November 27, 2023 • 3hr 42min

Visa

Acquired

This episode of Acquired tells the fascinating story of how Visa, the 11th most valuable company in the world, came to dominate the global payments landscape. Despite Visa's ubiquity, most people have little understanding of the company's history, business model, and the technical infrastructure that powers its network.

Visa

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Key Takeaways

Visa is the 11th most valuable company in the world, yet most people don't understand its history, business model, or how it operates.
Visa was created through an unlikely collaboration between Bank of America and hundreds of other banks, overcoming significant challenges to build a global payment network.
Visa's business model is a masterclass in incentive alignment, with a flexible "interchange fee" system that allows it to capture massive profits while providing value to all participants in the payment ecosystem.
Visa has built an incredibly reliable and scalable technical infrastructure, processing over 8,600 transactions per second with 99.999% uptime.
Despite its dominance, Visa faces potential disruption from emerging payment technologies and networks, though it has proven remarkably resilient so far.

Introduction

This episode of Acquired tells the fascinating story of how Visa, the 11th most valuable company in the world, came to dominate the global payments landscape. Despite Visa's ubiquity, most people have little understanding of the company's history, business model, and the technical infrastructure that powers its network.

The hosts, Ben Gilbert and David Rosenthal, dive deep into Visa's origins, the challenges it overcame, and the factors that have enabled it to become one of the most profitable and durable businesses in the world. They also explore potential threats to Visa's dominance and analyze the company's strengths and weaknesses through the lens of the "seven powers" framework.

Topics Discussed

The Origins of Visa (1958-1970) (3:59)

In 1958, Bank of America mailed 65,000 unsolicited credit cards to customers in Fresno, California, launching the "BankAmericard" - the precursor to Visa.
Bank of America was uniquely positioned to pioneer consumer credit cards, as it was the largest bank in the U.S. and had built a large consumer banking business in California.
The initial rollout was plagued by high fraud and default rates, but Bank of America persisted, eventually licensing the BankAmericard program to other banks across the country.

Forming the Visa Network (1968-1970) (54:11)

In 1968, the BankAmericard licensees demanded a summit with Bank of America to address operational issues with the network.
At this summit, a committee led by Dee Hock, a bank executive from Seattle, proposed creating a new organization to govern the network - National BankAmericard Inc. (NBI), which would later become Visa.
NBI was structured as a for-profit, non-stock membership corporation, with each participating bank having an equal vote in the governance of the network.
Hock's vision was to create a "transcendental organization" that could link together the world's banks and financial institutions to build a global payment network.

Visa's Technical Innovation (1:59:07)

Visa built a centralized authorization system, "VisaNet," to replace the manual, phone-based authorization process used previously.
Visa also developed an automated clearinghouse system to settle transactions electronically, replacing the previous paper-based system.
These technical innovations, developed in-house by Visa, enabled the network to scale and operate with extremely high reliability and uptime.
Visa's commitment to reliability and redundancy, including building a backup data center on the East Coast, was critical to the network's success.

Visa's Branding and Marketing (2:23:03)

In 1976, Visa rebranded from "BankAmericard" to the more globally recognizable "Visa" name and logo.
Visa also launched a major marketing campaign positioning itself against American Express, emphasizing its broader acceptance and lower costs for merchants.
Visa's sponsorship of the Olympics, starting in 1986, was a key part of this strategy to build a global brand and overcome the stigma associated with credit cards.

Visa's Transition to a Public Company (2:27:17)

In 2008, Visa went public, raising $18 billion in the largest IPO in U.S. history at the time.
The IPO structure isolated the company's liability from a class-action lawsuit against interchange fees, allowing Visa to go public while the banks that owned it cashed out.
This transition transformed Visa from a member-owned cooperative to a publicly traded company, but it maintained its unique governance structure and network model.

Visa's Business Model and Economics (2:30:27)

Visa's primary revenue source is the "interchange fee" - a percentage of each transaction that is split between the merchant's bank, the card issuing bank, and Visa.
Visa's gross margins exceed 98%, and its net income margins are around 50% - making it one of the most profitable large-scale businesses in the world.
Visa has also developed a range of "value-added services" that it sells to merchants and banks, further boosting its profitability.
The flexibility and complexity of the interchange fee system allows Visa to capture value while incentivizing all participants in the payment ecosystem.

Potential Threats to Visa's Dominance (3:20:00)

The maturation of the consumer payments market, with over 50% of transactions now occurring on cards, could slow Visa's growth tailwind.
The rise of closed-loop payment systems like Alipay and WeChat Pay in China pose a potential threat to Visa's open network model.
The emergence of real-time payment networks, such as Pix in Brazil and UPI in India, could disintermediate Visa's role in the payment ecosystem.
Tech giants like Apple could potentially build their own payment networks and disrupt Visa's business, though this would be a significant strategic and regulatory challenge.

Conclusion

Visa's story is one of remarkable innovation, collaboration, and persistence. From its origins as Bank of America's unsolicited credit card experiment in Fresno, California, to its current status as a global payments behemoth, Visa has built an incredibly durable and profitable business model.

The company's ability to align the incentives of all participants in the payment ecosystem, combined with its world-class technical infrastructure, has enabled Visa to maintain its dominance despite numerous challenges and potential threats. While the future may hold disruption from emerging payment technologies and networks, Visa's history suggests it will continue to adapt and evolve to maintain its position as a critical piece of the global financial infrastructure.

Ultimately, Visa's story is a testament to the power of vision, execution, and the ability to navigate complex, multi-stakeholder environments - qualities that have made it one of the most successful and influential companies of the modern era.