How Was Visa Created?

Have you ever thought to yourself "Man I'd love to have a toll-road on the entire global payments system"?

Well so did Dee Hock.

Here's how the "Father of Fintech" built Visa into the world's most powerful payments company:

The old way - To properly understand the role Visa plays in the payments ecosystem, it's helpful to look at the old way of facilitating transactions. In the early 1900's, installment credit was popularized.

This meant that merchants and manufacturers started letting people buy items without putting all the money down at the time of the purchase. This certainly wasn't ideal.

Merchants had to asses each individual customer's credit-worthiness and bear the risk of a late repayment, along with all the back office work of managing each account.

Due to these headaches, most banks at the time refused to write installment loans. Except for one, Bank of America.

Introducing BankAmericard - In 1958, Bank of America introduced the BankAmericard credit card. To get people to actually use it, BofA performed what's now referred to as "The Fresno Drop".

They pre-approved and sent cards to everyone in Fresno, California as 45% of the residents there already banked with BofA. This was actually quite successful as merchants were grateful to offload the headaches of managing the process.

BankAmericard expanded into other cities in CA and BofA attempted to expand nationwide. But that's where they ran into problems.

Due to regulation born out of the Great Depression, banks weren't allowed to have out of state customers, so they had to franchise the BankAmericard program out to other banks. This made authorizing transactions very difficult.

A Typical Transaction - Imagine you're buying a couch from the furniture mart and you and the furniture mart both have a different bank.

If you went to checkout with your BankAmericard, an attendant at the furniture mart would have to call their bank, who would then put the attendant on hold while they called your bank. Then your bank would put the furniture mart's bank on hold to go see if you had a large enough balance to approve the purchase. And throughout that whole process, you're just waiting there at the checkout stand.

But this was just the authorization phase.

Behind the scenes, the banks were sending reams of sales receipts and reimbursements to one another every day to actually settle the transactions. The entire system was wildly inefficient and costly for the banks involved.

The new solution - In 1968, Bank of America held a meeting with all its member banks to sort out the issue.

At the meeting, a VP at the National Bank of Commerce in Seattle, WA, Dee Hock (shown above) expressed his frustration of the current system and encouraged the formation of a separate organization that would be co-owned by all the member banks and solely focused on automating the backend.

In his biography Hock wrote: "Any organization that could guarantee, transport, and settle transactions in the form of arranged electronic particles twenty-four hours a day, seven days a week, around the globe, would have a market—every exchange of value in the world—that beggared the imagination."

By the end of the meeting, Hock was tasked with building it. And after about a year and a half, the base for this business was established. This organization was initially known as National BankAmericard but would eventually be renamed Visa.

A network effect for the ages - As more and more banks adopted Visa to offload the burden of authorizing and settling transactions, Visa added increasingly more "rails" between banks.

As the leading connector between banks, there was a great incentive for the next potential bank to join.

This has become the enduring and self-reinforcing cycle that still drives Visa today.

If you want to see how some of Visa's other metrics (Take-Rate, Transaction Volume, Processed Transactions, etc.) have progressed, check out their Segments and KPI's at FinChat.io.