Visa
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It's unna. When we picked this episode, I was like, this is going to be pretty down the middle and easy. And of course, as we get into the research, as always, it's like, oh, no big story here. No.

this always a story. Easy, you wait, you wait, you who? Easy you busy, you with you see me down, say, state. Welcome to season thirteen .

episode of acquired the podcast great technology companies and the stories and playbooks behind them.

And then gilbert.

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, master, has tighe lesly, 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 a less rosy feelings about VISA, given how much of their profits go to inter change fees. But the do 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 at captures and by whom, in what situations. So here are some astonishing stats on VISA. IT is the eleventh most valuable company in the world.

IT is worth more than any bank in the world, including every bank involved in creating IT visas. Brand is among the very most trusted in the world associated with reliability and security. But that said, if you ask most people what VISA does, they could not actually articulated.

VISA does not extend to 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 doesn't sane.

This is such an instant story. I can't believe all the way in season thirteen, and we haven't talked about this company here. But as we will get into, it's always been overlooked and underrated.

Well, perhaps not underrated the last decade or so. If you listening ers want to know, every time when episode drops, you can sign up for email updates at acquire data m slash email to new fun things. One emails now include little hints and some teasers about what next episode will be.

So if you want to play the guessing game, sign up at acquired data m slash email and the emails have another new feature we are including followup from previous episodes. When we learn new things from you after release, come talk about this episode with us after listening at acquired data m slash slack. And if you want more from David and I outside of these big long main acquired episodes, check out A C Q two our interviews on a second podcast feed.

Now, without further a do, this show is not investment advice. Dave and I may have investments in the companies we discuss, and the show is for informational and entertainment purposes only. David rosen, so where are we starting today?

Well, we are starting actually with a big thank you to dave stern, author of what is undeniably the very best book on VISA and its history, electronic value exchange. And we all thank you today of both for writing the book and for talking to us as we researched in helping us sit through everything is .

we're preparing here, fellow, the light. And of the book, which is so wonderfully esoterically named electronic value exchange, was his, I think, P. H.

D. Thesis that they sort of turned into a book. All right, take us back in time.

So d. Hoc, 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 cana 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 many 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 you would say, how did this company start? No hands. Who runs IT and who govern IT? No hands, where is IT headquartered? No hands. It's just a wild, as we are saying, the intro, how important this company is and yet still to this day, I think, you know maybe a few more people than in these time know the answer to these questions, but not many.

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. So artists today is to tackle these questions. And we start where some of you, I suspect no, but the vast majority of you, I also suspect, don't. We started one thousand nine hundred and fifty eight in france, california, with the drop.

the drop. This is the name of the title in this fantastic book, a piece of the action, how the middle class join the money class in his chapter one, the drop, one thousand nine hundred and fifty eight. The drop has become like, if you say the drop to someone in the fin tech industry, they're like a september thousand and fifty eight now.

And the rest world has no idea, yeah, are IT. So what happened? Well, the then largest bank in america, the 3Frances go 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.

And the reason was named big vitaly was IT was started by an italian immigrant who wanted to create something for the undermanned italians in his .

california community. Yes, mostly farmers, merchants. And seven S O. IT really started as, like the bank of the little guide.

So thank 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 re zono. Completely unlisted. Now couple things about this.

One is wild. I think the frisoni population at this point time was like maybe two hundred and two hundred and fifty thousand people, so like a huge portion of the city of arizona bank with bank of america. And that was true for all of california at the time too.

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 in sees or uncertainly.

Nobody asked for them. There's a great quote again from a piece of the action that describes that and says there had been no outward yearning among the residents of fraser o for such a device nor even the dim awareness that such a thing was in the works. IT simply arrived one day with no advances warning, as if I had dropped out of the sky are.

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 payment industries in the U. S. More broadly.

So like we said, B. A was the biggest bank in amErica in one thousand nine hundred fifties. 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, and were like the J. P. Morgans.

They were White shoe corporate banks based in new york. We talked about this a lot in the nike episode. IT was a leg for banks to Operate across the 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 round and to go the investment banking because you could service very large corporations that obviously, where large themselves, will generate lots of deposits, lots of lending activity. The investment banking activities around that. We're obviously very liquid.

That's how the J. P. Morgans, you know, the Morgans stay in with the center of the world, came to beaten. For the most part, consumer banks were a backwater, small. There was no way to agree get enough customers that you could get big enough 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 are sort of a bank of a city. You can also think about these more as credit.

Then the sort of big banks that we think about today, california, happen to be unique in that you could actually have branches all over the state. And california happen to have quite a large population. So kind of the only place you could pull off a large consumer bank?

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 his bank of italy with all these immigrants, had built up a consumer base.

They really wear unique. So, you know, the business of blanketing is, well, banking, you take deposits, you make loans, you make your money on the loans. Ba was doing tons and tons and tons of small, little and desperate consumer loans and lending.

So obviously more dies. And car loans like those to exist today. But they were doing like washing machine loans.

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 time, you would sit down with the bank manager, and he would authorize you to go spend one hundred and fifty dollars at some merchant and make you alone that you would come payback over the next few months in installations. 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, yes.

and specific items. So they go buy a refrigerator. Wild 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, what's pretty awesome, because you can take all of these desperate lending programs consolidated into just one card, cut out a ton of overhead fees and wait, wait, more efficient. So this is what they are launching, first in france, now as the pilot market. And they call IT the bank america.

D beautiful name, beautiful name. And IT would survive for quite a long time. now.

This wasn't exactly a new idea on the part of charge cards, and credit cards have been around for decades. What was new was this was the first time that I bank. Had entered this market at scale.

So let's talk about the history. History ally in the U. S.

transfering. Money was actually not dead easy. You had two options. You could use cash, or you could use checks. And checks worked, but they also had a bit of problems. One, until the creation of the federal reserve in the nineteen tens, the parties cashing the track, receiving the check didn't actually receive the full face value of the check because there is a bunch of work and like mAiling stuff for around traveling around the country that had to be done and that was taken as a discount out of the check.

And this is super important. This thing that we have today in your change 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 can have in your possession totally.

So problem number one, you didn't get all the money right. Problem number two, also a big problem. IT took a really log time.

Imagine, you know, we're talking like the eighteen hundred and early one hundred hundred hundreds. This stuff was on the pony express. You know, pieces of paper going around a really, really big country, not ideal yeah .

and until A C H, where the banks would sort of all meet once a day and decide, okay, how much do I know you? How much do you know me? An aggregate okay, let's just settle one transaction and then we will figure out all of our internal accounting ourselves.

They were literally like check by check and say, okay, I have this check so you'll meet six dollars and eight cents. Okay, next check O I O U, four dollars and twenty cent. And IT was this crazy system of individual careers, bringing checks from the person who gave IT to the merchant, for the merchant to go and track down the .

money and bring the money back totally. A C. H doesn't get developed in the U. S. Until nineteen seventies. wow. Humans, though, are quite a genius creatures that solving their problems particularly went 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 account try accounts. Rather than giving me money or a check, let me just keep tabs on a letter of what you bought, what the value is. I'll have IT all up.

And at the end of the month, you'll come give me a chequer cash for IT. I remember even made growing up in the one thousand and eighties, we had this at our local gas station near our house, really, we had a credit account. And I was just like whenever any of our family would go to this gas station and we will get the gas, and then we go inside and be like, we have an account here and they just right down. But IT was. And the end of the month I save, my dad would go give them some money.

which saves on Operations for everyone. It's, uh, 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.

So from charge council, 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 IT 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. The loss of standard stations across the country. You can have an account that works at all standard stations.

Yp, in one hundred thirty nine, standard oil of inDiana sent two hundred and fifty thousand unsolicited cards directly to all .

of their customers. A like a drop in the bucket we all in.

Interestingly, this is twenty 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. Yeah so there was step is then pretty quickly in a given local area, some of the retailers will get together and feel 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.

And just literally to simplify the back office as the first value proposition here.

yep. And for consumers, that's also pretty awesome because do you really want to Carry around fifty seven different charge cards in your wallet? Or would you rather have one that would be like, you know, your VISA two everywhere .

you want to be? yes. And not to mention on top of this, there is a huge benefit of a shared credit history. Now all these merchants who were losing money on people coming in, getting alone from them in the form of them to 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 bill 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.

Yep, so this comes to be kind of post depression in the nineteen thirties, forty forties in the U. S. And this really is starting to sound a lot like VISA, except as he point out, and 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 he wants to get to a certain scale. Nobody's really incentives to keep making this work because now you're enabling people to shop all your competitors, but also be once you get past on a couple hundred and thousand participants here, like our individual merchants equipped to manage a network like this. No, they don't have the resources to do.

right? So you have to spend up some kind of like shared organization that all the merchants are pulling their capital into in order to run the network on the behalf of all of the merchants gets messy.

Or there could be an independent third party for profit network that does this. And this is when diner's club in american express arrive on the scene. So diner's club was first time people might no one have heard of danna problem.

It's still exists today. It's like a sub brand of discover totally. There's a very famous legendary origin story behind dinners club. And IT goes like this.

In one thousand and forty nine, you know, post world were two economic prosperity, beginning of the mad men years in new york. In manhattan, a new york business man named Frank mcadam, a is hosting a lavish business dinner. 你 这样 讲， 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, faces saved.

His reputation as a every day businessman is preserved. And then afterward, I said, he's like talking with this way. It's like, oh, there's gotta a Better way to do this. There really should be a business person focused charge card network that would work at all the restaurants in manhattan where business people host dinners so .

nobody ever needs to bring their cash. And you know, you can just imagine that like role in this club of dinner or 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 nice statement at the end of the month that importantly, we do need to pay and full.

We cannot roll IT over into a lan n. We must pay IT, but that's nice because all of my business transactions are on one single statement is easy for my expense reports. It's easy for me to not have to Carry a well around. And of course, I get to look super awesome in front of all of my colleagues.

I think there are two really important points here. One, he said, I pay IT. I don't pay at my company. I don't care.

To 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 .

and just start tracking a certain number here when we were talking about checks earlier that we're getting a discount. And even in this era of early diner's 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.

So all that's a very nice story. It's completely fabricate. None of that actually happened, although stories like that did play out, i'm sure on a nightly basis.

manhattan. The reality is Frank just thought this would be a good business idea, and he was right. You see this all the time with network's network effect businesses.

This was the right little note of the network to start with. This was like harvard in facebook because restaurants in manhattan, they're competitive with one another, but it's not exclusive competition. This isn't J C. Penny versus macy. No restaurant turn manhattan, no matter how good they are, really, honestly believes that the majority of their customers are only going to die at their restaurant.

Great point. So there are 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 want to maxim the dollar value you can get out of them. But for your casual fans who like your business but aren't necessarily inclusively to use your business, you should figure out some kind of bundle ling system that makes you work with compliments 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.

You're enabling people to spend money in your restaurant easier and more frequently. And you don't really care that they also go at other restaurants because they are gonna do that anyway. It's crazy like the diners club is able to charge restaurants and other emergency expand to hotels, you know, airlines, anything that a business person traveller would need, seven percent of the gross bill.

You know, Martin's complained 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 card holders and its companies only. It's not individual people paying this fee.

Is the companies paying this fee, of course. Happy to pay IT IT enables business. Amazing, brilliant idea back in the day.

And we should say this is pricing power in action to have those very high fees. It's also unnecessary. The cost of running these networks in a previous technology generation was super high, and IT was not a 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 they 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 .

and diners club would ultimately fade, although he goes to over a million members that goes nationals acquired by city bank, then sold the discover in two thousand natus. We said still 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 dinner club was. They have to now go canvas the entire island of manhattan and ultimately, you know, the whole country in 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.

Where's from this point on? Basically, everybody else that comes into the industry already has established relationship sales channels into one or both sides of the market, which of course, brings us to the brand are all probably thinking about here. American express.

which is the diner's club of today, is the favoured card by businesses. IT is the card that is most used for travel and entertainment and meals.

yep. And so as you might remember from our b hathaway years a couple years ago, IMAX at this point time was primarily a traveller's checks business.

That's how they started.

right? Well, actually, though, they started in eighty. Do you know who started american express? This is a version of DHA .

culling up the VISA card? No, I don't.

I did not either until doing research for this episode. IT was started by a group of people, two of the most prominent among whom, ls and fargo, Harry wells and willing fargo.

Amazing.

totally amazing. Red, eighteen fifty, the wild west.

Different time. There was something like, they started american express, but then had a conflict. And so they left, and they started wells fargo after that.

Yeah, something like that. The infrastructure of amErica was getting built out. So american express called american express IT was an express male company. IT was like the pony express. That was how they move stuff around. And I think wells in targo, we're doing banking and so obvious ly bank and says we're talking about you need to move stuff around the country. IT was like a related business.

amazing. I think it's fascinating that wells fargo came after amax. Like you think wells fargo as this old timey foundation of america, amErica expresses even older than that.

So amx, by this point, time had become a travellers checks primarily that was the primary business. Has we talked about on the berkner episode? That was a freaking awesome business, partially because travellers checks, you know, they made good money.

You would buy a hundred dollar travellers check and pay M, X, O of fear, whatever. But the float and the brigge, like there's travellers checks out there today that are fifty, one hundred years old that have never been cast. And M X has just been sit on that cash for decades, investing in what an amazing business.

okay? So M X observes diner's club and says, hey, we need to get into this and we actually have and ability to get IT to this fast.

And they actually try to buy dinners club, but they can get their own Price. And so they're 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 have relationships with restaurants. We have relationships with hotels. We don't need you downers club. So just within like a year, maybe even two from when M X launches there charge car, you know business traveler program, they sign up seven hundred thousand members, which is almost as much as dinners club had signed up bit of many years of working on IT.

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 at 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.

So this brings us right back to friends now in one thousand nine hundred and fifty eight, because the timelines match up exactly, this is crazy. M. X.

Launched their charge card program in one thousand nine and fifty eight. B. A. Sees what's happening.

They, of course, I seen everything else going on in the dust before they understand the transformer of power that this can have for their scaled consumer banking business in california. And they are like, okay, the time is right. Let's do credit cards.

Let's go to for us now. But hopefully we painted the picture. Their motivation and dinners club and air max, 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 programme.

This is can be huge Operational savings for the bank if they can pulled this off too, though, the bigger opportunity for B, 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.

So this is where b eva, 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 bank amErica card, what what happen is you'd have this charge card, not a credit card, and the bill arrived at the end of the month, and then you would pay IT the innovation baked into the bank america, as they say, well, after the thirty days you get your statement, you compare in for, 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.

and IT was already happening at the way they were doing these loans. This wasn't actually like new behavior. IT was just a way easier, way more streamline on ramp into this consumer lending. That turbo charged IT.

This product is the combination of three things, the charge card that had been happening over in diners club, M. X, 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 hodge podge of retailers, but now this is issued by your bank. The big take away for bank amErica ard is that really bundles LED two different things together. One was convenience and the other is credit.

And there's one more really, really important sub point here too, what this loan is and IT relates to the banks and why this is so powerful for ba and for all banks. Think back to the old way that be a vy was doing this. A california, you know, homeowner wants to go buy a new refrigerator.

They walk into a big talk about IT with the lending offers a bunch Operational costs. Who cares about that at the end of the process, b eva gives them the money. The money is now out of B A va.

Hence it's out the door. The consumer then goes to the merchant and gives the merchant the money and buy their frigging. Or 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 his hands yet. They get to keep the money right.

A transaction has been authorized, but yes.

they get to keep the money. And because we're talking about california here, there is a very high likelihood chance. And I think at the beginning, I suspected one hundred percent chance that the merchant, also banks with, be away. So that money is never leaving bank of america's hands, which freeze up more capital, which freeze up float, which is just like the b of a. Management must have been besides themselves with glee about .

this model in theory, if they managed 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, when you mail sixty five thousand cars, same credit limit to every single customer and say, have added guys, and this is a brand new consumer behavior that they've heard about. They might have witnessed in one former another, but now they have a Bonnie ed charge plus credit card in their hands and you can lose lot .

of money first. Yeah because there's another more pernicious ous way that this type of lending is different than the previous type of lending that b eva was doing. It's unsecured. If you give a customer alone to go by the refrigerator, you don't want to go reposeful or refrigerator, but push comes to show you can go repossessed refrigerator. This whole consumer credit card land is secured lending.

So you probably shouldn't apply the assumptions about your loss ratios from secured lending to unsecured lending. But that is exactly .

what happened. 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 france now, sixty five thousand analytic 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 fono cohort ends up being defaulted delinquent, which I think is like five or six times what their delinquency rate was before on traditional lending.

Yeah, IT is pretty crazy. So it's worth pointing out you we're talking a lot about credit and debt at this point in time. Now in two and twenty three, somebodies kind of sounds like bad words.

And Frankly, it's because of the situation and that the society has sort of like push americans too. 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 department store, or a loan shark for that matter. There isn't another western country that has relied so heavily on consumer credit.

Between one thousand nine hundred and fifty eight and thousand nine hundred ninety. There was never a year where the amount of outstanding consumer debt wasn't higher than the year before. Years later, a bank 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 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. Third is 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 let us to today where because the growth of the american economy in 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 gona be Better than today.

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

And that may not be true on an individual basis, but IT is absolutely true on a societal basis.

So back to what I was think about why be A, A is so important? B, eva 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 want to pull 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 going to 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 over the first year, they sign up twenty thousand merchants in california and get this.

Do you know how many cars are told us they sign up that first year? no. Two, a million california cardholders signed up using the card in the first year.

IT took dinners club years to get to a million. M, X, was so proud. In the first year too. They get to seven hundred thousand. B, A, 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.

This is like meta launching threads or microsoft launching teams. You can sort of a 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 ramp through your distribution channels when you invent one your own.

you and not even more than that, as we said, this really was a big innovation like IT wasn't just that they copy the M X. And dinner club or anything else like they were adding credit to this. This was a huge innovation.

yep. So by one thousand .

nine hundred sixty one year, three of the program, they're able to get fraud under control enough that the whole program is profitable.

but they keep that under their hat. Yes.

yes, they don't want anybody else to know about this.

So there's been all these newspaper articles about all this money that ba is losing. So many banks that had been thinking about launching a similar program abandoned IT because they were like, oh, man, we thought this was gonna, but clearly it's not working for ba. So people were shutting down their efforts.

There was rumors that another bank was going to launch in L, A, in safety esco. And B, A, 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 I was such a giant's failure.

Here's a crazy stat from nineteen nineteen sixty to one thousand nine hundred and sixty six. So this whole era is actually a profitable era for B. F. A. But no one else knows that there were only ten new credit cards introduced in the entire united states because they did such a good job keeping what became a gusher for them quiet. But secret comes out in one thousand nine hundred and sixty six. And from one thousand nine hundred and sixty six to one thousand nine hundred and sixty eight, just two years, approximately four hundred and forty credit cards were introduced by banks, large and small, throughout the country.

yes. And IT is for ifc one thousand nine hundred and sixty six, when the secret gets out because face two of bank of america's grandmaster plan there gets unveiled, which is maybe worth quick set up. As we said, this was transformative for their business in california.

But there are the biggest bank in america, and they have been itching for any kind of way to expand to truly be the bank of america. why? How did they change to the name the bank of america? It's not.

They wanted to be the bank, california. So they are like, maybe this is our path. And california is only like ten percent of the U. S. Population in one thousand hundred and sixty six. They create the bank amErica service organization with the express purpose of the licensing out the bank public program and network to banks across the country, across all fifty states. And this is the seed of VISA.

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Yep, so learn how you can put A I agents to work for your people by clicking the link in the show notes or going to service now dot com slash A I dash agents. Okay, David, so how do we get to VISA? You have been telling me about the bank amErica from bank of america.

And I opened this show saying, visas, not a bank, and VISA doesn't have direct relationships. This is big, indirect thing where they work with other bigs. This is a big mismatch.

This story is so wild because this first chater that we just told, there's older ly one entity in the world that could have done this. Think of america. In the second chapter, there is also only one person in the world that could have taken bank amErica and turned into via.

And that is d hoc. So here we are in one thousand and sixty six. B of a now starts going around to all the other consumer banks in other states and selling them on joining the network as bank amErica licensees.

And the deal is that you pay b of A A twenty five thousand dollar franchise fee to get your franchise of the bank. AmErica is like a wines or something. Plus then you pay them a percentage of the gross transaction revenues. That literally is like a mcDonald. This is a while. And I get the executives must have just been throw in party after party because, a this whole thing turbo church their own business b now they're like, oh, we are gonna make all the other consumer banks in the country essentially into like surface on our kingdom here.

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 wanna use our card at lots of merchants. People still weren't using credit cards the way we do today, just treating IT like cash, using IT for coffees and the little things here there. I was still sort of treated as, this is the card for big purchases, some of which I may want to finance and decide later.

IT was also an intensely like private thing, kind of taboo thing, right? When you were using a credit card in these days, you were implicitly saying i'm using debt to buy this transaction and see, you didn't want other people that necessarily .

know that right is 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 kind of leaning into and say, 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 advances of the fact that now all these consumers have the card and all these versions out there accept the card is this weird franchise thing.

Well, the bad assumption was that other banks would consent to basically being surfed in their kingdom.

yes.

But at the outset, these other banks see the power. And now the B, A, A is telling them of what this is done for B, A, A. And they're, 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 the I offers exclusivity to banks in geographical areas to to start that eventually, of course, gets dropped.

But IT does tempt a lot of people. So within two years, by one thousand nine hundred and sixty eight, a couple hundred banks have signed up. There are six million cardholders across the country and beyond the country.

Actually, barclays bank than the U. K. Had signed up to be a franti z of bank amErica back in the day.

Wow, what year is this?

This is like in the mid sixties. wow.

That way earlier that I realized for international expansion.

yes, IT was already out of the U S. Because the system is a great system. But as this expands beyond be A V IT becomes clear that a bunch of stuff that.

Were either just assumptions or ways of business within B A. Or thin. They didn't have to worry about eight gonna scale to hundreds of banks, all fifty states, multiple countries around the world. One of the examples I looked to this earlier in california, in the bank of amErica owned and Operated bank american 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 merger and be a way control both sides once they expand the network and let other banks in over. Said that almost never the case.

right? know? B, F, A realized the sort of cardinal sin of many entrepreneurs, which is my particular situation, is actually not a pattern of several other customers, is actually an end of one. I am IOS sync rrap. 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 up.

So B, A, A is 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, A.

yes. And these merchant banks will come back to some of the terminology later, has gone on to become the acquiring bank because this is the bank that acquire is the emergent relationship as a customer.

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.

Yeah and this is the first moment that we start to see a departure from what american express was doing. The original back market was very similar to american express and diner's 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 banks closed loop network.

And now with this new bank of amErica licence system that they are starting to sort of develop here, that would become VISA. It's an open loop system. It's hay is one bank on one side who owns the customer, who owns the cardholder in one bank on another side. And we're going enable those systems to talk to each other, but they're not the same party.

This is open loop now. So this interchange thing, all of the other banks that are now signing up to become, you don't be of a franchisees for the big market system. They come to be a way.

And 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 are incurring because they need to figure out this interchange thing.

Oh, so the problem their experiencing is like bank america, how did you build all the technology to do this?

And bank of amErica responses like we didn't have that problem because in our corner, the world, we're the bank on both sides, right? We're close loop. So I don't know you guys figured that out. This sounds like a you problem, not a me problem.

I see. So when these banks are coming to back of america, they're not actually complaining about Price in anyway. They're literally saying how to you solve this problem?

No, I don't think Price an issue IT was this. And like a set of other things along these lines where the franchise were like, hey, we signed up for a franchise, you Operate the whole system right in bank of america. Like, no, no, no, we sold you a marketing system.

I see. So it's like, you know, you buy mcDonald franchise and they ship you some golden arches and they're like, good luck figuring out how to make cheese gers. That is exactly right.

okay. Now to be somewhat fair to bank of amErica here, the golden arches are worth a the bank amErica three colored bands, the blue, White and gold, are also worth an incredible amount here.

And of course, the ability to actually beyond the network that sends those payments, right?

Yes, of course, the newark has incredible value, but back to the brand in the marketing. So as all these other banks are considering whether to become franchisees of bank amErica ard, and some of them are like, no, i'm not gonna do that. Some of the one who do become franchisees, well, really all the ones who do become franchise ze's become very frustrated.

Of course, people are going to start competing systems. And right in this time, over this kind of year two period, a bunch local, geographical, competing credit card systems by various bank consortium come together. Those pretty quickly emerged into a national association called interbank, which spoil oer.

Interbank is mastercard. But at this point time, interbank is a Frank network. There is 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 car that I got from X, Y, Z? No, I don't know.

Bank of valenti, that's part of the interbank network, supposedly. Now I go somewhere. I've got that card.

That 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 because it's part of the master card dinner bank network.

I see it's like when i'm trying to figure out like I have to keep pulling up a asked airlines partner or network to figure out what international airline I should flies since I pay attention anything other than what alaska is one world. I don't I still even .

know what one world yeah yeah. You know that's today with the internet. You can do that back in the one thousand and six. There's literally no way for a perspective customer of emergent to know by looking at their card and looking at the sign on the door if that card is going to be expected unless they all have the same brand. And mark is so funny.

This is the original problem of diners club two. Because diners club, that 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 booklets, that was a list of all the merchants. So you could literally know if the card would be accepted at the restaurant you're at.

That's right. But now like the scale that these networks are starting to be at, like obviously, that's not terrible. So back to the mark, what these franchise 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 bank amErica name brand. And importantly, mark, so what are the colors of via up? sure. Everybody listening probably around the world knows that it's blue, White and gold.

which is the hills of california.

There is this amazing origin story to this. It's super reminiscent to the windows X P. Bliss while paper that the most viewed photo in the world, the hills, it's actually in my california ha.

So the story is the b of a teen when they are first rolling out the program, the guy test with card design. He lived in pleasant in california, in the ebay of the safety scuba area, where, you know, it's pleasant. And one fine spring morning, he looks at his back door at the local hillside.

The sky is this beautiful blue with White puffy clouds, very much like the windows XP bliss backside. And the hill is covered with beautiful golden coloured california poppies in bloom. He rushes back inside. He paints an abstracted version of his beautiful hillside wala the three bands, blue, White, gold, back america, VISA.

And this would go on to be incredibly valuable to plaster on your storefront and say, we accept bank amErica 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 they're shiny, cool thing that they like spending money on works there. And it's good for your business to be able to accept IT.

It's so wild that today, you know, we would think, oh, what's A T what's a competitive advantage? Is there able you need technology advantage. You know, even how we think of brand, all the companies we ve covered on the show is so much more than this.

But I was so simple back in the day. I was just could you create a two sided network where there was a common signal of acceptance? yes.

So from be a business perspective, daily, yeah, we did all the work. We created this. This is what you are. Franchisees from us take a limit from the franchise is perspective as we are talking about that you gave us a marketing program. How do we run this same thing?

OK. So they got this marketing program. How did IT literally work? Because this is pre .

magnetic stripe. Yeah.

there is no technology here. And this literally cool. I B come a bank of amErica license. What transactions does that let me do.

and how does that happen? So the banks, they have to resort all the way back to how checks worked back in, like the you know nineteen hundreds, early nineteen hundreds in the us. Where IT was always centralized.

The bank would go sign up a merchant .

in their local town, yep, and the banks would take the sales drafts from their merchants that the merchants had brought to them. And then they would go kind of individually decentralized mail or ham the country to the issuing banks, the cardholder banks, to get the money. And they just the way they finance all.

This was a discount for, just like checks back in the day. Okay, this sales draft is for a hundred dollars. This is all really hard to figure out. So like, okay, you give me ninety seven dollars instead, are you give me ninety dollars and and there was A A IT win.

so the sales drafts get handed to the licensees. So you've got, let's say, you running a department store and keep going with the illini example that he said you're running a chicago department store after a whole day of sales. You've got a bunch of sales during where you say all these customers came in with bank america. They said they're good for the money. So I gave them the goods and now i'm holding the sales draft.

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 need to get my know ninety three cents on the dollar or whatever. So then the bank is responsible. Probably yes.

So the merchant bank that acquiring bank males.

all those effect clive's invoices to all the other banks.

that the people who bought the goods there to their banks with their cards. And there was no standardized disco.

Uh, this is ludicrous, expensively.

I mean, it's chaos. People are so pest. And again, like whatever.

yeah whatever. For us, we just moved a few numbers internally. We actually .

enough to do any of this. And you all are pay our money. So like our empire, dreams are coming true.

wow. This is maybe painting bank amErica into people, 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 bank market had been Operating for a couple years internally to be a vy in in california now it's going across state lines. They had never been a problem before. You know the merchant banks verses the consumer banks.

The issuing bank is set right.

So all of these tensions come to ahead in october one thousand sixty eight, when the licenses, all the franchise of bank america, all these other banks across the country, they demand a summit. They need to air their agreement. You know, the parent with bank of america, this is untanned.

We can Operate like this. We got to fix this. B, A, vis, O, K, fine. We'll all get together .

in columbo.

Hio, you know? No, I thought you do this. yeah. column. Ohio, ohio state.

Oh, wow. amazing. This is where .

the birth of VISA happens. So the summer gets organized. And for the franchise, e banks, this is started becoming existent.

Al, 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, everybodys converging in columbus.

B, A, A. Sends to like mid level marketing managers to go face the hanging mob. None of the senior exactly is from B.

A, could be bothered enough to go deal with this. Wow, IT just says everything. And these ported hides who show up, I mean, they are literally facing like pitchforks.

The franchise sees are in sense and they're in sense, both the situation sucks and they like that. Demand b of a take us seriously. You have meddled in our entire businesses.

This is in chao lake. We got ta fix this. So what do these tubs be a big guys do right before lunch on the second day? They are like, we got to save our skins.

We got to get out here. Let's do the smart thing to make sure that everybody gets play gated. But nothing actually happens because they don't have any authorization from bank amErica to do anything.

They're the people sent to face them up. Let's appoint a committee of licenses to corn code, investigate all of the Operating problems and report back to us. You know, they can come out to safety is go.

They can meet us to be of a headquarters and will listen to their problems. Wow, but unfortunately for their goals, they're very narrow goals that particular morning. But very, very fortunately for all involved, the franchisees, the world consumers in the .

long term in is .

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 bank america, a franchise, a program manager from a small bank in seattle, the seattle national bank of commerce, which will go on to become riner bank. And then, ironically, do you know what happened to her in your back? You can make this stuff up.

No, I don't. But I can guess where this is going.

Once interstate banking regulations get loosen ed up, they get acquired. bye. Thank of america, of course, in the nineteen nineties. But for the moment, the person running their back amErica franti program is one d hoc. And I think you could really say on this day the founder of VISA and one of the .

most interesting characters in anything we've ever studied, because he is not a tycoon, the way that most of these people are.

no. And we going to talk about more about the intimate, but just keep the story going so we don't leave. You are on suspension on this day during the lunch break, the is got to put on this committee. He goes up to the two ba vy guys and he's leg hey, rather than us just putting together a list of grivet ces and reporting back to you.

Eva, 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 committing to be a big guy, alec, 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 shirt. And probably almost absurdly, I mean, this is a committee we're talking about. Nothing is gonna come of this.

So the whole summit reconvenes after lunch, and d gets up on stage, not the bank amErica a guys. And he proposes this idea to the group, say, hey, we've got this committee rather than us. Taking a list of agreements is back to be evy.

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 because they wanted to get out of there, go back home and away from the disaster of a meeting, we'll get on planes. They, i'll leave most of them probably thinking that nothing is ever gonna of this. Certainly to be a vy guys thinking nothing is ever gonna of this. But d kinder thinks he just got authorization to go create VISA .

whole new system, and he has no power at this point, but he kind of think he does. All right.

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Yeah, and he's not wrong. Uh, fortune favorite the ball. Do you know what you say? yes.

So to say a few more words about why this is so hard to organize this group of now competing banks to collide with one another. You've got multiple banks in the same state that are part of this system. Let's take elano y.

And to stick with this, you've got a bunch of banks in illinois that are now all part of the bank of amErica payment network, which is intimidates, linked with their banking Operations. If I am any one of those banks, I would wanted say, like, hey, no, I want to be the only back and know doing this. And okay, maybe there are a few others here with me, but I sure is.

I wants to shut the door to anybody else coming in and being part of this network. Where's 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 is, obviously, we 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.

and you basically wanted 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 takes a lot of time to go door to door to door to door. And maybe that particular merchant doesn't want to take on a second baking relationship. They already have one.

They're good totally. This is a classic two sided network. You want to race to get ubiquity as fast as possible on both sides of the network 呀。 So as d 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.

And that sounds like a really, really, really difficult problem to solve. Even if you could do that, how are you gonna get the D O J till let you do that? And I trust is going to be a issue here for sure.

But you know, if this is d 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 in case study.

So at a minimum, this could do for all the other banks in the world what he 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 franchise. This out two other banks, but other banks signed up for this, and they were willing to pay both the franchise fee and a percentage of transaction volume to bank of amErica because the salon song, the reward of doing this was so great to them.

and freely, all powerful by the fact that this is what consumers want.

Yes, absolutely. So in a certain way, this is sort of. I don't want to say inevitable because this is definitely not an 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 d 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 tion volume for doing that, the value that you would unlock in january IT begins the imagination to think about what this could be.

And if we could grow the pie, enough would be A, A, be comfortable, not owning the whole thing. That's the bottom line here.

So this is great passage from him and his book, one for many. He says any organization that could guarantee, transport and settle transactions in the form of arranged electronic particles, we cause digital information. amazing.

Twenty four hours a day, seven days a week around the globe would have on 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 dwarf the resources of most nations jointly. They could do IT.

But how IT would require a triumph dental organization linking together in holy new ways, an una maginness complex of diverse institutions and individuals. This is the opportunity, and this is what he essentially takes to bank of america. And now we got to say a few words about the, because this situation is nuts.

D is a banker. He is running the bank amErica franchise program at what would become in your bank in seattle. But he is 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 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 inborn ate.

He now walking into the board room in bank of america, which is what he's going to do, and standing toe toe with the vice chairman of bank of america, and saying, I think you should give me the bank of american card program because IT is in your self interest to do so, which almost literally are the words that come out of his mouth in that bedroom is just absolutely wild. Fortune favors ors the bold. Fortune favors s. The bold.

Importantly though, fortune VS the bold who have done the work to figure out how do the line incentives such that a logical person will think through and come of the same conclusion he has.

And this is the thing. D is an a duck for sure. But he is amazingly, but he's only basically all self taught.

He's incredibly well read. He started reading every book on, you know, his little farming. You know, that he get his, and even 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, and he did his associate degree. So he uses all of the techniques that he learned from competitive debate in persuading. 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 I D basically is the prototypical silicon valley founder. He's just a generation to, earlier in the wrong industry.

I once had a silicon valley founder, give a talk at a start up. We can iran, ten, twelve years ago, who said, until your company shuts down, you are just in the act of succeeding .

cut from the same clove yeah right down to every single state. There's one other important aspect to do that I think we should highlight here that enables him and all the VISA to succeed and that that he's about as far from the man and image of J. P.

Morgan is. You could imagine that is what enables this because if he were the C E. O of another bank or a senior executive or some well respected person marching into the bank of amErica board room 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 would work. Of course, bank 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 sub dining themselves to somebody who could conceivably be their equal.

So these just gone to be vy 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 there off will be so much greater than what I could be on its own. And maculate sly that works. Like.

would you rather own a few percent of something that is the default global way that commerce is produced, ed? Or would you rather own one hundred percent of, you know, bank amErica ds up?

Totally incredible that the 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 isn't actually figured out how to architect this thing such that that works. So he's got to go do that too, though. Then now he has to go back to all of the soon to be former franchise banks and convinced them why they should do this.

And this is a different argument from what he made to be A, A, B, A vy. 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 ill and o that are existing franchises of the make american system and say, hey, the new regulations, the new Operating laws for this organization are going to be all the banks and I can join, and we actively want to go convince all of your competitors to come join this system.

I see. So he's basically cover to them with a waver and saying, I want you to wave your exclusivity to some territory because they are new construct here or we're all working together. You and everyone else is agreeing that is good for the value of us all if we exclusivity.

you know what this is like? This is like bacon fl episode.

Yes.

exactly right. When the nfl started negotiating national television rights collectively as organization, yeah, a bound to the individual team was hated that because they were at, look, if i'm the jets, i'm making more money in my new york metro area doing my own TV deals, then i'm going to get as a share from u the nfl of additional deal. But in the long run, IT was absolutely the right decision and value a creative to everybody, including the jets that the nfl centralized.

This you'd rather be the jets with their proportional share of the fourteen billion dollar a year T V deal that the nfl has today. Then a whatever their very fat contract was alone in the, what the sixty seventies today.

IT is exactly the same thing. Okay, so how's this whole thing gonna work? D N, A few of his other fellow committee members, they go to saw leader california north, the seven cisco, just across the golden gate bridge, and they do an offset for a couple days at a hotel and soledad.

And there they come up with a number of Operating regulations, guidelines for this hypothetical new entity, four of which we're gona talk about here, that are super critical. One ownership of this new organization that's gonna called national bank amErica ic, the new owner of the bank amErica program, is going to be in the form of irrevocable non transferable rights of participation. So you're not going on stock in this thing. There's no equity. The way that you have ownership and the percentage otherness that you have in the network is by participating in IT in the amount of volume that you are contributing .

to the network. Oh, interesting.

So this means a couple things. One is sort of like representation and ownership according to value contributed to its non transferable. So you can't sell IT any individual bank if they to say h this is now 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 in the network will lose value. So there's no way to do that.

So it's basically designed for you to kind of break even on IT. If you're putting in seventeen percent of the transactions on the whole network and you're paying in fees on seventeen percent of the transaction, will good news for all of the profits from running the network, seventeen percent of them go back to you?

You're making the assumption that this is a cost only organization, forgetting the fact that IT is one of the greatest business models and revenue generators at all time. You are contributing seventeen percent of the volume to this. You are entitled to seventeen percent of the profits I see that we are extracting from the merchants and the cardholders .

yeah because this is the natural business model of inner change 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 this gun, I don't mean a beneficial one. I mean, i'm discounting the amount of money that I am giving you off of the hundred percent that you have received by the customer, basically taking that old check Carrier business model and Carrying in in the sort of a network form.

exactly. So the actual legal structure that d in his fellow community members plan on for this is a for profit non stock membership corporation. That is a mouthful .

IT is there .

is a myth out there that VISA was originally a nonprofit and that was converted to a four profit before the IPO two thousand. That's not true. IT was always for a profit.

IT was just a non stock membership corporation. And that was to get around banks selling the interest. So you don't participate in IT, you don't know IT.

So said one more time IT is .

a four profit, a four profit, none. Stock membership CoOperation, your ownership is your membership facility. It's like a cop. It's like all the or something yeah yeah. The way the d describes, IT told 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 of the subtenant.

There's actually another nfl and algy here. The nfl doesn't own the teams. The team owners own the nfl.

but the nl sets all the regulations for how the game is played and all the teams submit .

to IT is actually probably the best analogy for VISA. Is the nfl the organization?

I think IT totally is okay. So that point number one, maybe the most important one. Point number two, IT is a self organizing body with irrevocable governance rates for each member. And this is why, I guess also how it's like the I fell 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, budget 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 peer democracy.

Wow, you can imagine nothing happening if everybody has the right to do that.

Well, they said the threat hold at eighty percent for anything to happen. So there's a strong instead of not to call a vote and waste everybody's time unless you really think you can round up eighty percent of the vote.

Fascinating, which in practice just gives the all of the control in power of the company because everybody is is gonna listen to him as the year point three, we basically already discuss and that is that the mission of the organization is to facility CoOperation and trust among competing institutions to grow the bank amErica payment network larger than anyone institution could on its own, which is the pity gave to american 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 news. K.

I see. So none of these banks are members of inner bank at this point. These banks are exclusively members of whatever they have. visas.

Processor name is national bank america. think.

National bank america, think, yes.

At this point time. A, and I trust lawsuit would change that very shortly, I see. But at this point time, it's like, no, you are part of N B I exclusively. You don't go join her bank master card, and you also don't go start your own networks are peel off parts of the network. Everything that you are doing in payment card Operations needs to route into this network .

a big contract design, totally.

I think this is why they needed to pay the picture about the bank of amErica and all the other banks. The prize is worth IT. yep.

And then finally point for there will be a singular universal set of Operating in governing procedures that, much like the U. S. Constitution, is infinitely modifiable by a thresh hold vote of all members.

This is the eighty percent I talked about. And two, also like the U. S. 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 are 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.

right? You are signing up for something that might change in the future. And you don't get to know today if it's gona in the future, but at least you say .

that is exactly the pitch. And basically even even describing this now, having done all the research, read all the books, written the script we're talking about here, I still capable. This actually happens. D goes on like a tour across the country. He goes, meets with all the banks, bank of amErica helps him out.

They bring seeing your executives to to help convey in you do meetings with all the banks to persuade them every single member bank of the previous bank market franchise e organization, every single one of them signs up for the new organization LED by d not a single person jump ship. How many banks were at this point? Over two hundred. Wow is not wild. I mean.

once you get to like seventy or something, then the kind of seems likely that everyone's going to. But in those first twenty, the fact that nobody was out is crazy totally.

And d rates about this two bank amErica helps them out. They identified the thirteen most influential banks, and they convey the first summits with them of like, hey, what do we got to do the horse trade to get you guys involved? And then you can inspire all out in there, but at every single one, nobody jump ship.

And when is this? Like one thousand nine hundred and seventy ish.

The process starts in one hundred sixty eight. All wraps up in neither one thousand nine hundred seventy or one thousand seventy one. Important we've talked about, and I trust in D.

O, J. Here, you would think that this would be setting off massive alarm bells in washington. And with the department of justice, they get ahead of this.

So d 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 profoundness 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 D, O, J saying, like whole pass, you're good on this one. Wow, it's just like the .

presidential exceptions for the N. F. L like an anti trust exemption where yeah we're amenable to the fact that you're collaborating, potentially colluding. But that is actually one of the things that we believe will make the country Better.

So go for IT amErica the ball and it's create cards. Oh, easy. And that was a key point.

And then going in convincing all the other banks to sign up for this, because that was one of the first questions they asked, hey, if we do this, aren't we inviting the D. O. J. On our backs? And this is able to say, like, note, got the letter right here.

We're good. wow. amazing.

So very shortly after this, after the creation of N B I national big amErica card ink d in one thousand nine hundred and seventy two, he's thinking globally from the geico. He goes and creates a parallel similar organization of international banks using the bank market system. VISA was global from basically day one.

And IT wasn't just barclays in the U. K. IT was summa bank into pan IT was other banks throughout europe IT was canada IT was ln america. We won't go into all the detail here except one amazing story we're gona tell.

This was actually harder to pull off, if you can imagine that then forming N B I 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, I don't all picks you materna bank in japan, you have to decide, do I want to a buy this pitch of its worth IT to me to be a proportional owner of VISA. Or I could be the singular dominant credit card network in my country, which is more valuable.

And for many of them, theyd be right in saying that actually would be Better to be singular and dominant. Like you look at china union pay, I mean, that is the dominant way of payments flowing in china. That was for them, the right move, totally.

So once again, in south lido, this all comes to ahead. D knows that probably not all of the international banks are gone to agree to this. Some of them we're going to go there on way.

So he calls you do a final summit in salado. You're going to vote the next morning, final vote on who's going to join the sud pva network and who's gonna go IT on their own. N D.

Gives this nostalgic speech at the end of dinner saying, like here in south edda, looking out at the bay, this is where me, in 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 accomplish so much and had a chance at this dream. Just having the chance is worth IT. He's really good with his debate skills then he's like so before we meet one more time tomorrow to obviously disband this whole venture and have the dream to 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 little box out from into their seat.

They, on rapid and inside our pair of peer gold cuffs, inks dead. On each of the two cup of links, there is one half of the globe. And under one side, IT says in lattin studium ad prosperity m, which translates is the will to succeed.

And the other side, says valente, in convenient dum apologies to let speakers out there that i'm butchering that translates as the Grace to compromise and t explain its the soul and somebody from the crowd yells out, do you miserable baard because he just pulled out everybody's hard strings uh and like he gets the votes and the next morning all the holdouts reverse course, they all join. And what, you can't make this stuff up IT literally happens. The couplings are out there. You can google, he did this.

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 know the reason that you kill this.

is a character. So the other thing like these lions that he does, which is just hilarious, once this is all set up, this, the international part of VISA becomes first, I bank O, I B A and C O. Shortly after this, they rebrand the whole thing in the VISA, which i'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. D holds board meetings all around the world, you know different city all the time.

It's a global organization, but not he invites the spouses of all the board members to come to each location. His other family try up, you know, it's. And then he gets the idea. He invites the spouses into the board meeting itself.

Oh, what a nightmare.

So twenty five board members lus their spouses in his board meeting. This means two things. One, nothing is going to get done. The people in the room too, though he needs all these people to behave well together and, you know, be generating gal, what Better way to makes their on their best behavior than they have their spouse sitting behind them? Are you really as all in front of not only your spouse, but the spouses of all these other global blankets?

That's so funny. Let's start doing that.

We ve idly, uh, basic, amazing.

I think neither would .

join for that.

okay. So how does the name VISA come about? How does the sort of joining of the international .

and the domestic, okay, VISA is so important. It's not just a rebrand. IT has to happen once this international organization is set up.

Yeah.

amErica can be the name a bank. AmErica ain't to work. And importantly, is will 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 the scolopendrium sion, we need a truly global brand. And mark, remember back to the blue, White ld, three strikes, that iconic that works in their nationally.

Obviously, the name does not. So d holds a contest internally within N B I slash I bank o to generate a new name and offers a fifty dollar prize for the winning entry that is, chase them. And as legend goes, there are so many submissions of the name VISA that when they finally unveiled d makes a big deal and write out a fifty dollar check, check by the, using a check made out to everyone in the company.

Wait is funny, but then they change the name 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.

It's interesting. It's in english and I guess that make sense is the most .

spoken language. But no, it's not just in english. The name VISA in every, if not almost every language on earth.

And when you're travelling in VISA for a country, they call IT a VISA in other languages too.

that's what IT is. But when you are traveling internally, when you're going through customs in any country, IT is identified as a VISA.

That is the name yeah the universality is sort of a presumptive close because at this point you've got one three for five hundred banks, you know they are sixteen thousand today. It's quite the presumptive cloth that IT will be univerSally accepted everywhere, the way that VISA would imply.

I just every dimension, the presumptive clothes, the implication that this is a global network that you can bring your VISA with you when you're traveling to other countries in all work. The actual definition of the word VISA, that 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.

yeah. 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 inter bank, that was a problem until they expanded, died a mastercard. They've got the three bans, 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.

two. So VISA says, okay, here's the Operating regulations. Every card has to have the blue one gold in the middle ite 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 decorated. You can do literally whatever you want. Banks start going around. They do affinity card programs with N, F, L teams with merchants. This is how you get the southwest card. This is how you get the separate for winners car, is how you get the exercise, everything that they're a bilion of now.

So in the blue stripe, on the top of the top third of the card, the bank start to branding with the name of their bank .

and sum hindy. And this is kind of the brilliance of the VISA model. They were like, it's open to everyone up there.

right? That seems good for us.

We are happy with that. 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 university of VISA. great. We ve got the middle. You ve got the top. Go, well, do whatever you want.

wow. And that's how I end up with B, B, A on my a .

card today. Maybe the most important thing, though, for VISA really pulling away in 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 they're the new Operating regulations now that Mandate that all cards out there, all the previous bank americans need to be migrated to visit 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 still exists because consumers now they know and VISA runs a national advertising campaign. Hey, your bank of amErica a is going to switch to VISA. So some backs in a version of the frisina drop, they start sending unsolicited letters to consumers who are already VISA bank of my card customers with another bank, they're like, okay, it's time to switch over tear VISA card. Here's the application signed up with this.

Nice of them to, at this point in history, offer applications. I think a hundred million cards got dropped in the united states before the government made IT illegal. To just start randomly ly issuing credit to people without their awareness.

are asking for IT totally well. But because of this, a whole bunch of consumers start sort of unconsciously switching the bank that issues there VISA card. And then once this starts happening, this kicks off a total arms race where all the banks, the network and alec shoot, we got a blank at the whole country. 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 one thousand and seventy seven, and the next year in nineteen seventy eight, the number of banks participating in the VISA system grows by twenty percent. Because everybody who's not in the system now is like, get the VISA system.

By the way, this is the thing that pushes VISA ahead of what was, I believe, then called master charge. Yes, the inter bank had changed master charge. They had yet turned to master card.

But in one nine hundred and seventy six, master charge was actually bigger. They had seventy four hundred banks at this point in history. VISA had about seven thousand bags.

Mar church also had more car. Dollers thirty seven million verses. Bank americans, thirty one million before they changed to VISA. So this despite all the dexterity arranging between the member banks, IT was great for VISA to leave ahead of mastercard totally.

So that was a number of member banks grows by twenty percent. The number of active card holder in the visit network in this one year, girls by forty five percent. Wow, no child.

So as you say, they blow away past master card. Thanks to this. They're already way bigger than M X because M X is a different customer segment, which i'll talk about in a sec. And this really puts them on the path to becoming the dominant global network that they are today.

Yeah, and it's worth a moment on M X. 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 emacs win with their closed loop system where they own the whole thing end end and can provide the most incredibly custom experience for everyone on their platform, on the merchant side, on the consumer side.

And one of the answers of why this open loop system beat the close loop system is VISA adopts the strategy of the network of networks. They go sign up one bank, that bank can go sign up you a hundred billion customers or two 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 M X. M X also is a bank themselves, so is highly regulated.

And there are a bank by this point in history, I believe, on both sides of the transaction. So there are they card issuing bank, and they are emerged acquiring bank. And so in terms of scaling internationally, you mention their name, holds them back.

Also, they have to become a bank in another country in order to expand in that country where as VISA just needs to go top a few banks and say wanted you go figure out how to grow for us there. So there's network of networks thing. The open loops system.

Well, IT creates a little bit more of a clue user experience because they're sort of the lowest common denominator of data getting pass through the network. It's sort of open source verses something that wholly owned and Operated by a company or a protocol verses fully own application. Any time that you have something that's more distributed, you are going to a be compromising a little bit on the user experience because you can't sort of rule by fett when you want to make a change. But IT does potentially come with much Better scalability, which is the reason why these and mastercard have become the dominant way versus the close loop systems.

It's also worth closing the loop on master card here too. I mentioned that the D O, J eventually came after both via mater carton prevented them for being exclusive systems. That does happen in one thousand nine seventy five.

And so this concept of duality takes hold for the bags to really meeting. They can multiple on both VISA and mastercard in all the test, noting in case with the D O J, D is obviously a hundred percent against this happening. He doesn't want his banks to be able to join mater card too.

But he also makes the surprisingly correct argument is, like, look, this would be a huge mistake because U. S. Government, if you do this, you are going to freeze the payment networks.

In the U. S, nobody has ever gonna develop a new competing open loop payment network because now there's no more competitive vector between VISA and master card. Well, i'll have the same features. Banks will be members of both. They are gone to Operate in lockstep.

The Prices should be identical .

for both all this stuff. And D, J, S, like, no, no, we're going to do that anyway. Irony of ironies, later in one thousand hundred and eighty eight, the D, L, J, against es VISA and master card for being a do apply and not competitive and up.

So d was right. D was right. And to this day, d has been right. There been many attempts that will talk about told the end of the episode of displacing VISA mastercard, inventing new payment systems. And like they never work or they haven't worked yet.

but they're in the process of working so great.

it's probably actually worth sharing the M. X thing. So M X tried this crazy strategy in the eighties, and i'm flashing four and ten years here.

But they would basically cut their inner change, the discount rate that they were charging merchants massively if those merchants would go exclusive to amex. And this actually continued until nineteen ninety one for many of their merchants. And for costco went all the way to twenty sixteen, where they had the exclusive agreement with the max.

And if you are going to use a credit card to costco, IT had to be mx. But interestingly, VISA master card cried, follow when, uh, you know, all of their banks were multi I coming and amx, 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 kind of stopped and flash ford to today, all cards are accept. That is basically all locations.

So this basically concludes the full VISA story. Like, how did this incredible thing happen? You know, we've answered these 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 organization, social human behavior innovations, the business decorated .

yeah as dave puts IT in electronic value exchange, there is a socio technical aspect to this company. And we've talked about the socio but not the technical.

something that is also true. And also, I think we really underappreciated about VISA is is also a technology company. And there is a whole technology story in parallel with this too, that enabled the VISA we know today to these question of where is VISA headquarter and nobody knowing that its headquarters in the area, it's a silicon valley company.

IT was started in the same place in time as intel, a tari apple. The only thing that is different about IT versus those other companies is IT wasn't funded by venture capital and IT does didn't make anybody rich except the banks who own IT. And thus, we're already rich. But there is an incredible technology story.

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So whether start up or a large enterprise and your company is ready to automate complaints and streamline security reviews like vana seven thousand customers around the globe, i'd go back to making your beer taste Better head on over to vent a outcomes lush required and just tell them that been in David sent you and thanks to friend of the show, Christina anta CEO all acquired listeners get a thousand dollars of free credit vanted a com slash acquired okay. So David, what is visas, technical infrastructure look like? And how did this come to be?

So everything we just described up until now, amazing, incredible, unlikely, one in a million, but all IT really bought D. N. VISA. Was the opportunity.

yes.

to actually realize what he sold to bank of amErica in the other banks of a instant global payment network that a large percentage of global commerce runs on? Yeah, had to build a lot of technology to make that happen. And if you asked the question of d back in one thousand hundred and sixty eight, okay, let's assume we do this.

And we put one of these students be VISA cards in the hand of every consumer on the planet. Do they actually want to use them instead of cash checks? And the answer to that was probably not fascinating.

Now they wanted to use them in specific use cases, like when you point IT out, when you want to make a credit purchase, when you want to essentially do what installed ment financing was before, when you have any number of X, Y, Z, other set of factors. In the case of dino's club amx, when you went to impress your colleagues in your business partners, they 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, maybe a master card, to pay for everything .

that you do everywhere instantly. Yes, to illustrate, we will link this in the show notes, but there is an old T V segment from one nine hundred and ninety three. Not that old. Pretty recent of .

really sad news. Nineteen ninety three was thirty years ago. Yes, we will remember IT, but it's all now one thousand hundred. And ninety three to today is like the one thousand nine hundred and fifties were .

to ask when we were kids. Not good, not good, David, not good. This one thousand nine hundred 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 one thousand nine hundred ninety three, did not accept created cards, or at least this commercial makes IT seen that way. And they interview this woman and he 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 one thousand nine hundred and ninety three, and a second guy is interviewed and says something to the effect of, I just hope he doesn't slow things down because, you know, they'll have to call new york and then they'll have to do the thing and I just hope he doesn't slow things down. And it's like the prevAiling idea is that cash is fast, cache is easy.

cash is respectable. Credit cards are dead. What this woman is saying is really sad if you need to use debt to buy a burger.

Yes, but even at this point in history was viewed as this cuber something rather than a convenient thing to bust out the card, rather than, you know, like, I actually think burger can corporate change the numbers. And they were like for the amount time we spend handling change, we just want encourage everyone to be sweeping the card all the time, even if there.

you know, losing some change. It's crazy. Was ninety? Mean, here are I know about you, but I get pissed when somebody ahead me in line starts breaking out cash and coins and like.

oh, my g, 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 .

draft and then starting the milk around. yes. So to get from there to today, three major pieces of technology needed to be built by via one with transaction authorization.

So when we were talking about transactions happening earlier and the person in burger king was referencing like, oh, they got ta call in the york and they ve got to authorize the transaction and all that, we gloss over one sort of stop gap slash banded that VISA 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, I was, I don't know, fifty box or something like that. Anything paid with a credit card under fifty dollars IT was basically within the judgment of the cashier to h say yes or no, and so everybody just suit yes. I mean, the reality was this was the threshold low, which the banks and these were willing to say, okay, we will accept a certain amount fraud.

interesting. 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 than 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 card holder bank, my god, get somebody on the hall there, say, hey, i've got your card holder batman, his card number is xyz, you know, one, two, three. Can you look up his credit and know he wants to buy a five hundred dollar refrigerator? Can you can tell me if he is good for IT?

right? And this effectively would be like if they hit their limit.

Yes, have they hit the limit? The issuing bank, we go look that up. The person there are literally the person talk on the phone to the person that the merchant bank give them the answer. The merchant bank then switches the line back to the cash year at the store and says, like, yeah, band is good for IT, or no band is not good for IT.

So you had banks talking to banks.

people at merchants talking to people at their bank, talking to people at the current holders bank, and then reversing the hollow in.

But importantly, you had a person at the merchants bank calling a person at the cardholders back. Yes, today, that is known as reason that there is this piece of technology that sits in the middle that eliminates that bank to bank phone call.

And so this is a big part of one of the first things that these are built at that process that we just describe that could take like twenty minutes. And IT just didn't work outside of business hours for those banks. So say, you know, now that back back cards nationwide, soon to be international, all imagine you turn to buy something into pay at the jeffrey's merchant bank calls your cardholder bank back in america, close for business is no way for that transaction to happen.

Wow, that's crazy.

Not good. Definitely acted. So D N VISA know that this is like the first thing that they have to address. In one thousand nine hundred seventy one, right after NBA is formed, d starts a project called the bank amErica authorization system experimental, or B A S E base, to build technology to address this problem.

The whole thing actually started rather inauspiciously, because, right after all, the approvals came through for d to form N B I. I think he was literally the evening before the first board meeting. Bank of amErica comes up to d and they're like, can we take your IDE? There's something you need to know.

Oh god, that's always fun. Before a first warming.

they're well, kind of hard to tell you. We've 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 systems across the whole country. And we're gona do this. So, you know, d if you want us to remain part of N B, I remember, this is bank of america, the most important part of b oh my god.

I know.

you know that part of the Operating agreement is like, you know, we can't really Operate outside of the bounds of N, B. I, but this isn't really outside the bounds of the N. B.

I. This is a separate thing. This is authorization system. We're gona do this. And if you say we can do this work out, wow. So not good.

And it's true. It's not really like the issuing new cards or acquiring new merchants. There are being a technology provider .

because they in american express both see that, hey, this is a really, really, really valuable piece of technology. 嗯， d is, of course, pest, but what he going to do be A S take IT or leave IT. D takes IT as d then tells the story, bank of amErica and A, M, X go out and they try and pitch the other banks in N, B, I interbank 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 morphed into a tripartite consorting of in her bank, american express and bank of america. That's by association in the eye are old friends. The department of justice starts knifing around in the like.

Now this is actually collusion in the net competitive behavior. So if you go forward with this, we're going to sue you. And they all abandon the project. And this is huge for views of because this means they can build IT on their own.

fascinating.

So they do the natural thing at the time. And these are bankers, even though they're based in just go in silicon valley, these tech folks, they put out an r fp to folks like IBM systems integrators, you know, the accenture's of the day to go build this technology for them, go build a computerized authorization system for the bank amErica card VISA network. All the bids come back.

And of course, they are all way over budget and way over time. So dis, well, skirt, we're going to do at ourselves how hard can be? wow.

So IT is very d way he goes. And he recruits the guy from the firm that impressed them the most throughout the bidding process was a firmly T R W. And a guy named DRAM to too lian.

Digoxin to heaven is like, I like you. You come work for me. Leave T, R, W, M to hire you.

You build this here in hell. wow. And i'll give you the resources. You come join us and youll build out your own taxi here within N, B, I slash VISA m comes and joins and starts. The core of the VISA taxi d 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 that the electronic communication can happen to installing computer systems in each of the member banks around the country, so that instead, 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, four VISA in the bear.

And this becomes the same meteo o campus. You can see IT right off of one or one as you driving between seven go. And so you can value IT is, I believe, till the headquarters of VISA today. Now huge gaps in samoa o where they build the data center until .

I think next year, it's gona go back up to separate to go when they finish a building.

That's right. I think it's going to mission bay.

So more .

eglu sly A A in his new tiger VISA tech team. They do IT. They do IT in nine months. And IT works.

So dave stern write in this book about this whole situation and about deep d maintained that if you give computer people more time, they will just consume IT. So he always insisted, so it's so true. So he always insisted on shorter projects with uncompromising deadlines.

They will just consume.

just can IT fascinating.

okay? So they build what becomes vision IT in house at this point. You know there's no internet, so it's all just working over telephone communication.

Yep, direct that working amazing.

And so they're just Operating the whole network out of the data center .

in california. yep. Now importantly, this is only for transaction authorization. So the cards and the point of sale have not been digitized yet.

That's gonna be the final third piece of the store of technology, the 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 that the interbank communication I see.

So how does the settlement happen at this point in history?

So that's what's next that's the next big Operational technical problem that VISA needs to solve .

is like literally moving the money when IT needs to be moved.

reconcile the transactions, moving the money, getting everything wrapped up at the end of the day, week, month, sending out statements is all this stuff. You can 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 and peace consumed a lot of four times people. The back in peace consumed IT a lot of paper and time too. Maybe more time, but like a lot of paper .

because you're effectively .

mAiling checks and even more predictable ously as the network grew. And at this point in time, soon to be visas growing explosively, the complexity of the settlement peace also grows sort of exponentially. Every new bank know 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.

an n squared problem. 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.

And square is much worse when you're doing IT with paper than with computers.

yes. So what you really need to do this sufficiently to bring IT all the way back to the beginning of the episode is a clearing house. You need an automated clearing house. And this is unbelieved.

A few people had reference 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 clearing house for themselves to do settlement electronically over the network. The end up calling this project base 2 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 A C. H. System for checks, you know, automatic clearing house, A C, H, everyone in the banking system that was built by the sanford cisco branch of the federal reserve in the exact same years in the seventies when VISA was building their own essentially automated clearing house system.

That is wild.

Now i've never read anything. I couldn't find anything. I've never heard anybody say that they, like talk to each other, that they knew anything about what was going on, that they were sharing practices. I assume they probably didn't, but as well, the same place, the same time, solving the same problem, solving the same problem.

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 a hundred box five hundred times, and I paid you one hundred box four hundred times, what is the net that actually needs to get transferred? And that is a far more efficient way. You know, batching above is a far more efficient way than transfering the money back in fourth every single time, but still can be a complicated problem, especially when you have thousands of banks on each side of that equation.

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 well once base two is done. And again, IT also happens in less than a year, that is 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 do like some good, some bad between the banks, between the merchants.

the issuing back. If you're the one that owes the money, you kind of want the payment to take more time?

Yes, exactly. Also importantly, this is from dave's book. IT ends up saving about fifteen million dollars in labor and postage costs to the banks by automating this just in year one. And imagine if this were done manually today. I wouldn't possible to do this manually today.

No, you needed the technology solutions that they've put in place to enable the commerce scale that flows on this network today. p.

IT is also during this project that one of the most famous, this attack team stories in history happens.

This a good one.

This is in dave's book. So one of the guys, I think he was working on base one and then maybe got transferred in the base two. He is thinking about the system and reliability is so important. You know, this network kinko down, he's like, uh.

we actually .

have a pretty serious vulnerability. In this system. So he goes to C, D, and the whole VISA organization, I think, is like less than fifty people at this point in time.

Wow, just wild. And he like, d, you know, all this technology were building. You know, we ve got authorizations running or 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 purchased on a Cliff. And we're also about a mile from the same area as fault. So you know, we really might want to think about having some sort of redundant parallel site data center out there.

A IT is very d way, thinks fat is like, I let me think about this over the weekend. He comes back on monday and is like, alright, 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 a done within six months.

and invent the technology to keep these things synching ized, so they are actually redundant.

yes. So now d is not technical enough to talk about that, but this is super important up until this point in time, stayed the earth in the sort of flagged data center world was, yes, to have redundant other location backup PS. But the way that IT was typically done was you had your primary data center that Operated at full capacity all the time.

The backup s were just like cold storage. They were like dorman backup PS that only were there to come online if you had to fail over from the primary system VISA though in the VISA tech team, they are like, you know, if were going to go through all this trouble and expense of building another data center, let's use IT, let's use IT. So they rearchitects ted base one and completed architecture base two to run concurrently across multiple data centres 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.

wow. Totally wild. The right. I don't know that IT was the first, but IT was definitely not stay to the art before.

This whole data center world was still pretty new. And VISA definitely, like, through ingenuity, invented way to do this. fascinating.

And of course.

this is now how every day to send in the world runs today, pretty mazing. So that was data center innovation, which sort of happens in concert with settled digitization. The third big leg of the technologies to all that these are 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 digitising the point of sale terminal in the merchants that .

was very iphone know traditionally, they have a huge market here.

This one, S. T. There was no var phone before this. Now this is huge. This is the holy grail, the base one authorization system that was still only for transactions above the floor limit at the merchant. So, you know, above fifty box or hundred box or whatever IT replaced the need for phone calls, but I didn't digitize the transactions themselves.

So this is actually every transaction now is running digitally for authorization over the network.

exactly. Not only authorization, but just think about all the things that happen digitally around transactions, the you, 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 the machine readable. So before this, the cards were just pieces of plastic with him. Bost numbers on them, like you had to say your type the numbers into something.

And then I think about the ebing is that if you run a shot shot on IT a zip's APP with the uh the zip's APP for the card in print reader, you actually can get the numbers of IT without writing IT down yourself. That was a huge productivity gain when they launched the sort of imprint reader machines.

Yep, so this makes the decision the end up going with the mag stripe technology. This is the magnetic strip on the back of. So to this day, almost everybody's cards out there. There's a whole band of drama around this. City bank had financed appropriator magnetic solution that they were trying to push on the industry that I think the bunch of lawsuits .

and didn't they try to like hack the magnetics stripe. And then they did, just to prove that like the proprietory thing would have been more secure. Yes.

but IT was perfect. If so, this is like we're not going to pay you city bank skip on everything that we do here.

We take exactly .

so they stayed as on the max drive for the cards. The next step then is they have to create a digital points 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 .

that is outside their circle of competence. Yes.

we mention earlier, and you will lead to this is when their phone takes off. So what VISA does is they create a spec. They're like this is the spec of what we kind of need to be created and they invite different technology vendors to bid on IT. Vear phone ends up becoming the large dominant. I don't know what their market there was.

is I think they they like two thirds of the market at peak. Yeah.

and it's pretty crazy. They come up with this sub five hundred dollar device that can sit pretty easily on a merging countertop. That army has a bunch of other stuff on IT and not a lot of space and get IT distributed and h installed at all these merchants. Now the merchants didn't exactly want this thing necessarily, but the way we incentivize 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 happen digitally over the digital network.

I see if you use this instead of the zip APP.

you'll get cheaper fees. Yes.

exactly which that business model Carry through to today. I mean, the way that you charge a card massively affects the interchange that gets charged, whether it's key in with numbers or whether it's swiped or whether it's .

an e commerce transaction. 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 teleplay ation network amongst all the banks. Now vision needs a telemundo ation network amongst all the merchants around the whole world, the country in the world, that a another whole step change that's .

like single digit millions of nodes.

yes. So what are they gone to do for the pilot program? They work with one of the big telecom vendors and essentially, like build out themselves.

We're now in the one thousand nine hundred eighties here, but they realized during this that there's this new fledged kinds consumer networking service out there called copy serve. And for folks who either weren't alive in the U. S. At this time or not, americans can you serve was like an A O L competitor in the early days of the internet.

I think they invented the gift.

Oh, I think that might be right. yeah. And so as a consumer, you would pay a monthly fee to compuserve, A O, L, whatever. And IT would be your internet service provider, but also like your email and you know.

portal to the web. He was a proprietary internet.

So they somehow get in touch with copy serve. And they realized 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 merging point of sale terminals. And I think this goes on for like.

years. That's crazy. I had no idea. That's fascinating. Totally word. Normally you read IT to the problem where with spirit capacity, where like the time where people want your extra capacity is when you have none. So it's kind of amazing defined to complemental use cases for the same infrastructure that one one is waxing .

the other's winning. Yeah very 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 tons of fraud IT was happening below the floor limits. You know, if you're charging a five dollar transaction to a card, it's just not worth to the banks in these. It'll like figure out whether that's fragile or not now because it's all digital and instant, they can figure out whether .

that's brazil internet.

Um so during the pilot, banks and merchants that were participating in this program reduced charge backs to the system by eighty two percent relative to what was happening before. So I just like a massive amount of fraud gets eliminated.

which actually should totally justify a lower err change. If you're not paying for all the fraud in the system, then the system should cost less to run absolutely .

in many ways that hey.

we're going to know reward you with lower inter change to install these terminals like at the end of day, VISA probably could have maintained a margin and all the banks could maintained a profit margin and not lost any margin percentage because just implementing this technology lower the cost of running the thing.

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 car, do you, to have me, whatever.

And IT just works, and IT gets authorized and you get your thing immediately. This is the backbone to all that being possible too, though for VISA as a company, in VISA as a business, they are now fully digital. They can scale infinitely with essentially zero marginal cost.

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 mic every dollar after this basically fell to the bottom line in, yes.

this unlocks just to make a unfathomably good business bottle before this, some element of adding scale into the system required manual labor. Now it's all just one six hours.

Now the toll booth is fully built. IT is a high functioning toll booth. Ah movies that doesn't no .

longer has a human sitting there. You've got the fast past system.

Whatever you 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 is obviously the IPO of that, that we want to talk about in two thousand and eight and sort of how the structure of the whole thing changed. But I think you've got a marketing thing that you wanted .

talk about too. Yeah, there's one more really fun marketing peace that I want to come back before we move on to today, and that's the olympics. A lot of people, probably everybody listening now knows visas associated with the olympics.

They're probably the most associated brand other than nbc.

but that's only in america. MBC doesn't mean anything around the globe. VISA is the olympics everywhere. So this happens right around the same time as the digitization of points. In part, it's one hundred and eighty six.

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 point to the olympics in specific countries.

You could sponsor whatever, broadcast whatever television, radio with covering the olympics. In certain countries, you could have billboards and one not, but you couldn't do a global sponsorship. And there's no event like the olympics that could really do that saving 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 gona reach everybody in the world. And up until this point, one of the main stay, largest olympic sponsors in amErica was american express.

Because this fits perfectly with american express. It's for american business people who are traveling abroad. Olympics, great, amazing.

The olympics are the I O. C. Goes to m.

Max to try and sign them up to take this markey global sponsorship slot. They think it's a no brainer. They give M, X A sweet heart introductions.

Ory offered deal where the first people were going to fourteen million dollars. M, X. declines. wow. So they had their vision, the apple, and they missed IT a couple years before this, right? As the VISA empire was being completed with the falls digitization of the network, d ends up getting hasted from the company.

I think, you know, if he were so alive today, he would probably agree with the characteristic that d was one of the most amazing zero to one entrepreneurs in history. Not so much. I want to end ka 改， especially when the industry in which you are going from one to end and your shareholders and board is some of the most conservative final institutions in the world.

A lot of coffy starts to a rub, ends up with the leaving the company in one thousand eighty four. After this happens, VISA brings on a new global chief marketing officer, again name, john bennet, who came from twenty years at american express. So he and his team see that IMAX has passed on this new amazing global opportunity with the olympics.

They're also formulating the new views of marketing strategy. Up to that point, the marketing strategy had been mostly generate categories awareness for consumers around the world. To the extent we competed with anybody, we competed with master cards.

So we positioned against them. John comes in is like nona. The path of Victory here is not positioning against master card. The path to Victory is positioning against american express. Not because we want to kill american express, we don't actually care were way, way, way bigger than american express, but we need global ubiquity and adoption and people to get comfortable with using VISA, using credit cards. Remember, there's still this social stigma that woman in one thousand nine hundred ninety three and burger king who's like, oh, it's sad if you're using get to buy a hamburger.

which is so interesting because a signature piece of the bank amErica cards 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 this into a loan. But I have never elected that option. I hold these things called credit cards, but that's a miss no mer. I've never once used any credit.

right? And if this were certainly one thousand nine hundred eighty six and still one thousand and ninety three, 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.

right? Although I should say it's probably false to say never, never used any credit. The bank does flow you the money for a month, but they have a one month Grace period where you have no interest.

Yes, you are using dead. You're just not paying into.

yes.

which you know, hey, that's a great thing to deal.

A amazing gift that these banks give.

The world is the american way. So john just started. The strategy is used, american express, to eliminate the stigma around VISA and by association paint master cards having that stigma because 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 twenty five percent the size of visas. So they designed a whole marketing campaign around going after american express.

And the tagline of the campaign, you know, they show these exotic locales that the type of customers who would be using american express that they would be dining at these restaurants are going to these events, are going on these vacations at the end for tour of our similar age. Probably you remember exactly the words here. If you go there, remember, take your VISA card, because they don't take american express.

So great. And then the second tag line to IT with VISA, it's everywhere you want to be. So the olympic come up after M, X, declines.

John n. In the team, get in touch with the I, O. C.

The Price tag has gone up to seventeen million dollars just for the rights that before any media buys no advertising, there 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 twenty three million dollars in media for the one thousand nine hundred eighty eight olympics of forty million dollars in total on one global event, while the two, there's a summer in the winter olympics, but like one year of global events.

that's about one hundred and ten million dollars .

in today's dollars. Yeah, wild. Way more than they spent on any of the technology projects that we were just talking about.

I mean, yeah, R N D costs money, but go to market costs more.

Yeah, what's the line? The first time founders focus on technology. Second time founders focus on distribution. yeah. And then the real picker, 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 that training all these people that are going to the olympics year after year after year IT, has now been thirty seven years. That visas, the exclusive payments global sponsor of the olympics, they're contracted through twenty thirty two. So IT will be at least forty six years where VISA is the only card accepted at the olympics, which that's not .

that big deal because there's not that many people that go relatively, the people that see the media and understand the association.

Of course, of course, but the reason were talking about this ates and awesome story, but to the last outstanding piece of enabling the globe of 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 is IT position against A M X. Go to the olympics. It's the perfect event.

You're around the world. The type of people go to the olympics. The type of people who use M, X, they use their VISA cards.

and they are proud of IT love IT. So David, take us to the IPO. This thing was an organization that was owned, but not with stock.

a four profit non stock membership organization, right?

And now they're an enormously profitable public company. So how did we get from there to here?

Yeah just about a half a trillion dollar market cap. So the precipitating event wasn't actually the banks trying to get greedy monitise. They are asset, although they did.

they were motivated IT just fine the way that they .

currently owned IT. Yes, the profits being spit out of the system were just fine. In two thousand and five, there finally was another huge, and I trust lost you, I think, against both VISA and mastercard.

IT actually is a class action lawsuit that the merchants brought, and they basically got fully fed up with inner change. And you know, every ten years or so, there's some meaningful merchants push to try to change and or change. And they either do IT in congress or they do IT in a class action case, know this variety of different ways.

And this particular class action suit, two thousand and five, is still running today. And the numbers have mostly been figured out of how much VISA will o from a twenty twelve ruling that then got appealed. So sort of still going on.

But basically there was a lot of uncertainty in the two thousand five and six time frame of jeez, what's the liability here going to be. And master card had gone public and did not sort through this issue at all. They just set up we're going public and shareholders, yet there's lots of uncertainty in our future.

And like see but by 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. Max was already public. You know, you can reward and retain talent easier. That is just like lots of reasons why you would want this thing to be sort of a stand alone entity, especially at this point in history.

And what they had to do was they created these b shares, and they isolated all reliability from this class action suit to the by shares. So well, master card had a pretty flogged IPO. VISA had a great IPO. Because they said, whatever the courts ruled, the banks who own the b shares, the preexisting shareholder will own all that liability and all the a shares, the new people who are coming in as owners of the company will be protected.

Or that I didn't realize that in the research IT finally happens in two thousand VISA goes public, right? Is the financial crisis is starting, which obviously wasn't planned, but ends up being great for the banks and probably for a VISA too. IT becomes the largest U.

S. I. Po in history. Up to that point, they raised eighteen billion dollars at a ninety billion dollar in the show market cap, but that eighteen billion dollars wasn't primary capital to the company's baLance ship, because obviously VISA was incredibly profitable, did not need capital. He prints money. Why would you want to raise capital in the lute? That eighteen billion dollars was secondary selling to the banks that on the company, which I think for many of them proved to be a total lifeline through the financial crisis that help them arrive yeah I mean.

now VISA is owned mostly by big institutional shareholders, the van guards and fidelities of the world. And the banks are .

much smaller shareholders. Well, at this point, visas market cap is significantly larger than any of its former .

member banks. IT wild, I mean, d hoc basically was right that the T, L, D, R on this is this thing, this information network. That doesn't have to take on any other risk of any of these transactions is 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 listening ers, you can decide. So David and I have made passing references to the idea that this is the slut dorsy cash generating business. And I think it's time to actually examine inner change fees today, how they've changed over time, how they they flow, who benefits, what's visas cut, all of that.

So you can kind of understand IT. So this is business bottle. The first thing you know is almost nothing has changed since the eighties 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 vision net, who checks with the ish 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, within my seconds, unbelievably short period of time, no matter where you are in the world, 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 customers money in paying info.

Well, nearly info might as emergent discount rate. So what is this merge discount rate? There are a few things that play here.

There are inner change fees. And those inner change fees go to the issuing bank. There are assessment fees or network fees, and that network fee goes to VISA, mastercards, seta.

And then there are payment processing fees. And those go to the acquiring bank, the bank that acquired the merchant. This is the merchants bank and the technology provider of whatever they're using to process their payments.

So three fees in your change, network fees, paid processing fees. Here's what those could look like. And again, I say could because they are different in every scenario.

There is a very long PDF on visus website that is available with every different concoction you can 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 U. S. Credit card, the merchant is charged a two percent discount off the sale Price, serves a hundred dollar pair shoes.

You're now make ninety eight dollars. And what happens to that two percent? So that two percent, the lions share of IT, is the inner change, the one point six percent that goes to the bank that issued the card.

to the cardholder.

to the consumer, right? So when everybody on the planet is marketing credit card offers to you, they get the lions share of the inner change. So they actually have a lot to play with in customer acquisition for their cards because they make the lions share of the transaction, the inner change.

There's a lot of cost, and there are two because they bear all the fraud risk. There is a lot of things they get to do, but I know they get most of the money a small amount on the order of like point two percent or twenty bips for you finance people out there goes to the bank that acquired the merchant. This could be chased.

Fighter wealth fargo, this is the merchant 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, check out 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.

the technology provider and those are folks like first stuff, like.

yes, point one five to point two percent goes to the network. This number is actually quite hard to find. You read visus entire annual report and you're like, wait, but what part of the split do you actually get? And is because they get in in a variety of different ways.

I would say I don't know if the VISA people would tell you this is intentionally obvious ted or if I just ends up being kind of obvious ted, but is 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 there, twenty senses there's basic, no variable cost.

Yes, 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 visas. Network like this is tiny amounts of data stack, as much meta data as you want. On top of that, we are not shipping around huge payloads here.

There is not like and video 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 in fantastically small relative to the amount that technology has progressed. Sed this point two percent, the twenty cents on the hundred dollar transaction, very low variable costs associated with that.

So a few coffee outs on this debt is significantly less in most cases and often thanks to regulatory reasons. And the logic here is nobody y'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 account. So debit cards are going be less smaller. Merchants often pay closer to three percent than two percent because are just do in lower volume.

And for these small businesses, the acquiring bank actually has to do a lot more of work. Think about how difficult that is to market a credit card to an individual, while small businesses kind of behave like individuals. So because the acquiring bank actually has to do a lot more work and in curr cost, they get to make more money.

So there's sort of this very interesting thing that has happened where inner change is intentionally quite flexible. This is a playback theme that I want to pull forward. This business is probably the greatest master class in the entire world on incense of alignment.

And I was talking with lisa Alice at mott nath's son, 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 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 inner change is that it's intentionally flexible.

Yeah which brings up you know an obvious point that we perhaps in highlights specifically, as we should have earlier, this network is actually a five sided system. There's the consumer that is buying something. There is the merchant that is selling that's something to them.

There is the VISA network in the middle. That's the third party. But then there are also the fourth in 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 dispute up the value. And depending on who is doing what work, IT should be split .

different ways. And VISA has created these products where, you know, it's not just a VISA card. You might get a VISA signature, a VISA signature business or a VISA. I don't even know what they are, but they basically have said, why not we come up with other types of VISA cards, just have higher inter change. And merchants are like, what do you mean just have higher inter change?

Your new product is you .

charge me more. And VISA says, well, the cool thing about higher inter change 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 year, this VISA signature, you actually get more money.

Well, then they turned around and say, cool, i'm going to go and i'm going to give Better rewards to higher spending. You more were the customers and then visas argument back to the merchant is, well, hey, because were actually taking more money on this fancy or card, you're getting access to customers that we've now brought into our network who are much Better customers that you really want to have your establishment. And so it's this very interesting again, on follow a value, I think is the way to describe IT where, you know i'm sure that merchants wish they could be more a part of the decision process, but IT does theoretically enable incentives to be spread around that benefit every one of the ecosystem.

yep. And for merchants of scale today, they're cut in on this too, right? There's the alexa 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 have a certain size .

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 going to say, hey, we're going to help you get more card members by putting our logo on the card. And so even though often times were the merchant, well, actually what we're doing is we're helping you distribute cards 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 awards, but it's effectively marketing channel for the issuing bank. So they get to split about those economics.

And I guess that the absolute very highest levels of scale, you have something like the amazon in gp Morgan's relationship, where jp. Morgan chase is the merchant bank and J. P. Morgan chase is one of the largest issuing banks for cards in the world.

And so the amazon cheese 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 catch back rewards. So amazon, or J. P.

Morgan, 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 to that envelope of value.

Yes, IT is worth running out. The system today is prety tough to change, absence, 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 issues 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 action information, typically consumers won't do IT unless they get some very high number percent back, and that's actually more expensive than the inner change. 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 noneconomic like you have to believe that there is some long term benefit to doing IT. yep.

And famously, walmart and target two. I think I ve ve been trying to do this for years and years and years, and they never can make a work.

no. 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 behaviour.

And the merchant, in most cases, is really the only party that is not thrilled with this arrangement totally.

I mean, the most negative way someone could paint the ecosystem as IT exists today is that the whole credit current system is a wide scale bribe of the american consumer to, like, explore the world's retailers, using the retailers own money. But that is like a very cynical weight of view IT. 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 compare for.

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 inner change.

right, no matter who's buying the goods are marked up.

right? If you aren't someone that has a rewards based credit card, then your stuff just got more expensive. And the research firm that 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 page one hundred and forty nine dollars inflated Prices, because all Prices, no matter how you pay, have go up in order to make IT. So that paying in cash and cards is equivalent because in most states, is actually illegal to charge meaningful premium to people who are using credit cards. So on average, cash using household pays one hundred and forty .

nine dollars effectively, and subsidy.

But a card using household receives eleven hundred dollars in value. Eleven hundred. Doi.

know. I guess that makes sense. I think about the value of the rewards I get every year.

It's on every two years a two percent of everything .

you put in your card yeah which I mean, especially us running a business, I get we put a lot of stuff cards.

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 penaloza.

The other reason why it's really hard to change the system is this whole thing is a chicken of the egg problem. I mean, every two sided marketplace is a chicken of the egg problem. Bank our cards solve this when there were no regulations by dropping sixty five thousand credit lines on on wedding americans. And you can't do that now. So how do you boot strap one side of the marketplace when you can't do something like a drop?

And they were any 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, right? So what you're basically relying on now is some sort of extrinsic paradise shift, probably a technology paradigm shift that enables a new entrance to boot strap one side of the marketplace in one way or the other to create a new system. And without a new paradise emerging, this is the system, uh, I say a new paradise or the government intervention. This kind of is the system that we've made our bed and were stuck with for good and for bad.

I mean, I love my rewards cards.

right? And look at all of the economic value that had created by enabling e commerce. IT is truly astonishing that without U.

P, S 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 like people spend more when they use a card.

There is a broader range of buyers that use a card. Uh, very cool feature of these credit cards and dep 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 is a cost to checks.

right? If you're going to accept to check from somebody, there's a strong element of trust that you have to have with that individual or entity.

yeah. And if you're saying you Better come in here bearing cash or a cash or check you're enough way fewer customers, not to mention like there's totally a cost of facilities 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 is a very meaningful and a cash that piles up in your establishment. And so you need to make sure that you have security or likely 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 all the Operational over had associated with that.

There is a value to providing payment and there is a cost to whatever 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 are certainly is some cost, no matter what form of payment is used.

absolutely.

So the business today, what does VISA look like? Well, last year, VISA proceed fourteen trillion dollars of volume through their network, which is a almost meaninglessly large number. How do you even think about that?

One fun way to think about that, that I calculated is, if you start from nineteen and seventy one, the first full year that the bank amErica network was liberated from bank america, the growth in payment volume on the network since then has been seventeen point three percent compounded annually for fifty one years.

Oh my god, wild IT. Turns out the world eventually did want to pay with frictionless, fast and often credit extending methods. Seventeen percent compounded for fifty one years.

Ah I mean, this is like picture levels of compounding that is happening here yeah and .

it's not .

like you people may think of seventeen percent. Like go I have seen I R, and have you seen them to than that over fifty one years? Not many of us.

It's amazing. The number of transactions they process last year was over a hundred hundred ninety billion. So that is twenty seven transactions per person on earth, including Young children every single year.

Hey, man, Young children require a lot of comments.

let me tell you. So I here, there are four point one billion VISA cards in circulation. Their net revenue is twenty nine billion dollars, twenty nine that up from twenty two billion two years ago.

So there is an interesting thing that I didn't really realized with VISA, which is it's had a hell of a decade in my head. VISA has been this steady state thing in the world as has master card. But the last decade has been the story of this is incredible dominance in revenue and transactions in 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 valued services as six billion will talk about. That means the most shocking thing about the business is they have fifty percent net income margins. So of the thirty ish billion they made in revenue, their net income was fifteen.

This is absurd. All the picture repainted in the whole story, IT was all building toward the climax of they have created something with essentially zero marginal costs in perhaps the largest work IT out there, certainly one of them global commerce, both e and non e commerce and .

as VISA would argue, both consumer but also be to b commerce.

Ah fifty percent that income margins on thirty billion in revenue there .

IT is and you might say so way, if they have fifty percent that income margins, what is their growth margin because is IT SaaS level good at 1 five eighty five percent？ No, their gross margins are ninety eight percent. There are no variable cost in this business. There are no cost of good sold.

unreal.

It's crazy. So I think with fifty percent of 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 that income margin, including master card, which is forty three percent.

And just to throw some numbers out for people that are like not you look at a financial statement all the time. Microsoft, thirty four percent net income urgence. Microsoft sells software.

They ship bits. Apple, twenty five percent. They have an incredibly marked up product that is differently tied wildly by brand, twenty five percent net income margins. Google, google has a monopoly in a market of information. What are the cost involved that twenty one percent that income market?

I would thought google will be higher as we were talking in my mind. I was like, well, google is probably the only one that can come close. But wow, microsoft desire, I didn't realize that yeah, it's not it's not.

They do have twenty seven thousand employees. In some ways, that feels like an oddly large number and in other ways, I feel 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 that is.

David?

That would be in video. yeah. So weirdly.

mirror image eve in video doesn't have girls margins like VISA. IT is the ultimate solution. I think that .

is the takeaway. 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 through put infrastructure globally. That's an unbelievably impressive thing with almost no downtime. IT is ninety nine point. Nine, nine, nine percent up time, which i'm not a site reliability engineer, but I think that is five nine.

which is what I mean, you hear about A W S going down more frequently than you hear about .

VISA going on totally that sixteen thousand banks in two hundred countries, they have six data centers distributed across the world is kind of amazing. It's only six, to be honest, with that kind of reliability and up time.

you know, related to that though, you raise a good point earlier. The data envelope, I supposed to the value envelope, although I guess this is sort of the same, is also not that large relative to the importance in the value.

right?

This is not youtube. Yeah the transactions themselves, in part because this was all architected in .

the seventies that definitely why lots of people in the eco system would love IT. If you could send entire receipts in machine readable form across this network, you can't we're stuck with the lowest common denominator protocol that were shipping very crude pieces of information across yp.

I will say there are other people that are participants in the ecosystem that are perfectly fine with IT having almost no information or minimal information going across IT, an example of which is the banks. The banks don't want to be sharing any of this information that could put them at a strategic disadvantage. Your bank knows your name, knows your social security number, knows your address VISA i'm run and transactions across their network all the time. All that knows is my card number IT has no notion of identity. Isn't that crazy?

I don't realize that yeah that is crazy.

And the banks like that because then the banks get to say, no, no, this is my customer VISA. We will use your network because this is the way that I need to accomplish something for my customer. But i'm not just going to like turn my customer to your customer.

Why would I do that? And one of the things we didn't talk about in the story, because I was long enough, as is, is the whole debit cards struggle. Obviously, debit cards are a big part in debit transactions, a big part of the VISA network today.

But when VISA first tried to introduce them, this was one of the things that LED to d hawks ouster. 嗯， the banks were like, no, no, no, no, no. Devi cards.

That sounds like banking relationships. Banking relationships are my domain. That's where I make my money. Those are my deposits. You look like you're trying to reach your hand across from being in service of us into competing with us a and obviously, devo cards did eventually become part of the system, but not in the way that you know IT was looking like the initially .

wanted them too. It's pretty fascinating that debt came later functionally to me as a consumer, even though I get floated for a month, my credit card is essentially a debit card where if I want to, I can turn IT into alone at the end of thirty days.

It's a debit with a lot of benefits.

right? And obviously, like I get to keep the money for thirty more days. It's not quite the same thing.

But debt is a simple or product. So it's so interesting that debit came decades after credit cards on the VISA network. You would think they would have started with debit, but of course, they couldn't have started with debit. The banks would never have gone for that.

right? That was the domain of the banks. And actually, there is a big fight between VISA and all the A, T, M networks.

D, wanted your VISA card to also be your A, T, M company. Makes sense, right? Like why would you have .

different cards? Mine is today.

They basically are now. But for many, many years they weren't. And they certainly weren't back in these.

right. And I think part of the reason why debit cards were sort of like forced into existence was the consumers basically demanded IT where they were like, look, if I can pay with a card for this high value purchase and I don't want to use credit, you're telling me that if I don't want credit, then I have to walk down the street, withdraw cash from my bank and bring the cash.

Is there not something like a credit card but doesn't extend me alone? So in closing on the numbers today, this is the important number to know and one that may make you uncomfortable. But i'm curious how this lands for you.

David, U. S. Merchants paid an estimated ninety three billion in VISA and master card credit card fees last year, according to the nelsen report in industry publication that ninety three billion was up from thirty three billion in twenty twelve.

Wow, that's a lot more billions.

That's a lot more billions. So we've talked a lot here about the inner change and how VISA makes money in the transaction. I will say half of americans Carry a credit card baLance, which is absolutely brutal since those interest rates right now around twenty two percent.

David uni learn in doing some research that the reason why we all get these credit cards from north dakota is because every state used to have anti user laws, like no one was allowed to make you serious loans. And north to koto was the first to drop them. And that's why all the banks issued all their card programs out of north dakota because you could do things like have twenty two percent loans made to consumers and have that be entirely fine. So that's the sad history of why your credit cards always get mad from there.

And there is no dedicated is really sad and unfortunate on the consumer debt side of all this. You know on the fee side, on the one hand, i'm tempted to say like all obviously tripling the amount of fees that merchants are paying for a credit processing over ten years, like that's ridiculous.

but transaction value has meaningfully gone up to like gross .

volume is wait up, yes, transaction value. But also I have to imagine a big part of that is share of commerce that happening as e commerce versus traditional commerce. The credit card networks really are providing a huge amount of value to e commerce, says you were saying early, they are to physical commerce too.

Nobody wants to pay with cash or checking more these days. But like e commerce, there's no other way that, that can happen. So does that make sense that the credit networks and their associated parties take more value in that world? I think so yeah.

there has been downward pressure on enter change for a long time. I think industry average right now is downside on two point two four, which is you know compelling considering we started at seven percent, right? That downward pressure has been easy to give on by VISA for things like in person transactions with card present. But for a lot of their super high margin online transactions where the growth is, that's where they decide. Actually, we have really high enter change for that area. So this is sort of a master of packaging, figuring out, you know, how can we take some things and sort of make them more affordable to our merchants or give them away for free, while also figuring out how can we sort of move things around or invent new products that are super high march and that give us a lot of room to run in the future .

up and make sense to do the thought exercise, right? Let's see your physical merchant and you decide to walk away from this a all the credit card networks say your only cash or check. I mean, you probably you're committing suicide as a business bit like you could Operate if you're providing enough value like A T ms exist, you know you can Operate.

There's plenty of cash only bars.

Yeah exactly. But great example. If you're on the internet and you say i'm walking away from the credit card companies, you are literally committing suicide, right? I mean, you could use paypal, I guess.

but your pain just as much for that yeah totally. Unless you are literally getting people to type in their account and routing numbers, you are paying credit card like fees to expect payments on the internet job it's worth sharing. So what we're in the revenue streams here, the money that card issuers make only a minority of IT is actually from the inner change.

And keep in mind, the card issuers are the ones that make that one point six percent. The bulk of the transaction. Most of the money that card issuers make is from interest payments, right?

I mean, their banks, that's the thing. Although back to the beginning of the episode, what was the motivation for bank of america? In the early days, IT was turbo charge my banking Operations.

What is your banking Operation? It's taking deposits, make loans with them, make money on the industries on those loans. Nothing has changed in the banking industry totally.

Visas, incentives are more transactions because we want more point two percent. And the issues, incentives are Carrier baLance because that's where we make most of our money. Yes.

because even though they're getting the lion share of the transaction fee, that's going all right back to the consumer in the form of rewards .

and ati fraud measures and other value added services that they have to buy from VISA. Probably a good time to introduce that six billion that visas doing in value added services that is all brand new high margin products that they've sort of invented in the last ten years or so that they're trying to .

sell to merchants of the higher margin the court product, right? Brand new also high margin products.

right? Merchants, banks, they're basically trying to sell products to people in the ecosystem. And I fraud analytics, and it's working very well. They're king a lot of money on that and y've view that as a py grocery in the future too.

But again, it's a little bit of like shifting things around in the same picture like look, there's downward pressure on inner change and we can demonstrate to you that inner change is going down. Oh, but we have this great product that is helpful and basically necessary that you also should buy. And there's a lot .

of that going on.

all right. So that basically covers the high level stats on the business today so that we can go into analysis and have a general shape of the business were talking about. But you know eleven largest company in the world valued at half a trillion dollars round thirty billion revenue. And they get to keep half that at the end of the day, and they take no financial risk. And they are just moving information around mind blowing.

They get to keep up that after taxes. The end of the day, at this is actual cash in the bank.

right? This is not even this is net income crazy. Are I David power?

That's not good to you. Oh, let's talk.

Power are its a listeners. This is where we talk through hamilton helmers seven powers framework, which is trying to figure out what is IT about this particular business that enables you to achieve persistent differential return and be more profitable than their closest competitor and do so sustainably.

It's an interesting one.

This is a lot like the lucky mark episode, where. I'm actually not sure we can apply the formal definition where we say like what enables them to be more profitable than mastercard because together they're like this government enable, do apply.

And the way that we did this in the lucky mark episode S S, we said, let's look at the five defense contractors as one entity and say, what enables the five of them collectively to outcompete new entrance. And I think that's the right thing to do here with VISA master card too. At the end of the day, via mastercard have basically no sustainable competitive advantage over each other. It's just Operational excEllence whose slightly more clever on the bets they're willing to make for these value added services or next product lines. So yeah.

I think the one area where there is difference between them and is probably less so today, but was quite strong through the nineties and two thousands, was brand. I do you think VISA made a genius move position, sing against american express, going up market in perception and partners with .

the olympics. It's funny, even though it's a commodity like them in mastercard, they somehow .

position themselves that's my brand, Better in these markets.

But you're literally never making I guess it's for the banks because consumers are never making a buying decision on whether it's VISA mastercard. That is not how you decide what .

kind the brand is like the intel inside, it's an ingredient brand. So yes, the banks make the decision, but really the consumers make the decision because if consumers have a preference for these ever master card.

they will demand from the banks. No, there is not differentiate enough to demand that. I just so don't see that any consumer ever has way there. I got the chase safie reserve card five years ago because I was by far the best rewards card for the type of thing that I spend money on as probably with half of our audience. And I think it's a VISA infinite wish i'm sure is one of their high fee things, which is why they can pass on so many rewards.

I think today that's true. But I do think based on the researching as maybe two bias towards VISA, but I think this a did accelerate past mastercard. And I think there was a strong brand element of that. I think it's more equal today.

Yeah, it's interesting. It's funny how I used to feel more like you were getting a VISA card that was somehow like powered by a bank and now IT feels more like you are getting a custom proprietary product that a bank invented for you that happens to either, say, VISA or master card on IT. Yes.

totally agree. Or a merchant.

I mean, when you have the alaska card, you feel like you have the elastic card. You're like, sorry, there's a bank behind this and like a is VISA matic D I don't I don't care. It's the alaska.

Yeah I think there's totally also a story that's beyond the scope of this episode, but how banks and in particular chase eight american expresses customer base over the last set of years.

Yeah I mean, in part that's just bad strategy on M X, is part that you know eventually IT was going to happen that they would not be the scale player being a close loop network. You're just going to be a more niche player. And so how do you win as in each player, you need to retain your highest value customers and your highest margin customers?

Well, they missed the generational transfer. I think they did retain their highest value, highest margin customers. I think those customers are just eighty years old. No.

yes, it's true. I think there are less affluent people in our generation who have m xs verses. The premium products from banks are merchants job. okay.

So VISA master card together, which of the seven powers do they have today? And if you want to also analysis, which did they have early days. And I will start. I think there is an easy no brainer that you have scale economies, any investment that VISA or master card make get emitted zed across sixteen thousand member banks, across four billion cards, across half the humans on the planet, or whatever IT is. I mean, just good luck competing with any fixed cast investment that VISA is gona make. IT will payback instantly if IT works to the except that they can roll IT out to any tiny fraction of their customer base is just so huge that IT fits the scale economies thing where you know if netflix goes and by a piece of content, they can pay more for IT because they can show IT to more people visas. The exact same thing with all of their fixed R N D costs.

Tell me, if you think otherwise on this. I think there's basically like a law of economic nature that if your gross margins exceed call IT seventy five, eighty percent and you are of a certain revenue scale thresh hold like argos, margins succeed seven, five, eighty percent, but like a two percent company with us to minimize amount of revenue in the global economy. But say you're you know in the billions of dollars of revenue scale, you must have scale, economy, power.

right? It's almost stupid to say this one is like, okay, yeah, but that's actually not what gives the business. That's not what's so special about IT. The network economies are what's .

so special about IT? Yes, of course, of course. Yeah, but yeah, you must. You simply must, if you have those margins at that revenue scale, have scale economists.

right? At a great point. okay. Explain to us the network economies.

Well, I mean, this is even Better than the classic two sided tork. This is the classic five sided network effect.

where you have an amplifier on each side because you have the banks going and using all of their scale to amplify your own go to market emotion.

Yep, I think this is also true with network economies, a network power, the more participants in the network, the greater complexity grows and the harder is to actually pull off the network. There's plenty of single side networks like facebook is a single sided network, at least on the user based. There's advertisers, you could argue second side, but everybody's the same note in the newark.

Then there two sides in networks like L, B, N, B is the classic or something like that. There are three sided network out there, probably some four. And clearly, this is an example of the five sided network. But as you add sides to the network, the number of successful examples goes like way, way, way, way, way down because it's just so hard, right?

Because they're harder to pull, but they're so locked in once they're in.

yes. And I think this whole story that we told of how incredibly freaking hard and unlikely IT was that this happened means that you have a five sided network affect business at its basically unBeatable yeah totally .

agree on network economies, I don't think there's much process power. I don't think there's really any switching costs. I in fact, that's probably a bare case to any card company today, is that especially with digital payments, do you don't even have to Carry cards even more? I should go get approved for fifty cards and write a script to make IT so that whatever the most interesting card for that given transaction is pops the top of my wallet. They think there is almost no switching costs anywhere, really, because when any of these banks have their contract up, they just go and talk to these and mastercards say, who gives me a Better deal? Because you guys are both the same.

This is two after the first and I trust lawsuit when duality was introduced in banks. Could multiple before then, yes. After then zero.

Well, yeah. I mean, before then there is interesting analysis to do between VISA and master card.

Now there is none. Yeah, which is exactly what the oc predicted.

Yeah but yeah, there are switching costs between the VISA mastercard oligopoly and someone else, I suppose yes, there isn't another option. Yep, but if you were a bank that wanted to issue bunch of cards that .

weren't VISA or a master card.

I no, that's a close leave network too. Oh, right. They are their own bank. Yeah.

pretty interesting. Nobody else. Counter position, the last one done now I think, right.

you almost can't have IT doesn't come back, right?

But there was incredible counter positioning back in the day we think of america.

They were the only institution in amErica that could pull this off that could absorb the losses that had minimum viable customer based on the consumer side and on the merchant side, that had the dynamics that they did within california that even though new york was still bigger as a state, the market IT was so fragmented there that none of the banks had enough powered to pull this off. They were literally the only one who could do this. Yeah.

absolutely. Right now I think that's .

IT for power. Yep, play book, let's do IT.

The first one is this business is a toll booth. And toll booths make for great businesses, especially when everyone has to drive on your road or the road next to yours, and both of them turns the same toll.

Well put, I going to do my best charly monger, I have nothing dead on .

now on go. The next one that I think is pretty interesting is VISA, as I rather hold any your report, they have a narrative around these new things that they're launching, especially the value at as services being good for consumers and everything that is good for consumers, often for security and privacy is also good for VISA.

That is sort of the playbook that VISA runs as they figure out what is something that we can sort of advertised as a benefit to you that also helps us either increase number of transactions, margin or locking. And that is the way to analyze their entire products with. You hear something has launched like, okay, why? Which of those three needles in for them? That's my main one. I've got more analysis to do and bearable. But what do you have?

The two that jump out to me are one just like our nfl episode, just like our benchmark episodes coming. This capitalism.

yes, the best example. Yes.

a IT is the best example of communist capitalism, certainly that we've ever studied, probably in the world. Hard to imagine what Better. And to, it's like a special breed of coding.

This capitalism, you go to laugh at this that I force out, is democratic communist capitalism, the ultimate ity, right? It's this idea of like, yes, it's capitalism, its competitors spending together to create more value than they could alone. But this is that, a massive scale, like with bench markets, five partners with the N.

F. L. It's thirty, thirty two teams, something like that.

yeah. This is our whole global financial infrastructure that is decided to do this together.

right? This is thousands of banks that have decided to do this together. That is its own separate class of, as I think way, way harder to pull off yeah, ban you know you and meet together like acquired as communist capitalism fresher.

If we were starting a venture capital firm with three of our friends, can we pulled off with five people? sure. Could we pull this off with two hundred banks? No.

right, especially when you're not starting from scratch. I mean, the two hundred banks that they pulled that off with, they all had a agreement in place where they owned a franchise and you have to go to them and say you have to forfeit your franchise and instead sign this other agreement. It's like you're not starting ting from zero.

You're starting from negative. And back of america, the french ise or d had to go to them and say, hey, you GTA for fit the whole asset. That's a great point.

Is that one? And then the other two, you I think it's the twin stories of innovation here, which IT really had tip to dave stern for tipping a cell phone here, the socio technical innovation, the organizational stuff, the communities ital ism, the democratic capital m, everything we are talking about, incredible. Also, the technology story here, incredible. Neither of which, because of this weird nature of who owned IT and how IT was set up, people really understood. But both of Richard, to grow class, incredible stories.

Yeah.

super true. And write here in silicon valley.

who would have thought a success story at a silicon valley? I've gone so beat up over the last few years. They really deserve this.

But that's what I find so funny. Nobody knows that this is a silicon really company.

Do you like run into easy people hanging on .

around services? O exceedingly rarely. Well, I take that back in the tech venture capital world, exceedingly rally in the corner of san Francisco. That very much exists, which is the old money finance.

You can see a bank of america, absolutely, in that world, and Jenny in that world, because those are the folks who are on the board of the ballet, who are the patrons who donors the long time. Chairman of the board of the ballet was the CEO of V Z U S A. For many years. Like there are a lot of these of people in the world here. It's funny though that like you would think that would have black more into the silicon valley world, but I really hasn't.

You would think every tech company would love to be VISA. The financial profile of visas business is more tech than any of the tech companies. IT is what they all wish they could have.

Yes, fascinating. alright. You want to do value creation, value capture, just so. Originally, inner change was supposed to cover the cost of Operating the network, creating a trusted system, preventing fraud, offering innovation every few years to improve the system.

And with the incredible profit margin that VISA makes today, not to mention whatever the card issuing banks make, IT is very clear that the market has evolved such that these players can charge more in a transaction that is necessary to cover their cost. And like i'm not sitting here demonizing anyone who doesn't use cost plus pricing, I am a capitalist. I fully embrace the idea that a business can and should achieve pricing power. If you can position itself to do so in a market.

we're looking for high gross margins to.

right? exactly. But it's interesting that because of the multi I layer network effect, David, that you brought up in the power section, IT is not easy and potentially impossible for the free market to do its thing and have some new player that actually applies margin pressure here.

The free market is clearly not playing out. And other than a big technology innovation that shifts the paradigm in a huge way, these entities have massively optimized their costs and continued to scale in a huge way such that they just get to capture way more value then IT costs them to create. Yep, seemingly indefinitely.

There's a lot more to talk about in bear ball there.

yes. I mean, the word's place that this kind of shows up is the a couple percent plus thirty cents that kind of feel small. Yeah.

the thirty cents is really .

pernicious ous. It's pernicious ous, especially for uh, small transaction item. So like coffee shops, there's an example of a piece that will linked to in the episode sources of A A coffee roaster and shop where their line item of what they had to pay in payment processing fees is actually larger than what they paid for beans.

Wow, that's crazy. Even large retailer ers that run at pretty thin margins. IT is often the case that their ebata is the same size as their card processing fees.

I mean, any time where your average transaction value is less than ten box, that thirty senses a killer.

that's where the thirty cents kills you. But any time that you are a low margin business, which many retailers are, if you're discounter, if you're walmart, you're paying two, three percent of the whole transaction. But when you look at the margin profile, the way that, that gets amplified is that you're paying fifteen percent or more of your available growth margin on that item.

So the only place where this doesn't kill you is if you're a high gross margin, high ticket item business, that when you can be like card fees, whatever, but if you're selling too high Price of goods, then you often get into a scenario where you know you are doing less frequent transactions, more considered purchases, and you can go around the system. This is a bad case on VISA. Are they ever gone to participate in real state? Or cars or, no, not at these in your change rates. Why would anyone ever buckle to pay these sorts of things for things that cost a thousand hours or more? yes.

Well, before we go into bear bow, I know you and we have a lot to talk about what could potentially disrupt VISA and matter card. I think that is worth just one minute on the evalu creation inside of this. And I really think you hit the nail on the head a while back when you said e commerce.

Yes, all the other stuff, we are just talking about the thirty six, everything that is a lot of value capture. There's a lot of value capture that VISA is doing a master card, too. On the other hand, I don't think e commerce really would have happened.

I don't alone. There's plenty of other value creation out there, two lots and lots of a lots. But lets just take key commerce.

I feel like this is passed over. And like, you know, that would have been enough. E commerce would have been enough because I don't think of what had happened without credit cards.

or at least that would have been many years behind because you need to sort of invent some new mechanism .

to enable payments over the internet. That would have been a long slog if paypal had to gain adoption for all payments on the internet to happen.

I had a good point, which by way, paypal is on a shockingly large number of websites today. Paypal has a lot of market power because they they have penetrated america. They are deep in terms of people's preferred payment method, which was something i've been kind of blind to really I .

miss that in the research that's quite surprising to me. Yeah well, that leads a red bearable all yeah payment iles.

And especially interesting company right now because they're strategy pretty well positioned, but they're going through a leadership transition. And so you don't actually know what the new strategy is going to be yet. Yes.

okay, Better able.

Let's do IT well. Okay, bear. And before I actually go into A A tongue tie joke is if they ever get to stop making the insane margins that they do on F, X transactions, that the ultimate bare case, it's something like a hundred times the margin that they make on domestic ones wow, if you look at how VISA breaks out segments here, like, oh my god, the international transactions are lucky, profitable whenever they have to do a currency conversion.

So that's like worth knowing when you're trying to understand the shape of the businesses. The more international, the Better for them. But my real bear case is that their business model has basically always been tied to the digitization of consumer payments.

Ts, ever since they rolled out the three key technologies you were talking about. David, I mean, at this point in global history, which is kind of amazing, we're finally here. Over fifty percent of consumer payments to merchants go on cards. Now that took forever to get here forty years or something like that fifty years. But we will start decelerating because we've already shifted more than have the payments to happen on cards.

right? Or on the back half of the adoption curve.

right. So that is this tail win that has been with VISA forever. Like any time you could come up with any bare case, IT was always just trumped by the idea that, well, more people are going to do digital transaction. So they're just onna out, run any headwinds in their way that will start to slow. It's not like visas.

Core business revenue is going to like flat line or decline or anything like that, but they will have less of the growth tail wind from this amazing secular, a thing that's been happening, which is people shifting payments to cards and digital methods. You know, as the year s progress. My next one is closed loop systems like alipay in ten cense ecosystem.

To the extent that super apps actually happened in the U. S. The way that they did in china, we would be telling a very different story. I am the amount of volume that flows in the mobile ecosystem there that is not a part of of the credit carney system.

I actually don't know if I could have happened here, but the rise of that is super dangerous, and people often will sight like will the starbucks APP is a very good example of people using a digital wallet that's native to a retail here. How many people do you know that reload their starbuck's APP with their direct checking, account routing and account number? Everyone actually loads IT using a credit at that is not bad for them at all. IT only becomes bad for them if they actually get this immediate, where a bank and a merchant go direct to the merchants consumer and manage to initiate a payment flow digitally that doesn't involve a car network. You.

the two things I would want to investigate on the could what happened in china happened here? One, just to build out of infrastructure, happened more concurrently in the payment infrastructures already built out here, technology infrastructure gap built out afterwards. Where is that all happened altogether in china too, though maybe more important as the government influences, I doubt that chinese government wanted VISA do know, a sensible american corporation powering their payments.

There's actually is really interesting. We are deal that got cut between china union pay and VISA where if you use a cup card in china C U P IT uses the C U P reals. But if you go internally where like there is no china union pay turbo at, you know, my local coffee shop here, seattle.

If you were to travel here and swipe IT, IT runs on VISA. But they sort of have the national security benefit and the economic benefit of four people in china, transacting in china. That runs on china owned payment rails yeah .

which you know I mean, I guess that is an associated bir case, right? China in of itself. And could other governments around the world started adopting .

similar postures? Yep, the next one is similar, but a little bit different. Real time payment networks are starting to become a thing. The instant bank transfers that these provide are not exactly a payment system. IT lacks a lot of the features that you would need for payments, like the ability to refund.

That is a prominent one, like when you just initiate a bank transfer, there is no sort of insurance around the charge back or a refund or anything like that, but you could build payment type features on top of that. And real time payments are starting to become a thing in a lot of countries. So in the us, of course, we have fed now, but the adoption of that is slow because there's not a fed Mandate for IT to happen.

The way that this has happened in other countries in brazil, pix P, I X has had very fast uptake. U P, I, in india is another one. The UK has something called faster payments. And this can get a especially scary for VISA when they start working across geography like singapore and india have already linked theirs up. And so that is a method of transfering money between countries that has nothing to do with VISA and that some shares something they are keeping a very close eye and trying to figure out, is there a way that we can become the real time payment system that governments decide that their country should adopt.

And you know, I mean, technology and infrastructure ecosystem is getting built on this, obviously around the world, in youtube and great friends of the show, modern treasury, like they are enabling a lot of this totally.

yeah. Apple, I just think, is like a general bare case here, but here's my sort of specific implementation.

Apple, right?

yeah. So on a apple pay transaction, i'm pretty sure apple makes about as much as VISA does because they stack an extra fifteen basis points on top of the other three fees that we talked about, the one to go to the issue, the one to go to the merchants bank and the one to go to VISA itself.

And so if apple has convinced merchants that is fine, to lose another fifteen basis points on every transaction because it's so freaking convenient that users gets tapped their phones, that is just step wanted an equation. Here's the like really extreme apple payment bulcke. If apple were to have payment terminals, then they could totally run all of those apple pay payments on their own network.

As IT happens right now, you need to have a card issued by a bank that likely is issued on VISA or mastercard or max discover and then IT goes over those payment rails. Apple just puts a little charge on top of IT and then it's the same way any other transaction happens. But if I were to apple pay with my apple card at an apple point of sale, why would that ever need to rudin on visas network? And so apple doesn't make point of cell hardware today.

But if they were to acquire square, or if they were to do something way out of their D. N. A. And go acquire like their phone or a legacy provider, they could create their own closed loop network where they're actually the payment method and the merchants technology provider.

Yep, I actually don't think they need to do that. I mean, their apple, right? They just use ipads and they would have as part of apple pay, they would have apple pay for merit software.

There would be on the ipads. No, that's too hard. That adoption curve sucks. I think they would pay the what square res market cap or blocks like thirty billion or something right now. Apple could totally just go by block and do this overnight and light up .

all the existing merchants you like.

What else you going to do with two hundred fifty billion of cash up? I mean, maybe they would try, but apple is not GTA be in the business of directly having a sales force to sign up all these merchants.

I don't think agreed. I have a counter point to that, but all say IT for the ball. So I little letter here. okay.

I mean, the other thing the lighter weight thing on apple is even if they don't try to build their own close loop thing, who really cares what's in your wallet when your wallet is your phone for consumers? Now, if you are using your phone in your head, your payment method is your phone, and it's like the car underneath. That is not terribly important, other than the fact that you need to remember to auto pay IT.

And like, idea has the one with the best rewards. And that's not what most people are thinking because I think actually in the majority of people don't have rewards based credit cards, but they loaded some card in there, they kind of forgot about that and they pay. And apple is actually the means of payment, not the card.

Even those flowing over the rails. Consumers don't think of IT that way. yeah. So I don't know exactly how that will manifest in chisel away at visas value. But IT certainly is fair to say that the card network and the card issue or have less of a role in the consumers mind than they used to based on the fact that we know of mobile payments.

apple pay and google pay, along with the are, I think, by lake, many, many, many orders amount to the most successfull. coz. I alternative payment systems that have actually gotten installed bases.

right? Google pays very popular too.

Yeah, yeah, yeah. Bit like what else. I mean, they're been another alternative payment systems over the years. And none of the match, at least domestically in the U.

S. Apple and google pipe, yep. So my T, L, D, R, on the bare case is the core business Better is so that till win lessons, the debt networks gets sort of chipped away at more rails emerged for each use case that sort of again has further chipping away at there are available use cases, even if not the actual ones that they're using today, but the ones that they could go tackle in the future might get eaten by other people.

And they spend a bunch of wasted money trying to figure this out. But I know those are the best bare cases I can come up with. And the funniest thing is, when I asked, will think about the people at the end of the show that we had conversations with when we would ask people, hey, what's your bearing ball on VISA? Basically, everyone just gave us a bear case because they're like the all .

cases obvious yeah told and I think the obvious both cases. This is just an incredibly powerful network effect that's fifty years in the making and is five sided. And lord knows I can't think of any other five sided network .

effects writing a secular, increasing market.

writing a secular wave, and nobody has ever broken IT. And past performance is a strong indicator of future performance in this domain.

Yep, the coral area that too is lots of people have had lots of similar bear cases that they've said five years ago, ten years ago. And like none of those things have come true, VISA has just continued to grow, you know, low double digit percent growth every single year, I guess, to your calculation of seventeen percent over fifty one years. People in the past have said many of these bare cases, but have never come true.

So that's kind of the most obvious. Here are a few that are most evident to me that are sort of potentials on top of their core business because IT is true, that interchange is facing downward pressure. I mean, we talk about all the way from seven percent down to two and change.

And so they do these interesting other things. One benefit to them of digital payments. We talked about the potential drawback back with apple being able to maybe this immediate in some way.

That's not exactly clear yet is organization. So the way that apple pay works is that your card doesn't actually get sent to the merging your card number. None of the identifying information on there goes.

Instead, your card gets token ized and a token representing your card does, which is, as VISA will tell you, amazing for security and privacy. What IT also does. This allows them to create more proprietary services.

In the old card number system. There was a lot more flexibility in what a merchant and their payment processor could actually do with the literal information on the they could choose what network to run IT on. There was sort of more optionality with IT when you had the raw information and now visas like, hey, we got to token.

Do you want us to do any of the cool token base services that we have with IT? And like those are high margin for us. And so that sort of the toga ization is good for them.

They now have more digital tokens than card credentials that's been growing really fast and doubled last year, their sort of tokens on their network. So VISA quote on this is this Marks a huge milestone, one both for the transition to digital and in our work to secure the wider payments ecosystem. And you Better bet that that's good for, you know, long term margins and layering products later on other bull cases.

So this is like my favorite one from there, the member, the invidia slide of the trillion dollar a time. So here's visas version payments. All of payments is about two hundred trillion dollars of volume, and cards are only twenty trillion dollars.

So here we've been playing in this tiny little for action of the available market. And there's a few things that they call out that they want to move into that B2B pay ments is abo ut a h ut ton and twe nty tri llion if the y can acc ess IT. B to b commerce is actually just much larger than B2C com merce.

If you think about the amount money that flows over invoices that are paid via A C H R wire VISA, I think is intensely aware that they're not going to take two and a half percent in a change on a company invoice, another company for a million dollar services provided thing. But you know there are elements of B2B tha t do hav e in a c ha nge. I mean, if you're issued a rambow bricks card and you go swipe that, that's A B to b at transaction.

So they're very excited about addressing B2B, both in their further pushing cards but also developing B2B spe cific pro ducts tha t hav e mor e app ropriate mon etization mod els. And then they also we've been talking a lot about consumer to business. Like when I decide to pay for something at a business, if you flip that business to consumer, that is a thirty trillion dollar time for a thirty trillion dollar volume addressable opportunity.

And you can think of that as like, uh, insurance company needs to like. Pay payout after a car insurance and they need to make that happen fast or a refunds. Let's say you never bought anything, but a company still needs to send you some money or like uber needs to pay their drivers this sort of there is a whole business theyve created called VISA direct, which is the business to consumer push based payments, which is a kind of a new foray for them.

And then the last one is just expansion of crossed border payments. If they can do more international transactions, that is hugely, hugely profitable. So those are my that is me trying to faithful ly represent the bull case that VISA paints for their shareholders. Because, David, these bulk es are so easy. You should read in your report the whole things .

of one of the additional said I was going to add on bulky sort of as a response to the apple and by association, google bear case. Pretty everybody we talk to point IT out as the number of one most obvious bear case for VISA right now is apple and google and the incredible progress in inroads that they have made into rails and transactions. But as you say, all those transactions are still just toga ized VISA master card cards.

right? It's a broadcast today.

Yeah, it's a broadcast today. You know, there may be no on that are missing here, but if you play out how, let's say, apple decides, okay, we want to go after VISA. I'm not sure how apple could actually do that really without becoming a bank themselves.

You know, I M X is a closed loop system, is a bank discovers close slip system? It's a bank. Does apple want to be a bank?

Or they could become like a stripe?

Yeah, I guess so.

Or like a square, there are the technology providers, and they have merchant acquire r banks behind them.

Yeah, sure. They could do that. Apple's finance and fin tech Operations do not exist in a vacuum. Is apple gna take on the risk to the apple franchise of all the regulation and scrutiny that .

comes from that IT depends. Apple will eventually saturate their market and they are looking for what the next frontiers and two hundred trillion dollars of volume moving around the global economy.

I think, yes, absolutely saw nothing in this won't happen. But tim cook board level discussion on this, alright, let's play out the d hoc thought exercise. Apple succeeds.

They do IT. They eat VISA visas. Market cap is now added to apple's market cap. great. Apple's market cap to screwed by twenty five percent.

Well, that I think they have to think that they can improve something. They won't go into this unless they think they can improve both the user experience and create a Better business out of IT. Good boy, good boy. And I mean, the vision pro will come out and we will have to see if that is the future or not. But post that like they're gna do a car or they are gonna into payments.

they to keep going after bigger, bigger.

keep your the cute apple that we know of past is gone. And we have to think about like what would a good capital alligator do with their strategic position.

I'm not making the argument that there is still a cute apple. I'm just saying like I think actually entering the arena introduced a significant amount of risk to the whole that they have to way in a way that some of .

these other markets don't. Yeah, that's super true. Okay, I have one trivia thing for you before carve's. You may already know this, but did you know that you can get a bank amErica today?

I did not. Is IT like a branded VISA product from bank of america?

IT is a branded product from bank of amErica available on bank amErica outcome. There's no one you'll feed. Click on their website to apply now. And the beautiful irony that will tie a bow on this whole episode is the bank americard credit card by bank of amErica runs on master cards.

As user started to set that up, I was like, I know where you're going with this. I know where you're going with this into bank for the way.

Willing to, in the show notes, get yourself a bank amErica ard and run your transactions of our master cards. Beautiful Stellar network.

Ww, how? Arias, what a great place to leave the story.

There can be that many people that are applying for this thing. And you would think that VISA would try to go get this deal done just for installing gia purposes.

That's a crime against internet business history. What a story, man.

uh, truly. okay. Covets car vets. Mine is available on netflix. IT is a show called, I think you should leave. I have not left this hard in a long time each episode. Des, like fifteen minutes. It's like three comedy sketches with a guy named tim Robinson, is sort of the brains behind IT and is in many of the episodes.

So we were talking about this.

that our drinks to new york. Yes, if I were you listening ers, and you haven't watched this yet, I would go to season three. Episode one.

My favorite ski of them all starts approximately six minutes in actually the whole episode. But the switch two and three are the truly unbelievable ones. But it's just he's so outlandish and so I don't know. It's like everything that sketch comedy should be in the absolute highest production value you could possibly imagine, shot very convincingly, I think, using the same photographer, but using a completely different set of lenses, lighting sets, post production, such that everything that they are trying to emulate, whether it's a game show or a dating show or a commercial, feels like the appropriate think that you're trying to emulate.

It's just really good. That's amazing how to check IT out. My carve out is a book I think is my first fun fiction book in a while.

First born by Brandon sAnderson, IT is a awesome financial, the first in the series. We can read IT as a stand alone too. It's been out for a long time and has many, many passionate fans out there. IT was recommended to me by great friend of the show guy, a journey the founder of sneak time we got together, which is super fund sneak, is an amazing, very large cybersecurity company that i'm sure many .

of you know about fos on developers, right? Yes.

depreciate. You see their billboard all up, down, one of one here. And so is go.

But yeah, he recommended IT to me a while back, and IT took me a while to get to IT know, totally parenting. But I read that I thought was awesome. Jenny read, IT SHE loves.

She's, of course, now done the whole series because she's a very aci's reader. The world building, the magical system, all the core funy elements are really great to political intrigue. Highly recommend.

awesome. Well, we definite a few. Thank you on this one. Uh, huge. Thank you to dave stern for spending the time with us and recanting his academic thesis. And I was just awesome reading the book.

I have a personal thank you to good friend of mine, Jason, pint of pad. Very helpful to get just general high level thoughts on payments industry. Thank you to lisa.

Alice from muffet nath's son lisa did an amazing interview with ben thoms in a few weeks back. If you are a strategy ery subscriber that is totally worth reading, and I preferred listening, so go listen to that. After I read that, I shot her email and I was like, word out to do this.

I would love to talk to about some of this. So a huge things to her good friend of the show, demetri from modern treasury, for helping us quickly get up to speed on payments and good front end of mine. And David, both bene idols, who is a former product person from stripe, sign up for emails to find out about the latest acquired episodes to get in on our teasers of what the next episode is gna be.

And here, the follow ups and corrections. After we learn them from, you should join the slack, acquire data, m, slash, slack. You should check out A C, Q two. In particular, our next episode and is not out yet, is going to be a follow up to this episode on VISA. Our buddy garv from thrive capital is joining us for a follow up to analyze the payments landscape today.

And graph has spent his entire career as a founder and investor in fin tech companies, and they actually gave a talk on the history of credit cards that we used for research in this episode. So check out A C Q to search and subscribes in any podcast player. And then the next week, maybe two weeks, our interview with gore will come out and be sure to check IT out with that, check out the merge store, acquire e dota m slb store and sports some of the sweet wearing the shirt right now.

sweet swag around pay change fees.

That's right. That's right. And with at lessors.

i'll see next time. I'll see the next time. Truth is that you with that, you with a you who got the truth.