Cant mention the history of Visa without mentioning Dee Hock [0], who analysed the ecosystem and deliberately structured it in a way where it could thrive despite the mixed incentives of all the parties that contribute to it [1].
This quote on why he resigned as CEO just as it was proven to be so successful:
>> "It’s the organizational concepts and ideas that were essential. I merely came to symbolize them. Such organizations should be management-proof.”
If you have dealt with large, completely incompetent organisations and wondered how the hell they actually keep going - theres your answer. If built correctly it's genuinely difficult to mess things up.
> If built correctly it's genuinely difficult to mess things up.
...but that also implies that it can built in such a way that it's genuinely difficult to improve, too, right?
I worked in state government for a while, and I noticed that whenever the governor switched, all the upper management switched too. All the new people would be gunning to start some big initiative that would look good on their resume (and they'd not be around for the aftermath). There was a lot of institutionalized inertia resistant to these efforts, which I eventually decided was basically survivorship bias - anything not resistant to change would stumble and fail in the face of such regular (and often wasteful!) pet projects. What resulted was the stereotypical concept of bureaucracy today.
But here you are saying that such inertia can be designed into the system. Interesting...
The natural ebb and flow of political appointees in government is a great example of it. Good civil servants can make things go great.
Where government performs very poorly is typically where both the formal and informal leadership networks are not up to the task. Brilliant appointed leaders exist and can do amazing things. The informal leadership and machinery requires care and feeding, and tends to fail spectacularly when it's ignored or actively undermined.
I didn't mean to imply it was! What it is, however, is resistant to change. Often that's a feature, not a bug.
I've often generalized things as "govt is good at reliable, bad at efficient, while private industry is good at efficient, bad at reliable" . (The entire idea of competition is that companies can and will go out of business, switch markets, etc).
Thus, I personally approve of private industry where I care about efficiency more than reliability (say, garbage/recycling/compost pick up) and govt where I care about reliability over efficiency (say, childhood education). This is also why I personally oppose most "public-private partnerships", as they tend to take the reliability of private industry and add the efficiency of govt.
To agree to your point about leadership - most of the pet projects to arrive from upper leadership failed to last, often failed to ever get past early stages...but those projects that DID survive and became part of the new process were able to do so because enough people pushed for it long enough and hard enough, which serves as a decent barometer for what is important.
Here I've been associating govt and bureaucracy, but that's only a generalization - large corporations (and smaller ones, occasionally) can have plenty of bureaucracy, for the exact same reasons and with the exact same outcomes (both good and bad).
Another benefit of beauraucracy, which I think is understated, is that it might be our best antidote to corruption.
When you have a networked system of approvals and records, and people whose livelihood depends on them maintaining those records in good order, it can become more risky and expensive to buy favours and break the rules than to follow them.
But you need both a good beauraucracy, and a culture of civil servants that value honesty and good order and following-the-rules. A good beauraucracy can reinforce those cultural values, and vice-versa. But just one half is not enough.
I wanted to keep it very high-level so that a 10 year old could understand so unfortunately some things had to get left out; like Dee. I did link to his book as part of the further reading/resources at the bottom of the writeup though.
It was such a well written article, both part 1 and 2. Subscribed to your RSS feed now.
One thing if you are interested you should look into is how Visa and MasterCard are basically shunted out of the next generation payment systems in China and India. It actually shows they just can’t keep expanding with economy as competitors either complexly bypass them (WeChat/Pay, Paytm) or the government builds their own (Rupay, UPI by NPCI) which leaves them trailing.
UPI is a system built by National Payments Corporation of India and it is now the most dominant payment system in India in less than just over 3 years since its launch. They support both offline and online payments and increasingly people are not even thinking about credit cards.
I’m still a fan of credit cards and their utilities but increasingly competition is catching up to established behemoths Visa and MasterCard.
> If built correctly it's genuinely difficult to mess things up.
Indian Space Research Organization (ISRO) [0], Indian Institue of Management - Ahmedabad [1], and (the not so known) Physical Research Laboratory [3], premier institutions in India, all of them founded by the same person - Vikram Sarabhai. Each of them stood the test of time.
Given the situation of all other government run institutions in India, ISRO is truly a marvel. Maybe "it's genuinely difficult to mess things up"!
Intersting. Eventually he left to farm a ranch west of silicon valley. His prose is poetry:
In his 1991 Business Hall of Fame acceptance speech Hock explained:
“ Through the years, I have greatly feared and sought to keep at bay the four beasts that inevitably devour their keeper – Ego, Envy, Avarice, and Ambition. In 1984, I severed all connections with business for a life of isolation and anonymity, convinced I was making a great bargain by trading money for time, position for liberty, and ego for contentment – that the beasts were securely caged.
While Visa and MasterCard are household names in the western world, there's a similar oligopoly (and similar history) in airline bookings system, which is largely unknown to people outside the domain.
Majority of worldwide airline bookings go through Amadeus/Sabre/Travelport, who similarly get a cut on each transaction. (The GDS industry has long been thought to decline _just in a few years_ but for now it still stays rather strong - although big airlines are actively trying to get more independent). The net incomes are about order of magnitude lower than credit card industry, but that's still hundreds of millions per year.
Tech debt accumulation from the 1950's onwards to now basically. The GDS are integrated with everything from check-in, rebooking, ops center, etc. Lots of companies looking to change this, and some airlines have been able to modernize. But it's a fraught process that can lead to mass cancellations during the upgrade period as stuff breaks.
Quite naturally, I started looking at how other major providers - Mastercard, Amex and Discover caught up to this interbank transaction labyrinth. Here's what I think after a quick look.
- Mastercard seems to have been a direct response to the growing popularity and profits of BankAmericard. [1] It started about the same time (mid 1960-s) which probably explains its growth and ability to bring enough banks in its fold.
- American Express was founded back in 1850 [2]. If I go by the original article, it appears Amex was not on the credit scene (certainly not the pioneer?) during the Americard boom. Do we know how it compensated and captured almost a quarter of the market in the US [2]? Second-mover advantage?
- Discover is the "third largest credit card brand in the United States, when measured by cards in force, with nearly 50 million cardholders" [3]. Two key acquisitions may be explain this - Pulse (an interbank electronic funds transfer network) and Diners Club (the original daddy from the article). There is no citation the Pulse acquisition but I'd assume it is an old network. The Diners Club network probably was a healthy addition to their customer base outside the US.
Yes Mastercard was in response to the success of the BankAmericard. Banks were much more regional in the 1950s-1960s because of a federal law that prevented them from operating outside of their home state.
Bank of America was the largest bank in the largest state (California), and had the most successful credit card program (the BankAmericard). When they began franchising the program to other banks, it made sense to concentrate their efforts in states near California.
Mastercard (at the time known as Mastercharge) was formed in response by a bunch of East Coast banks.
Re: Amex... they were big in the traveler's cheques business around the time that Diner's Club launched. Diner's Club proved the model, and Amex leveraged their extensive traveler's cheque network and wealthy user base to enter the market.
>> These are the hallmarks of one of the best businesses on the planet.
The "best business on the planet" is effectively a tax on economy growth? They don't even reinvest their profits - they return them to shareholders. So the value of the "best business on the planet" is that it takes a percentage of every transaction and funnels it into the personal wealth of Visa shareholders?
That kind of platform business should really be run as a non-profit, and instead of paying dividends, should reduce processing fees to where it just covers operating costs and capex.
Instead it sounds like it's just a driver of inequality simply because they have a captive market and no real competition. I suppose that's the "best business" under a very specific definition of best.
But in terms of making the world a better place, I don't think so.
Don't under-appreciate the benefits of having a portable, globally-ubiquitous, safe, instant method of consumer credit that is accepted by millions of merchants.
Imagine it's 1920 and you want to buy a sewing machine, which is 3 months salary. You could save up for years, during which time you're not able to sew any clothes. After you've finally saved enough, you walk over to the merchant with a wad of cash. On the way, you get robbed or lose the cash. Tough luck; no sewing machine, no money. And as for the merchant, they lose out on the sale until the time the customer has enough cash.
But maybe the merchant is willing to let you spread the cost over time. Great, now you can afford the sewing machine earlier and the merchant can book the sale sooner. But now the merchant has to hire staff to process bills and collect payment, they have to asses how likely each customer is to repay, they have to physically mail invoices and then drop payment off at the bank, etc. And every time the customer wants to make a purchase, they have to go through the long approval process with each individual merchant they shop at. No one likes waiting in lines.
Fast forward to Visa/Mastercard...customer walks into practically any store in the world, hands over a piece of plastic (or taps their phone), and walks out with any item. They get an instant, no-questions-asked personal loan.
1. Great for merchants because they reap all the benefits of extending credit (e.g., higher sales) without any of the credit risk/back-office headaches;
2. Great for customers because they can buy anything, anywhere, instantly, regardless of whether they have enough money in their account at that particular moment.
And neither party has to worry much about fraud, losing money/getting mugged, getting ripped off, etc.
This enables literally trillions of dollars of spend and economic growth. I think that's worth the ~$10b profit Visa makes.
The profits returned as dividends are pure rent extraction and essentially a tax on global economic growth.
That's why it should have a different structure. The mystery is why the member banks allowed it to become a for-profit entity and why governments continue to allow it to suck profits from their economies.
I'm sorry but why is what Visa does considered "pure rent extraction" versus any other for-profit business?
Merchants may often gripe about the fees they're paying per transaction, but this ignores the tremendous benefits they receive. Yes, a huge retailer like Wal-Mart or Costco has the resources to extend credit, develop POS software, establish relationships with thousands of banks, etc. But do you think the corner bodega does? Or a restaurant that has 1% margins? It may sound simple: "eliminate cc fees and the merchant's margins go from 1% to 3%". But then you're hunting down customers for payment, mailing invoices, extending credit for 30-60 days. There's a real benefit to working capital to getting paid as soon as you swipe that card.
As for why this is the structure...well, it used to non-profit and co-owned by all banks and it worked okay for a bit, but it's harder to balance incentives. And, banks were strapped for cash in 2008 (time of IPO).
I would also disagree with your assessment that it "sucks profits from their economies". These networks truly create far more economic value than they themselves keep. And what they do keep isn't going up into outer space or getting incinerated....
Other places like Europe, Australia have capped interchange rates through regulation. Many countries have domestic cards with much lower (or even flat yearly rather than per transaction) fees.
The fees don’t have to be as high as they are.
Costs to chance delinquent debt should be included in the interest calculation
You said it yourself. Their capex is flat (in real terms?) and their marginal cost per transaction is zero. What happens to the per-transaction fee? It looks like it almost all goes to shareholders as dividends.
That's funneling money from the entire global economy into the accounts of a few wealthy shareholders and institutions in the west. That's pure rent going to capitalists just because they have the dominant payment platform.
No doubt that it creates economic value, that's why people use it! But a non-profit that charged fees just enough to cover operating costs would do just as well and leave money in the local economies where the payments are made instead of contributing to global inequality.
> They don't even reinvest their profits - they return them to shareholders.
Yes, they leave it for their shareholders to decide how they want to reinvest their profits, as opposed to making this decision for them.
> So the value of the "best business on the planet" is that it takes a percentage of every transaction and funnels it into the personal wealth of Visa shareholders?
Yes, this is literally the only thing they do. They provide no service whatsoever, and it's strange that merchants decide to give them a cut into their profits for no reason at all.
> Instead it sounds like it's just a driver of inequality simply because they have a captive market and no real competition.
Yes, the company with ~20% of global market share has no real competition.
Instead of a non-profit, it should simply be nationalized and run as a utility. This not only eliminates the "tax on transactions", it would also transfer Visa's enormous power to structure markets (by cutting entities out of the payment processing system) from a private corporation to a body with at least some democratic accountability.
I would certainly draw it much closer to the public interest that it is now by most countries.
In particular, "platform" businesses like Visa, Google, Amazon, etc. should at a bare minimum restricted from competing with the users of their platform. Ideally, the social value of the platform would be made public by a government buyout (aka nationalization) instead of flowing to the hands of the few select shareholders of the platform or subject to the whims of the platform company's executives.
Complete mystery why they allowed it to become a for-profit entity. Are those member banks now shareholders? Does that mean they are profiting on the backs of all new entrants?
Building a worldwide payment network creates more transactions and more value than whatever profits Visa makes from it. If a non-profit version didn’t work as well, the loss in economic activity would more than offset whatever was saved in Visa shareholder profits.
Everything about how they make money and the value of the business model is correct, but i'm not sure its the time to be bullish on schemes:
- National switches are surely eroding domestic transaction volume in the markets where they are deployed
- Im not aware of a schemes playing a central part in any of the big wallet based payment systems taking over POS
- Non-bank / non-scheme pay later systems are growing extremely fast amongst younger demographics at least here in SEA
- (Im guessing) that with increased financial literacy the profitability and popularity of credit cards is decreasing
There have been some really interesting developments (Eg MC assisting international cash out for large marketplaces), but the core business isn't looking anywhere near as stable as it was 10 years ago.
China is also an interesting example of a large, increasingly developed country where credit cards are barely used: they went straight to electronic payments with Alipay/WeChat Pay. There are a number of companies in SE Asia and India trying to replicate the model, and many are starting to get traction: PayTM, GrabPay, Gojek, etc.
As far as I know, most of these payment networks don't extend credit to customers in the same way that Visa's network enables. Consumer credit is a very powerful force that is often under-appreciated, and that benefits all parties involved in a transaction (e.g., consumers, merchants, and banks).
I feel credit-cards-as-credit is mostly an American thing, basically everyone I know in Europe treats their card effectively as a debit one, the only difference being you could not rent a car with a debit one.
Some people don't even know the difference and get surprised when their card cannot be used for some credit usages.
Yep. Typically the the role of credit facilities is supplied by a different class of app, eg. Klarna, Kredivo, Akulaku. Though the wallets are now providing their own, eg Alipays Check Later, Gojek & Ovos Paylater.
I was told the decision to use a one-time seeded cryptographic key to sign over the original card partners (when they adopted PKI) and then destroy the private key caused some ructions when the tech execs wanted to keep shards of the destroyed hardware in lucite: sombody was concerned key recovery would be possible.
In Norway all the banks come together and created BankAccept as an addition to VISA, where they put some extra information on the card and bypass all the VISA fees for usage in Norway. The other Scandinavian countries have done the same.
Only if you pay online (with the credit card number) will the fee apply.
That's excellent. We have too many blood sucking financial people and they are draining the life out of the USA, producing nothing of lasting value!
Credit cards are solved problem for the last 30 years. The fact that they take 3% to 4% of every transaction and then extract a usurious 20% annual interest rate at a time when loan rates are 4% should be criminally prosecuted.
A 1% cut and 3% over prime rate interest rate (currently 5.5%) should be mandated by legislation!
Credit card loans aren't collateralized and can be spent on almost anything so the risk of default (without collecting the principal) is higher, at least in theory. Usually most consumer loans, like car or houses, are easily collateralized. Can't do that with a vacation to the bahamas
The reason for the higher interest rate is due to loss and fraud costs.
Traditional loans (car, house, HELOC, etc...) can have much lower rates because if there are assets that are put up as collateral (the car, house) that can be repossessed and re-sold by the bank; while in the case of most credit card purchases there is no recourse for the issuing bank to recover the money that owed to the merchant bank.
As long as you live within your means (i.e. pay your balance off every month) a credit card can a convenient payment mechanism
> The fact that they take 3% to 4% of every transaction and then extract a usurious 20% annual interest rate at a time when loan rates are 4% should be criminally prosecuted.
The fees seem to vary a lot by region. Here in Finland majority of cards are VISA/MC (with no local version like described above for Norway), but the card-present merchant transaction fees are low - e.g. ~0.3% for EU consumer debit cards and ~0.9% for EU consumer credit cards.
Interesting stuff. I always knew of the different parties involved in a CC transaction, but this explained in a super simple way. Kudos. Weird that there is no about section and wth is the author ?
(Error) Bank Americard actually changed their name because they wanted to expand internationally and having America in the name was not good in every country. That's precisely why they chose the name VISA.
MasterCharge got started just a few years after Bank Americard. I feel like they probably changed their name to MasterCard just to respond to their competitor's name change....
Started by BankAmericard by Bank of America in CA only. They then franchised it to other banks in neighboring states, and eventually international banks (I believe under the BankAmericard brand, or under the other bank's brand). And then in the mid 1970s all the participating banks decided to rebrand under "VISA".
Did Bank of America retain its original 0.5% agreement with the other banks when they spun off visa ? It seems odd that they would just give up an asset like that for other banks to own it.
And funnily enough, recently even Bank of America started issuing MasterCard credit cards. The pioneering BankAmericard that started it all is now a MasterCard.
The site isn't about mine safety disclosures—it's just a name.
A quirky requirement that came out of Dodd-Frank is that ALL publicly traded companies are required to make a disclosure about mine safety, regardless of whether or not they even have mines. So if you look at Visa's 10-K, or Google's, or Chipotle's, they all have a line item for mine safety disclosures.
I'm guessing it's a tongue-in-cheek nod at the requirement for Mine Safety Disclosures you'll often see as a blank section in company filings. It looks more like a finance/investment website.
It's interesting (and great!) to see this level of research and attention to detail in a blog. Do you mind if I ask why? Are you gathering potential users for a product, service, or startup in this space?
No myth. It was the first CARD and line of credit that could be used at multiple merchants. Prior to that, you had a line of credit with each individual merchant.
Is it possible for any decentralized currency to effectively remove the middle man and the fee associated with it or would it be more like the current credit system start using more efficient technologies that make transaction fees cheaper and we keep them around.
This quote on why he resigned as CEO just as it was proven to be so successful:
>> "It’s the organizational concepts and ideas that were essential. I merely came to symbolize them. Such organizations should be management-proof.”
If you have dealt with large, completely incompetent organisations and wondered how the hell they actually keep going - theres your answer. If built correctly it's genuinely difficult to mess things up.
[0] https://en.wikipedia.org/wiki/Dee_Hock
[1] https://www.fastcompany.com/27333/trillion-dollar-vision-dee...