This week, we delve into the fascinating history of Visa, a company that quietly powers trillions of dollars in transactions annually, yet remains surprisingly unknown to most. Despite being the 11th largest company in the world by market cap, many are unaware of its origins, governance, and business model. This episode uncovers the remarkable journey of Visa, from its chaotic beginnings as BankAmericard to its current status as a global payments network. We encourage you to listen to the full audio podcast for an in-depth exploration of this incredible story.
- Humble Origins: Visa's story begins with the Bank of America (B of A) and its innovative, yet initially disastrous, BankAmericard program. In 1958, B of A mailed 65,000 unsolicited credit cards in Fresno, CA, resulting in massive fraud and losses.
- The Innovation: BankAmericard innovated by combining the convenience of a charge card with the ability to carry a balance and make installment payments, unlike Diners Club and American Express which were purely charge cards.
- Franchising Challenges: B of A began franchising BankAmericard to other banks, charging a fee and a percentage of transaction revenue. However, these franchisee banks became frustrated with B of A's lack of operational support and the complexities of interbank settlement.
- Dee Hock's Vision: Dee Hock, a BankAmericard franchisee program manager, proposed a new, collaborative approach where the franchisee banks would control the network. This led to the formation of National BankAmericard Inc (NBI), a for-profit, non-stock membership corporation, owned and governed by its member banks.
- A True Democracy: NBI, which later became Visa, operated as a pure democracy, with each member bank having a vote. The member banks were also forbidden from joining competing networks or creating their own, creating an exclusive system.
- Global Ambitions: Hock envisioned a global network from the start, establishing a parallel organization for international banks. His persuasive tactics, including the use of symbolic cufflinks, convinced dissenting banks to join the network.
- The Name "Visa": The name "Visa" was strategically chosen for its universality and implication of global acceptance, like an entry visa for travel. The name implied a global reach and that the card acts as an "entry pass" to commerce.
- Branding Strategy: Banks were allowed to add their own branding and affinity programs on the top band of the card, while Visa maintained the middle with its blue, white, and gold colors. This approach balanced universality with individual bank branding.
- Technology as a Differentiator: Visa is also a technology company, building its own telecom network, computer systems, and data center. The company developed BASE I and BASE II payment authorization systems and standardized the magnetic stripe for cards.
- From Paper to Digital: Visa transformed from a paper based system, where transaction information was physically mailed, to a fully digital network with electronic authorization and settlement, enabling a new level of scale.
- Marketing and Brand Building: Visa's sponsorship of the Olympics helped remove the stigma from using credit cards, positioning it against American Express.
- IPO and Current Business: Visa went public in 2008, which proved to be a major benefit to its member banks during the financial crisis. Today, Visa processes $14 trillion in volume annually, with over 4.1 billion cards in circulation. The company generates roughly $30 billion in revenue with net income margins of 50% and gross margins of 98%.
- Visa is a Network, Not a Bank: It acts as a network connecting banks to each other, without taking on the risks of lending or directly dealing with consumers or merchants.
- Interchange Fees: Visa's business model relies on capturing a small percentage (interchange fee) of each transaction volume. This interchange fee is shared between the issuing bank, merchant bank, and Visa.
- Scale Economies: Due to the low marginal cost of processing transactions, Visa benefits from significant scale economies.
- Network Effects: Visa benefits from a multi-sided network, where the value for both merchants and consumers increases as more participants join.
- Toll Booth Business: Visa functions as a toll booth, taking a small percentage of every transaction, making it a very strong business model.
- "Communist Capitalism": Visa is a collaboration of thousands of banks working together towards shared goals, making it a difficult system to reproduce.
- Socio-Technical Innovation: Visa’s success is a result of both its organizational and technological innovations, including the self-organizing body and development of its network infrastructure.
- Bear Cases: Potential reduction in FX transaction margins. Growth of closed-loop systems and real-time payment networks. Increased competition from tech companies like Apple.
- Bull Cases: A strong secular trend towards digital transactions. Continued expansion into B2B and B2C payments. Growth of cross-border payments. Tokenization of credit cards improves security, further solidifying Visa as a trusted network.
Visa's journey is a testament to the power of innovation, strategic leadership, and a well-designed network model. From its humble beginnings to becoming a global payments giant, Visa has consistently leveraged its unique governance structure, technology, and brand to achieve remarkable success. While challenges remain, Visa's position seems secure due to its vast scale and network effects.
Listen to the full podcast episode to delve deeper into this incredible story and learn more about the strategies that have made Visa one of the world's most profitable companies. Share this newsletter with your network to spread the word about Visa’s fascinating history and its impact on the global financial landscape.
