Visa (Audio)

1. BGBen Gilbert0:00

   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]

2. DRDavid Rosenthal0:09

   Yep, there's always a story.

3. SPSpeaker0:11

   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?

4. BGBen Gilbert0:28

   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.

5. DRDavid Rosenthal0:36

   I'm David Rosenthal.

6. BGBen Gilbert0:38

   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.

7. DRDavid Rosenthal2:20

   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.

8. BGBen Gilbert2:30

   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?

9. DRDavid Rosenthal3:28

   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.

10. BGBen Gilbert3:46

    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.

11. DRDavid Rosenthal3:55

    Correct.

12. BGBen Gilbert3:56

    All right, take us back in time.

13. DRDavid Rosenthal3:59

    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.

14. BGBen Gilbert4:56

    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.

15. DRDavid Rosenthal5:03

    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.

16. BGBen Gilbert5:21

    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."

17. DRDavid Rosenthal5:39

    Yep. [chuckles] And the rest of the world has no idea.

18. BGBen Gilbert5:43

    Yep.

19. DRDavid Rosenthal5:44

    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.

20. BGBen Gilbert6:07

    ... 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.

21. DRDavid Rosenthal6:15

    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.

22. BGBen Gilbert7:06

    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."

23. DRDavid Rosenthal7:25

    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.

24. BGBen Gilbert8:38

    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.

25. DRDavid Rosenthal9:16

    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.

26. BGBen Gilbert9:57

    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.

27. DRDavid Rosenthal10:22

    Yeah, and for specific items, to, like, go buy a refrigerator.

28. BGBen Gilbert10:26

    Wild.

29. DRDavid Rosenthal10:26

    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.

30. BGBen Gilbert10:57

    Beautiful name.

Episode duration: 3:43:24