From: acquiredfm
Visa has developed into an absolutely incredible system that allows individuals to transact almost anywhere in the world with a piece of plastic [00:00:41]. The system enables transactions in any currency, without the merchant needing to know or trust the consumer, and vice versa [00:00:48]. Over decades, Visa, alongside Mastercard, has tirelessly worked to stitch together banks, merchants, and consumer relationships globally to make this possible [00:01:00].
Despite its pervasive presence, many people cannot articulate what Visa does [01:57:00]. Visa does not extend credit, issue cards, or work directly with merchants or consumers [01:57:02]. It is not a bank or a financial institution, and it does not bear any risk [01:57:09]. Visa is merely a network connecting banks to other banks [01:57:13].
Visa’s brand is among the most trusted globally, associated with reliability and security [01:51:50]. It is the 11th most valuable company in the world, worth more than any bank involved in its creation [01:43:00].
Historical Foundation and Global Expansion
The journey began in 1958 in Fresno, California, with Bank of America’s “the drop,” mailing 65,000 unsolicited rectangular pieces of plastic to customers [00:05:16]. This initiative, called the BankAmericard, was the first time a bank had entered the credit card market at scale [00:11:11]. The innovation baked into the BankAmericard was the ability to roll over the bill into a loan after a 30-day grace period, effectively giving birth to the modern credit card [00:28:31]. This marked a significant shift from traditional charge cards that required full payment at the end of the month [00:18:56].
The BankAmericard system initially faced immense fraud and delinquency, but Bank of America, as the largest bank in America, could absorb these losses [00:34:57]. By 1961, the program became profitable, a secret kept quiet by Bank of America [00:36:36]. This secrecy limited competition, with only 10 new credit cards introduced in the U.S. between 1960 and 1966 [00:37:28].
The shift to a global network began in 1966 when Bank of America created the BankAmericard Service Organization to license the program to banks nationwide [00:38:36]. This move was the seed of Visa. Initially, licensees paid a franchise fee and a percentage of gross transaction revenues to Bank of America [00:42:02]. By 1968, a couple hundred banks had signed up, accumulating 6 million cardholders across the country and even internationally, including Barclays Bank in the UK [00:44:21].
The expansion highlighted the need for a formal network to settle transactions between different banks, leading to the concept of interchange [00:46:00]. The initial decentralized mailing of sales drafts was costly and inefficient [00:53:51]. This led to a summit in October 1968 in Columbus, Ohio, where Dee Hock, a Seattle banker, proposed designing a new way to operate the entire system [00:56:26].
Hock envisioned a “transcendental organization” linking diverse institutions [01:09:17]. He proposed a for-profit non-stock membership corporation where ownership was based on participation and volume contributed to the network [01:18:24]. This structure, which he described as a “reverse holding company” (similar to how NFL teams own the NFL), aimed to facilitate cooperation and trust among competing banks [01:19:08]. All 200+ BankAmericard franchisees joined the new National BankAmericard Inc. (NBI), driven by the immense value of a unified network [01:23:36]. Dee Hock also successfully convinced the Department of Justice to grant an antitrust pass, arguing that the system’s profound utility for American consumers and businesses outweighed potential collusion concerns [01:24:42].
In 1972, Hock established a parallel international organization, making Visa global from nearly day one [01:25:59]. The name “Visa” was chosen for its universality across languages and its implication of an “entry pass” to commerce [01:32:30]. This rebranding, combined with the mandate to migrate all BankAmericards to Visa cards, sparked an “arms race” among banks, leading to a 20% increase in participating banks and a 45% increase in active cardholders within a year (1977-1978) [01:37:06]. This surge propelled Visa past Master Charge (later Mastercard) in scale [01:37:35].
Technological Innovations Enabling Global Scale
Visa’s global reach and efficiency were built on foundational technological advancements:
- Transaction Authorizations (BASE I): Initially, transactions above a “floor limit” required manual phone calls between the merchant’s bank and the cardholder’s bank, often impossible outside business hours [01:51:00]. Starting in 1971, Visa built the BankAmericard Authorization System Experimental (BASE I) to automate this process, eliminating phone calls and enabling transactions globally, 24/7 [01:53:41].
- Automated Settlement (BASE II): To manage the exponentially growing complexity of settlements, Visa built an automated clearing house system called BASE II [02:01:26]. This system allowed transactions to be settled in batch overnight, reducing average settlement time from a week to a single night and saving banks millions in labor and postage [02:03:08].
- Concurrent Data Centers: Visa innovated with data center architecture, running operations concurrently across multiple data centers, rather than just having cold backups [02:06:41]. This approach, one of the first of its kind, ensures 99.999% uptime, making Visa’s infrastructure more reliable than many cloud providers [02:51:25].
- Point-of-Sale Digitization: Visa played a key role in digitizing the transaction point itself. They standardized on magnetic stripe technology for cards and created specifications for digital point-of-sale terminals [02:09:17]. They incentivized merchants to adopt these terminals by offering discounts on transaction fees, significantly reducing fraud by 82% during pilot programs [02:11:04]. This laid the backbone for modern, instant digital payments [02:15:05].
Global Brand and Ubiquity
Visa’s strategic marketing efforts cemented its global brand identity:
- “It’s Everywhere You Want To Be”: After American Express declined a global Olympic sponsorship in 1986, Visa, under new CMO John Bennett (a former AMX executive), seized the opportunity [02:18:15]. Visa spent $40 million for the 1988 Olympics, becoming the exclusive payment provider [02:22:43]. This move, along with their tagline “Visa, it’s everywhere you want to be,” effectively positioned Visa against American Express, highlighting Visa’s wider acceptance and overcoming the social stigma associated with credit cards [02:21:24]. Visa has been the exclusive global payment sponsor of the Olympics for 37 years and is contracted through 2032 [02:23:51].
- Flexible Branding: Visa allowed member banks to co-brand cards with their own logos and affinity programs (e.g., airline cards, sports teams) in the blue stripe, while maintaining the iconic blue, white, and gold Visa logo in the middle [01:34:05]. This strategy incentivized banks to promote Visa cards, further extending the network’s reach [01:35:02].
Economic and Societal Impact
The impact of Visa’s system on global commerce is profound:
- Unfathomable Profitability: Visa operates on an incredibly profitable business model. In 2023, it processed 33 billion in 2012 [02:46:06]. This represents a 17.3% compounded annual growth rate over 51 years [02:46:27]. Their net revenue was $29 billion, with 50% net income margins and 98% gross margins [02:49:15]. This makes Visa one of the most profitable large-scale companies globally [02:49:32].
- Interchange Fees and Consumer Rewards: The primary revenue source for the ecosystem is the merchant discount rate, typically around 2-3% of the sale [02:31:09]. The largest portion (e.g., 1.6%) goes to the issuing bank (interchange fees), a smaller amount to the acquiring bank, and Visa itself receives about 0.15% to 0.2% [02:31:21]. This “envelope of value” structure allows the ecosystem to incentivize various participants [02:35:06]. Consumers, especially those with rewards cards, benefit significantly, with card-using households receiving an average of 149 annually) [02:41:34].
- Enabling E-commerce: The credit card networks have been indispensable for the growth of e-commerce. Without a secure and frictionless payment mechanism, online commerce would have been severely hindered or delayed [02:44:19].
- Chicken-and-Egg Problem: The existing system, once established, is incredibly difficult to disrupt due to the massive two-sided (or five-sided) network effects [02:43:02]. Merchants and consumers are locked in, as departing from the network would severely limit sales or convenience [02:40:01].
Challenges and Future Outlook
Despite its dominance, Visa faces potential challenges and strategies in the global payments industry:
- Maturing Core Business: While still growing, the rapid pace of shifting consumer payments from cash to cards is decelerating as over 50% of transactions are now digital [03:21:00].
- Closed-Loop Systems and Real-time Payments: The rise of closed-loop systems like Alipay/WeChat Pay in China, or real-time payment networks (Pix in Brazil, UPI in India, FedNow in the US), could chip away at Visa’s market share [03:21:56]. These systems offer instant bank transfers without relying on card networks [03:24:06].
- Mobile Wallet Dominance: Platforms like Apple Pay and Google Pay, while currently running on Visa’s rails (with Apple taking an additional fee), could potentially disintermediate card networks if they were to integrate directly with merchant point-of-sale systems or become banks themselves [03:25:41].
- New Revenue Streams: Visa’s bull case includes expanding into massive untapped markets beyond consumer-to-business card payments. This includes the 30 trillion business-to-consumer (B2C) volume (e.g., Visa Direct for payouts and refunds), and further expansion of highly profitable cross-border payments [03:33:00].
- Value-Added Services: Visa is actively developing and selling high-margin “value-added services” (generating $6 billion in revenue), such as anti-fraud analytics and tokenization services. These aim to maintain profitability as interchange fees face downward pressure and provide more secure digital transactions [03:31:33].
Visa’s journey from an experimental program within Bank of America to a global financial powerhouse highlights the profound impact of innovative organizational structures and relentless technological development on global commerce.