, this is when Verifone takes off. So what Visa does is they create a spec. They're like: "This is the spec of what we kinda need to be created," and they invite different technology vendors to bid on it. Verifone ends up becoming the large, dominant... I actually don't know what their market share was or is.

Ben Gilbert 2:10:39 I think they had, like, two-thirds of the market at peak.

David Rosenthal 2:10:41 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, [chuckles] 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 happened digitally over the digital network.

Ben Gilbert 2:11:16 I see. If you use this instead of the zip zap, you'll get cheaper fees.

David Rosenthal 2:11:19 Yep, exactly.

Ben Gilbert 2:11:21 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.

David Rosenthal 2:11:33 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, the country and the world. That's another whole step change.

Ben Gilbert 2:11:56 That's like single-digit millions of nodes.

David Rosenthal 2:11:58 Yes. So what are they gonna 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 kinda consumer networking service out there called CompuServe.

Ben Gilbert 2:12:19 [chuckles]

David Rosenthal 2:12:20 And for folks who either weren't alive in the US at this time or are not Americans, CompuServe was like an AOL competitor in the early days of the internet.

Ben Gilbert 2:12:28 I think they invented the GIF.

David Rosenthal 2:12:30 Ooh, I think that might be right. Yeah.

Ben Gilbert 2:12:32 Yep.

David Rosenthal 2:12:32 So as a consumer, you would pay a monthly fee to CompuServe 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.

Ben Gilbert 2:12:44 It was a proprietary internet.

David Rosenthal 2:12:46 So they somehow get in 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 CompuServe network capacity to send their digital transactions from merchant point-of-sale terminals, and I think this goes on for, like, years.

Ben Gilbert 2:13:18 That's crazy. I had no idea. That's fascinating.

David Rosenthal 2:13:22 Totally wild.

Ben Gilbert 2:13:23 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 complementary use cases for the same infrastructure that when one is waxing, the other's waning.

David Rosenthal 2:13:39 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 five-dollar 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, 'cause it's all digital and instant, they can figure out whether that's fraudulent or not.

Ben Gilbert 2:14:12 Hmm.

David Rosenthal 2:14:13 So during the pilot, banks and merchants that were participating in this program reduced chargebacks to the system by eighty-two percent, relative to what was happening before. So just, like, a massive amount of fraud gets eliminated.

Ben Gilbert 2:14:30 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.

David Rosenthal 2:14:39 Absolutely.

Ben Gilbert 2:14:40 In many ways that, "Hey, we're gonna, you know, reward you with lower interchange to install these terminals," like, at the end of the day, Visa probably could have maintained a margin, and all the banks could have maintained a profit margin and not lost any margin percentage, 'cause just implementing this technology lowered the cost of running the whole thing.

David Rosenthal 2:14:56 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 your card, or whatever, and it just works, and it gets authorized, and you get your thing immediately. This is the backbone to all of 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.

Ben Gilbert 2:15:35 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. [chuckles]

David Rosenthal 2:15:51 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.

Ben Gilbert 2:16:05 Now, the toll booth is fully built. It is a high-functioning toll booth. [chuckles]

David Rosenthal 2:16:11 Yeah.

Ben Gilbert 2:16:11 It's a im- immoveable toll booth. [chuckles]

David Rosenthal 2:16:13 It's digitized. It doesn't- no longer has a human sitting there.

Ben Gilbert 2:16:16 Ugh.

David Rosenthal 2:16:17 They've got the FastPass system or whatever.

Ben Gilbert 2:16:19 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 wanna 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 wanna talk about, too.

David Rosenthal 2:16:41 Yeah. There's one more really fun marketing piece that I wanna come back to before we move on to today, and that's the Olympics. A lot of people, probably everybody listening now, knows Visa is associated with the Olympics.

Ben Gilbert 2:16:57 They're probably the most associated brand, other than NBC.

David Rosenthal 2:17:02 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 and 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 gonna reach everybody in the world. And up until this point, one of the mainstay, largest Olympic sponsors in America was American Express. [laughing]

Ben Gilbert 2:18:07 [chuckles]

David Rosenthal 2:18:07 'Cause this fits perfectly with American Express. It's for American business people who are traveling abroad. Olympics, great, amazing. The Olympics, uh, the IOC, goes to Amex to try and sign them up to take this marquee global sponsorship slot. They think it's a no-brainer. They give Amex a sweetheart introductory offer deal. "You're the first people we're going to, fourteen million dollars." Amex declines.

Ben Gilbert 2:18:33 Whoa!

David Rosenthal 2:18:34 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, Dee ends up getting ousted from the company. I think, you know, if he were still alive today, he would probably agree with the characterization that Dee was one of the most amazing zero-to-one entrepreneurs in history, not so much a one-to-N kinda guy, especially when the industry in which you're going from one to N, and your shareholders and board is all some of the most conservative financial institutions in the world. [chuckles] A lot of conflict starts to erupt, ends up with Dee leaving the company in 1984. After this happens, Visa brings on a new global chief marketing officer, a guy named John Bennett, who came from twenty years at American Express. So he and his team see that Amex has passed on this new, amazing global opportunity with the Olympics. They're also formulating the new Visa marketing strategy. Up 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 MasterCard, so we positioned against them. John comes in, and he's like: "No, no, no.... The path to victory here is not positioning against MasterCard. The path to victory is positioning against American Express.

Ben Gilbert 2:20:09 Hmm.

David Rosenthal 2:20:09 Not because we wanna 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."

Ben Gilbert 2:20:33 Which is so interesting because a signature piece of the BankAmericard since it launched was that it is actually a charge card, where at the end of the first month, you have the option to turn it into a loan, but I have never elected that option. I hold these things called credit cards, but that's a misnomer. I've never once used any credit.

David Rosenthal 2:20:52 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.

Ben Gilbert 2:21:03 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.

David Rosenthal 2:21:11 Yes, you are using debt, you're just not paying interest.

Ben Gilbert 2:21:14 Yes.

David Rosenthal 2:21:15 Which, you know, hey, that's a great thing to do.

Ben Gilbert 2:21:17 That's a amazing gift that these banks give the world.

David Rosenthal 2:21:20 It's the American way. So John had just started. The strategy is use American Express to eliminate the stigma around Visa and, by association, paint MasterCard as having that stigma, 'cause 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 Visa's. So they design a whole marketing campaign around going after American Express, and the tagline of the campaign, you know, they show these exotic locales, the, 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 Amex declines, John and the team get in touch with the IOC. The price tag has gone up to $17 million just for the rights. That's before any media buys. No advertising, that 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.

Ben Gilbert 2:23:04 That's about $110 million in today's dollars.

David Rosenthal 2:23:07 Yeah, wild. Way more than they spent on any of the technology projects that we were just talking about.

Ben Gilbert 2:23:13 I mean, yeah, R&D costs money, but go-to-market costs more.

David Rosenthal 2:23:16 Yeah. [chuckles] What's the line? Uh, first-time founders focus on technology, second-time founders focus on distribution?

Ben Gilbert 2:23:22 Yep.

David Rosenthal 2:23:23 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 training all these people that are going to the Olympics year after year after year. It has now been 37 years that Visa is the exclusive payments global sponsor of the Olympics. They're contracted through 2032, so it will be at least 46 years [chuckles] where Visa is the only card accepted at the Olympics.

Ben Gilbert 2:24:07 Which that's not that big a deal, 'cause there's not that many people that go relative to the people that see the media and understand the brand association.

David Rosenthal 2:24:14 Of course, of course, but the reason we're talking about this, A, it's an awesome story, but, two, the last outstanding piece of enabling the global Visa empire, this last thing is the stigma. How do they get rid of the stigma of I can use my credit card and not feel like it's a taboo? This was it, position against Amex, go to the Olympics. It's the perfect event. You're around the world. The type of people who go to the Olympics, the type of people who use Amex, they use their Visa cards, and they're proud of it.

Ben Gilbert 2:24:44 Love it. So, David, take us to the IPO. This thing was an organization that was owned, but not with stock.

David Rosenthal 2:24:53 A for-profit, non-stock membership organization.

Ben Gilbert 2:24:56 Right, and now they're an enormously profitable public company. So how did we get from there to here?

David Rosenthal 2:25:01 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.

Ben Gilbert 2:25:14 They were monetizing it just fine the way that they currently owned it.

David Rosenthal 2:25:16 Yes, the profits being spit out of the system were just fine. In 2005, there finally was another huge antitrust lawsuit, I think against both Visa and MasterCard.

Ben Gilbert 2:25:29 It actually is a class-action lawsuit-

David Rosenthal 2:25:32 Ah.

Ben Gilbert 2:25:32 -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 '06 time frame of, "Geez, 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. Amex 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 preexisting shareholders, will own all that liability and all the A shares, the, the new people who are coming in as owners of the company, will be protected."

David Rosenthal 2:27:18 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 eighteen billion dollars at a ninety billion dollar initial market cap, but that eighteen billion dollars wasn't primary capital to the company's balance sheet because, obviously, Visa was incredibly profitable, did not need capital.

Ben Gilbert 2:27:54 It prints money. Why would you want to raise capital and dilute?

David Rosenthal 2:27:56 That eighteen billion dollars 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.

Ben Gilbert 2:28:11 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.

David Rosenthal 2:28:20 Well, at this point, Visa's market cap is significantly larger than any of its former member banks.

Ben Gilbert 2:28:27 It's wild. I mean, Dee Hock 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 Visa's cut, all of that, so you can kind of understand it. So Visa's business model. The first thing to know is almost nothing has 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 auth flows upstream, the merchant runs the card, checks with their bank, who checks with VisaNet, who checks with the issuer's 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, and no matter what currency you are transacting in, your transaction can happen. Pretty unbelievable. Amazing that within seconds you can know for certain that someone is vouching for the customer's money and paying in full. Well, nearly in full, minus a merchant discount rate. 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, et cetera. And then there are payment processing fees, and those go to the acquiring bank, the bank that acquired the merchant, this is the merchant's bank, and the technology provider of whatever they're using to process their payments. 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 two percent discount off the sale price. So if it was a hundred dollar pair of shoes, you're now making ninety-eight dollars, and what happens to that two percent? So that two percent, the lion's share of it is the interchange, the one point six percent. That goes to the bank that issued the card.

David Rosenthal 2:31:27 To the cardholder, to the consumer.

Ben Gilbert 2:31:30 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's 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 gotta do, but, you know, they get most of the money. A small amount, on the order of, like, point two percent, or, uh, twenty bips for you finance people out there, goes to the bank that acquired the merchant. This could be Chase, Fiserv, Wells Fargo. This is, you know, the merchant's 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 point two percent can kind of get split between the financial institution and the technology provider.

David Rosenthal 2:32:30 And those are folks like First Data and stuff like that, right?

Ben Gilbert 2:32:33 Yes. Point one five to point two percent 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 obfuscated or if it just ends up being kind of obfuscated, but it's not super easy to figure this out. So Visa, let's round it to point two percent, gets twenty cents of that hundred dollar shoe sale. But the cool thing about their twenty cents is there's basically no variable costs.

David Rosenthal 2:33:15 Yes.

Ben Gilbert 2:33:15 It's not dealing with fraud. It's not moving heavy data around. I mean, merchants are allowed to have a twenty-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 infinitesimally small relative to the amount that technology has progressed. This point two percent, the twenty cents on the hundred dollar 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 merchant's account, so debit cards are gonna be less. Smaller merchants often pay closer to three percent than two percent 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. Well, 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 MoffettNathanson, 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.

David Rosenthal 2:35:37 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-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.

Ben Gilbert 2:36:23 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?"

David Rosenthal 2:36:43 Your new product is you're charging me more?

Ben Gilbert 2:36:45 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 gonna go, and I'm gonna give better rewards to higher-spending, you know, more creditworthy customers." And then Visa's argument back to the merchant is, "Well, hey, because we're actually taking more money on this fancier card, you're getting access to customers that we've now brought onto our network who are much better customers that you really want to have at your establishment." 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.

David Rosenthal 2:37:50 Yep, 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 of a certain size.

Ben Gilbert 2:38:10 ... Right. In the olden days, you know, if you're the affinity logo that got printed in the top stripe, the way that works today is you have a special deal with the issuing bank, where you're gonna say, "Hey, we're gonna help you get more card members by putting our logo on the card. And so even though oftentimes we're the merchant, well, actually, what we're doing is we're helping you distribute cards [chuckles] 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 a marketing channel for the issuing bank, so they get to split some of those economics.

David Rosenthal 2:38:48 And I guess at the absolute, very highest levels of scale, you have something like the Amazon and JPMorgan Chase relationship, where JPMorgan Chase is the merchant bank, and JPMorgan 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 five percent cashback rewards. So Amazon or JPMorgan, 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 of that envelope of value.

Ben Gilbert 2:39:37 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.

David Rosenthal 2:40:36 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.

Ben Gilbert 2:40:44 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.

David Rosenthal 2:40:54 And the merchant, in most cases, is really the only party that is not thrilled with this arrangement.

Ben Gilbert 2:41:01 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 wide-scale bribe of the American consumer to, like, extort the world's retailers, using the retailer's own money, but that is, like, a very cynical way to view it.

David Rosenthal 2:41:19 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.

Ben Gilbert 2:41:27 So that's a strong argument. There's been independent research firms that have looked into this and basically determined that this is a reverse Robin Hood scenario, that the wealthiest consumers are the ones who have rewards cards, and because all the goods are marked up to accommodate interchange-

David Rosenthal 2:41:46 Right. No matter who's buying, the goods are marked up.

Ben Gilbert 2:41:49 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, 'cause 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. 'Cause 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.

David Rosenthal 2:42:28 Effectively in subsidy.

Ben Gilbert 2:42:30 Yes, but a card-using household receives $1,100 in value.

David Rosenthal 2:42:35 $1,100? I mean, I guess that makes sense. I think about the value of the rewards I get every year.

Ben Gilbert 2:42:40 It's on average... What is it? 2% of everything you put on your card.

David Rosenthal 2:42:43 Yeah, which, I mean, especially us running a business, like, yeah, we put a lot of stuff on cards.

Ben Gilbert 2:42:48 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 or the egg problem. I mean, every two-sided marketplace is a chicken or the egg problem. BankAmericard solved this when there were no regulations by dropping 65,000 credit lines [chuckles] 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?

David Rosenthal 2:43:21 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.

Ben Gilbert 2:43:33 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. Uh, I'd 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.

David Rosenthal 2:44:03 Yep. I mean, I love my rewards cards.

Ben Gilbert 2:44:06 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." Ah, 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 gonna get the money very soon when they walk out the door, which that wouldn't happen in checks. There's a cost to checks.

David Rosenthal 2:44:55 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.

Ben Gilbert 2:45:03 Yep, and if you're saying, "You better come in here bearing cash or a cashier's check," you're gonna 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 one hundred and fifty to two hundred and fifty dollars. 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.

David Rosenthal 2:45:36 Totally, the operational overhead associated with that.

Ben Gilbert 2:45:39 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 three percent, or in the old days, five percent or seven percent? No, absolutely not. But there certainly is some cost, no matter what form of payment is used.

David Rosenthal 2:45:57 Absolutely.

Ben Gilbert 2:45:58 So the business today, what does Visa look like? Well, last year, Visa processed fourteen trillion dollars of volume through their network, which is a almost meaninglessly large number. How do you even think about that?

David Rosenthal 2:46:13 One fun way to think about that, that I calculated is if you start from nineteen seventy-one, the first full year that the BankAmericard network was liberated from Bank of America, the growth in payment volume on the network since then has been seventeen point three percent, compounded annually for fifty-one years.

Ben Gilbert 2:46:37 Oh, my God, wild! It turns out the world eventually did want to pay with frictionless, fast, and often credit-extending methods.

David Rosenthal 2:46:47 Yep.

Ben Gilbert 2:46:48 Wow, seventeen percent compounded for fifty-one years.

David Rosenthal 2:46:52 Yeah. I mean, this is like Berkshire levels of compounding that is happening here.

Ben Gilbert 2:46:57 Yep.

David Rosenthal 2:46:58 And it's not like, you know, people may think, "Oh, seventeen percent, like, oh, I have seen IRRs greater than that." Have you seen them greater than that over fifty-one years?

Ben Gilbert 2:47:06 Right.

David Rosenthal 2:47:07 Not many of those.

Ben Gilbert 2:47:08 It's amazing. The number of transactions they processed last year was over a hundred and ninety billion. So that is twenty-seven transactions per person on Earth, including young children, every single year.

David Rosenthal 2:47:22 [chuckles] Hey, man, young children require a lot of commerce-

Ben Gilbert 2:47:25 [laughing]

David Rosenthal 2:47:25 ... Let me tell you.

Ben Gilbert 2:47:26 So I hear. There are four point one billion Visa cards in circulation. Their net revenue is twenty-nine billion dollars. Twenty-nine. That's up from twenty-two billion two 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.

David Rosenthal 2:47:49 Yeah.

Ben Gilbert 2:47:49 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 six billion. So look at their overall revenue number of twenty-nine billion. Their value-added services is six billion. We'll talk about what that means. The most shocking thing about the business is they have fifty percent net income margins. So of the thirty-ish billion that they made in revenue, their net income was fifteen.

David Rosenthal 2:48:34 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.

Ben Gilbert 2:48:54 Global commerce.

David Rosenthal 2:48:54 Both E and non-E commerce.

Ben Gilbert 2:48:57 And as Visa would argue, both consumer, but also B2B commerce.

David Rosenthal 2:49:01 Yeah, fifty percent net income margins on thirty billion in revenue. There it is.

Ben Gilbert 2:49:06 And you might say, "So wait, if they have fifty percent net income margins, what is their gross margin?" Because is it SaaS level good at-

David Rosenthal 2:49:14 [laughing]

Ben Gilbert 2:49:14 ... seventy-five, eighty-five percent?

David Rosenthal 2:49:16 Nope.

Ben Gilbert 2:49:16 Their gross margins are ninety-eight percent.

David Rosenthal 2:49:20 Unreal.

Ben Gilbert 2:49:21 There are no variable costs in this business. There are no costs of goods sold.

David Rosenthal 2:49:26 Unreal.

Ben Gilbert 2:49:27 It's crazy. So I think with fifty percent 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 ten times smaller that have over a fifty percent net income margin, including MasterCard, which is forty-three percent. And just to throw some numbers out for people that are, like, not, you know, looking at financial statements all the time, Microsoft, thirty-four percent net income margins. Microsoft sells software. They ship bits. Apple, twenty-five percent. They have an incredibly marked-up product that is differentiated wildly by brand, twenty-five percent net income margins. Google, Google has a monopoly in a market of information. What are the costs involved in that business? Twenty-one percent net income margins.

David Rosenthal 2:50:17 Wow! I would've 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.

Ben Gilbert 2:50:27 Yeah, it's nuts.

David Rosenthal 2:50:28 It's nuts.

Ben Gilbert 2:50:30 ... They do have twenty-seven thousand 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 Acquired that does thirty billion dollars in revenue and has twenty-seven thousand employees. Do you know what it is, David?

David Rosenthal 2:50:50 That would be NVIDIA.

Ben Gilbert 2:50:52 Yeah. It's a weirdly mirror image.

David Rosenthal 2:50:54 Even NVIDIA doesn't have gross margins like Visa. [laughing]

Ben Gilbert 2:50:58 [laughing]

David Rosenthal 2:50:58 It is the ultimate solution. I think that is the takeaway.

Ben Gilbert 2:51:02 Yes. Visa does seven hundred and seven million transactions per day. That is eighty-six hundred 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 an unbelievably impressive thing. With almost no downtime, it is ninety-nine point nine nine nine percent uptime, which I am not a site reliability engineer, but I think that is five nines.

David Rosenthal 2:51:32 Which is wild. I mean, you hear about AWS going down more frequently than you hear about Visa going down.

Ben Gilbert 2:51:37 Totally. That's sixteen thousand banks in two hundred countries. They have six data centers distributed across the world. It's kind of amazing it's only six, to be honest, with that kind of reliability and uptime.

David Rosenthal 2:51:49 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.

Ben Gilbert 2:52:04 Right. This is not YouTube.

David Rosenthal 2:52:05 Yeah. The transactions themselves, in part because this was all architected in the '70s-

Ben Gilbert 2:52:11 Right,