Visa (Audio)

To paraphrase Visa founder Dee Hock, how many of you know Visa? Great, all of you. Now, how many of you know how it started? Or, for that matter, *who* started it? Who runs and governs it? Where is it headquartered? What’s its business model? For the 11th largest market cap company in the world, Visa’s history and strategy is almost shockingly unknown. A huge portion of the world’s population uses their products on a daily basis (you might say Visa is… everywhere people want to be), but very few know the amazing story behind how that came to be. Or why Visa continues to be one of the most incredible and incredibly durable business franchises of all-time. (50%+ net income margins!! On $30B of revenue!) Today we do our part to change that. Tune in for one heck of a journey. *Links:* - Burger King rolling out credit cards in 1993: https://twitter.com/historyinmemes/status/1703199359838679042?s=12 - Get your BankAmericard MasterCard today! (!?): https://www.bankofamerica.com/credit-cards/products/bankamericard-credit-card/ - Episode sources: https://www.acquired.fm/episodes/visa#sources *Carve Outs:* - I Think You Should Leave: https://www.netflix.com/title/80986854 - Mistborn: https://www.amazon.com/Mistborn-Final-Empire-Brandon-Sanderson/dp/0765377136 _Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions._

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Ben Gilbert?

  It's funny, when we picked this episode, I was like, oh, this is gonna be pretty down the middle and easy. And then, of course, as we get into the research, as always, it's like, oh, nope, big story here. Yep, there's always a story.

• 0:28Ben Gilbert?

  Welcome to season 13, episode four of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert. I'm David Rosenthal. 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, Mastercard, has tirelessly spent decades stitching together all the banks, merchants, and the relationships with consumers to make this possible. Now,

• 1:09Ben Gilbert?

  this is just the rosy side of the story, and merchants may harbor far less rosy feelings about Visa, given how much of their profits go to interchange fees. But the duality 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 it captures and by whom, in what situations. So here are some astonishing stats on Visa. It is the 11th most valuable company in the world. It is worth more than any bank in the world, including every bank involved in creating it. Visa's brand is among the very most trusted in the world, associated with

• 1:52Ben Gilbert?

  reliability and security. But that said, if you asked most people what Visa does, they could not actually articulate it. Visa does not extend 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 is insane.

• 2:20David Rosenthal?

  This is such an insane story. I can't believe we're all the way in season 13 and we haven't talked about this company yet. But as we will get into, it's always been overlooked and underrated.

• 2:30Ben Gilbert?

  Well, perhaps not underrated the last decade or so. If you listeners want to know every time an episode drops, you can sign up for email updates at acquired.fm/ email. Two 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.fm/ email. And the emails have another new feature. We are including follow-ups from previous episodes when we learn new things from you after release. Come talk about this episode with us after listening at acquired.fm/ Slack. And if you want more from David and I outside of these big, long, main acquired episodes, check out ACQ2, our interviews on a second

• 3:14Ben Gilbert?

  podcast feed. Now, without further ado, this show is not investment advice. David and I may have investments in the companies we discuss, and this show is for informational and entertainment purposes only. David Rosenthal, where are we starting today?

• 3:28David Rosenthal?

  Well, we are starting, actually, with a big thank you to Dave Sterns, author of what is undeniably the very best book on Visa and its history, Electronic Value Exchange. And we owe a thank you to Dave, both for writing the book and for talking to us as we researched and helping us sift through everything as we're preparing here.

• 3:46Ben Gilbert?

  Fellow Seattleite and the book, which is so wonderfully esoterically named, Electronic Value Exchange, was his, I think, PhD thesis that they sort of turned into a book.

• 3:55David Rosenthal?

  Correct.

• 3:56Ben Gilbert?

  All right. Take us back in time.

• 3:59David Rosenthal?

  So, Dehak, 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 kind of 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. Then he 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 they would say, how did this company start? No hands. Who runs it and who governs it? No hands. Where is it headquartered? No hands.

• 4:44David Rosenthal?

  It's just wild, as we were saying in the intro, how important this company is. And yet, still, to this day, I think, you know, maybe a few more people than in Dee's time know the answer to these questions, but not many.

• 4:56Ben Gilbert?

  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.

• 5:03David Rosenthal?

  So our task today is to tackle Dee's questions. And we start where some of you, I suspect, know, but the vast majority of you, I also suspect, don't. We start in 1958 in Fresno, California, with the drop.

• 5:21Ben Gilbert?

  The drop. This is the name of the title in this fantastic book, A Piece of the Action: How the Middle Class Joined the Money Class, and it's chapter one, The Drop, 1958. The drop has become like, if you say the drop to someone in the fintech industry, they're like, oh, September 1958, Fresno.

• 5:39David Rosenthal?

  Yep. And the rest of the world has no idea.

• 5:43Ben Gilbert?

  Yep.

• 5:43David Rosenthal?

  All right, so what happened? Well, the then largest bank in America, the San Francisco-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.

• 6:07Ben Gilbert?

  And the reason it was named Bank of Italy was it was started by an Italian immigrant who wanted to create something for the underbanked Italians in his California community.

• 6:15David Rosenthal?

  Yeah, mostly farmers and merchants in San Francisco. It really started as like the Bank of the Little Guy. So Bank of America decides that they are going to mail out little rectangular pieces of plastic. To every single one of their 65,000 customers in the city of Fresno, completely unsolicited. Now, a couple of things about this. One, it's wild. I think the Fresno population at this point in time was like maybe 200, 250,000 people. So like a huge portion of the city of Fresno banked with Bank of America. And that was true for all of California at the time.

• 6:58David Rosenthal?

  Two, 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 ensues.

• 7:06Ben Gilbert?

  Well, and certainly, nobody asked for them. There's this great quote, again, from a piece of the action that describes it and says, "There had been no outward yearning among the residents of Fresno for such a device, nor even the dimmest awareness that such a thing was in the works. It simply arrived one day with no advance warning, as if it had dropped out of the sky."

• 7:25David Rosenthal?

  All right. 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 and payment industries in the US more broadly. So like we said, B of A was the biggest bank in America in the 1950s. 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 then were like the JP Morgans. They were white shoe corporate banks based in New York. We talked about this a lot in the Nike episode. It was illegal for banks to operate across state lines until much, much later in history. So for banks back then, the only way that you could

• 8:07David Rosenthal?

  actually get big for just about everybody else in the industry was to go the corporate route and to go the investment banking route, because you could service very large corporations that obviously were large themselves, would generate lots of deposits, lots of lending activity. The investment banking activities around that were obviously very lucrative. That's how the JP Morgans, the Morgan Stanleys, et cetera, the world came to be. For the most part, consumer banks were kinda backwater, small. There was no way to aggregate enough customers that you could get big enough.

• 8:38Ben Gilbert?

  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 were sort of a bank of a city. You could almost think about these more as credit unions than these sort of big banks that we think about today. California happened to be unique in that you could actually have branches all over the state and California happened to have quite a large population. So it was kind of the only place you could pull off a large consumer bank.

• 9:16David Rosenthal?

  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 as Bank of Italy with all these immigrants, had built up a consumer base. They really were unique. So, you know, the business of banking is, well, banking. You take deposits, you make loans, you make your money on the loans. B of A was doing tons and tons and tons of small, little and disparate consumer loans and lending. So obviously mortgages and car loans, like those still exist today, but they were doing like washing machine loans.

• 9:56Ben Gilbert?

  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 $150 at some merchant and make you a loan that you would come pay back over the next few months in installments. 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.

• 10:22David Rosenthal?

  Yeah. And for specific items, so like go buy a refrigerator.

• 10:25Ben Gilbert?

  Wild.

• 10:26David Rosenthal?

  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, well, it's pretty awesome because you can take all of these disparate lending programs, consolidate it into just one card, cut out a ton of overhead fees and make it way more efficient. So this is what they are launching, first in Fresno as the pilot market, and they call it the Bank AmeriCard.

• 10:56Ben Gilbert?

  Beautiful name.

• 10:57David Rosenthal?

  Beautiful name, and it would survive for quite a long time. Now, this wasn't exactly a new idea on the part of Bank of America. Charge cards and credit cards have been around for decades. What was new was this was the first time that a bank had entered this market at scale. So let's talk about the history. Historically, in the US, transferring money was actually not that easy. You had two options. You could use cash or you could use checks. And checks worked, but they also had a bunch of problems. One, until the creation of the Federal Reserve in the 1910s, the parties cashing the check, receiving the check, didn't actually receive the full face value of the check

• 11:40David Rosenthal?

  because there was a bunch of work and like mailing stuff around, traveling around the country that had to be done. And that was taken as a discount out of the check.

• 11:48Ben Gilbert?

  And this is super important. This thing that we have today, interchange 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 could have in your possession.

• 12:11David Rosenthal?

  Totally. So problem number one, you didn't get all the money.

• 12:15Ben Gilbert?

  Right.

• 12:16David Rosenthal?

  Problem number two, also a big problem. It took a really long time. Imagine, you know, we're talking like the 1800s, early 1900s. This stuff was on the Pony Express, you know, pieces of paper going around a really, really big country. Not ideal.

• 12:31Ben Gilbert?

  Yeah, and until ACH, where the banks would sort of all meet once a day and decide, okay, how much do I owe you? How much do you owe me in aggregate? Okay, let's just settle one transaction and then we'll figure out all of our internal accounting ourselves. They were literally like check by check and saying, okay, I have this check, so you owe me $6.08. Okay, next check. Oh, I owe you $4.20. And it was this crazy system of individual couriers 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.

• 13:05David Rosenthal?

  Totally. And spoiler alert, ACH doesn't get developed in the US until the 1970s.

• 13:11Ben Gilbert?

  Wow.

• 13:12David Rosenthal?

  Humans, though, are quite ingenious creatures at solving their problems, particularly when 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 accounts, charge accounts. Rather than giving me money or a check, let me just keep tabs on a ledger of what you bought, what the value is. I'll tab it all up and then at the end of the month, you'll come give me a check or cash for it. I remember even me growing up in the 1980s, we had this at our local gas station near our house.

• 13:48Ben Gilbert?

  Really?

• 13:49David Rosenthal?

  We had a credit account and it was just like, whenever any of our family would go to this gas station, we would get the gas. And then we'd go inside and be like, oh, we have an account here and they'd just write down what it was. And then at the end of the month, I assume my dad would go give them some money.

• 14:05Ben Gilbert?

  Which saves on operations for everyone. It's, oh, 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.

• 14:13David Rosenthal?

  So from charge accounts at 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. There are lots of standard stations across the country. You can have an account that works at all standard stations.

• 14:39Ben Gilbert?

  Yep. In 1939, Standard Oil of Indiana sent 250,000 unsolicited cards directly to all of their customers.

• 14:49David Rosenthal?

  Yeah. Making the Fresno drop look like a drop in the bucket, shall we say?

• 14:52Ben Gilbert?

  Well, and interestingly, this is 20 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.

• 15:04David Rosenthal?

  Yep. So there was that phase. Then pretty quickly, in a given local area, some of the retailers would get together and be 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.

• 15:32Ben Gilbert?

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

• 15:36David Rosenthal?

  Yep. And for consumers, that's also pretty awesome because do you really want to carry around 57 different charge cards in your wallet? Or would you rather have one that would be like, you know, your Visa to everywhere you want to be?

• 15:51Ben Gilbert?

  Yes. And not to mention, on top of this, there is the huge benefit of a shared credit history. Now, all these merchants who were losing money on people coming and getting a loan from them in the form of, I'm going 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 bills 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.

• 16:19David Rosenthal?

  Yep. So this comes to be kind of post-depression in the 1930s, 1940s in the US. And this really is starting to sound a lot like Visa. Except, as you point out, Ben, 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, once you get to a certain scale, nobody's really incentivized to keep making this work. A, because now you're enabling people to shop all your competitors. But also, B, once you get past, I don't know, a couple hundred, a thousand participants here, like, are individual merchants equipped to manage a network like this?

• 17:04David Rosenthal?

  No, they don't have the resources to do this.

• 17:06Ben Gilbert?

  Right. So you have to spin up some kind of like, shared organization that all the merchants are pooling their capital into in order to run the network on behalf of all of the merchants? It gets messy.

• 17:17David Rosenthal?

  Or, there could be an independent, third-party, for-profit network that does this. And this is when Diners Club and American Express arrive on the scene. So, Diners Club was first, and people might know and have heard of Diners Club. It still exists today. It's like a sub-brand of Discover.

• 17:35Ben Gilbert?

  Totally.

• 17:36David Rosenthal?

  There's a very famous, legendary origin story behind Diners Club. And it goes like this. In 1949, you know, post-World War II, economic prosperity, beginning of the madmen years in New York and Manhattan, a New York businessman named Frank McNamara is hosting a lavish business dinner in downtown. 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,

• 18:20David Rosenthal?

  and you know, face is saved, his reputation as a erudite businessman is preserved. And then afterwards, he's talking to his wife, he's like, oh, there's gotta be 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.

• 18:40Ben Gilbert?

  So, nobody ever needs to bring their cash? And you know, you could just imagine that like, we're all in this club of diners where 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 one nice statement at the end of the month that importantly, we do need to pay in full. We cannot roll it over into a loan. We must pay it. But, that's nice because all of my business transactions are on one single statement. It's easy for my expense reports. It's easy for me to not have to carry a wallet around. And of course, I get to look super awesome in front of all of my colleagues.

• 19:15David Rosenthal?

  I think there are two really important points here. One, you said, "I pay it." I don't pay it, my company pays. I don't care. Two, 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.

• 19:35Ben Gilbert?

  And just to start tracking a certain number here, when we were talking about checks earlier that were getting a discount, and even in this era of early Diners Club, early American Express, we're talking about a 5% to 7% discount of what actually got remitted ultimately to the restaurant or the retailer versus what the bill was originally that the consumer authorized.

• 19:57David Rosenthal?

  So all that's a very nice story, except it's completely fabricated. None of that actually happened, although stories like that did play out, I'm sure, on a nightly basis in Manhattan. The reality is Frank just thought this would be a good business idea, and he was right. You know, you see this all the time with networks, network effect businesses. This was the right little node of the network to start with. This was like Harvard and Facebook, because restaurants in Manhattan, they're competitive with one another, but it's not exclusive competition. This isn't JCPenney's versus Macy's. No restaurateur in Manhattan, no matter how good they are, really honestly believes

• 20:38David Rosenthal?

  that a majority of their customers are only going to dine at their restaurant.

• 20:43Ben Gilbert?

  Great point. So there's some incentivized sharing. It's almost like the reason to enter into a bundle. For your most extreme fans, which are only going to be like the top 5% of your customers, sure, you want some kind of exclusive relationship, and you want to maximize the dollar value you can get out of them. But for your casual fans who like your business but aren't necessarily exclusively going to use your business, you should figure out some kind of bundling 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.

• 21:20David Rosenthal?

  You're enabling people to spend money in your restaurant easier and more frequently. And you don't really care that they also go to other restaurants because they're going to do that anyway. It's crazy. Like you said, Diners Club is able to charge restaurants and other merchants. They expand to hotels, you know, airlines, anything that a business person traveler would need. 7% of the gross bill, you know, merchants complain about 3% today, 7%. 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 cardholders. And it's companies. Like, it's not individual people paying this fee. It's the companies paying this fee. Of course, they're happy to pay it. It enables business. Amazing, brilliant idea back in the day.

• 22:05Ben Gilbert?

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

• 22:36David Rosenthal?

  And Diners Club would ultimately fade, although it grows to over a million members. It goes national. It gets acquired by Citibank, then sold to Discover in 2008. As we said, it's still a 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 Diners Club was. They have to now go canvas the entire island of Manhattan, and ultimately, you know, the whole country and 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. Whereas, from this point on, basically, everybody else

• 23:21David Rosenthal?

  that comes into the industry already has established relationships, sales channels into one or both sides of the market. Which, of course, brings us to the brand you're all probably thinking about here, American Express.

• 23:35Ben Gilbert?

  Which is the diners' club of today. It's the favored card by businesses. It is the card that is most used for travel and entertainment and meals.

• 23:46David Rosenthal?

  Yep. And so, as you might remember from our Berkshire Hathaway series a couple of years ago, Amex at this point in time was primarily a traveler's checks business.

• 23:55Ben Gilbert?

  That's how they started, right?

• 23:57David Rosenthal?

  Well, actually, no. They started in 1850. This is amazing. Do you know who started American Express? This is a version of D. Hawk holding up the Visa card.

• 24:04Ben Gilbert?

  Ooh, no, I don't.

• 24:07David Rosenthal?

  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 were-

• 24:14Ben Gilbert?

  Wells and Fargo.

• 24:15David Rosenthal?

  Henry Wells and William Fargo.

• 24:17Ben Gilbert?

  Amazing.

• 24:18David Rosenthal?

  Totally amazing, man. 1850, the Wild West, different time.

• 24:23Ben Gilbert?

  It was something like they started American Express, but then had a conflict. And so they left and they started Wells Fargo after that.

• 24:30David Rosenthal?

  Yeah, something like that. The infrastructure of America was getting built out. So, American Express, called American Express, it was an express mail company. It was like the Pony Express. That was how they moved stuff around. And I think Wells and Fargo were doing banking. And so, obviously, banks, as we're talking about, you need to move stuff around the country. It was like a related business.

• 24:49Ben Gilbert?

  It's amazing. I think it's fascinating that Wells Fargo came after Amex. Like, you think Wells Fargo as this old timey foundation of America. American Express is even older than that.

• 24:59David Rosenthal?

  So, Amex, by this point in time, had become a traveler's checks primarily. That was their primary business. As we talked about on the Berkshire episode, that was a freaking awesome business. Partially because traveler's checks, you know, they made good money. You would buy a $100 traveler's check and pay Amex a little fee or whatever. But the float and the brokerage, like, there's traveler's checks out there today that are 50, 100 years old that have never been cashed. And Amex has just been sitting on that cash for decades, investing it. What an amazing business.

• 25:32Ben Gilbert?

  Okay, so Amex observes Diners Club and says, hey, we need to get into this and we actually have an ability to get into this fast.

• 25:40David Rosenthal?

  And they actually try to buy Diners Club, but they can't get their own price. And so they're like, 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 relationships with restaurants. We have relationships with hotels. We don't need you, Diners Club. So just within like a year, maybe even two from when Amex launches their charge card, you know, business traveler program, they sign up 700,000 members, which is almost as much as Diners Club had signed up, you know, many years of working on it.

• 26:22Ben Gilbert?

  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 it-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.

• 26:49David Rosenthal?

  So this brings us right back to Fresno in 1958 because the timelines match up exactly. This is crazy. Amex launched their charge card program in 1958. B of A sees what's happening. They of course had seen everything else going on in the industry before. They understand the transformative power that this can have for their scaled consumer banking business in California. And they're like, okay, the time is right. Let's do credit cards. Let's go to Fresno. But hopefully, as we painted the picture, their motivation and Diners Club and Amex and even the merchants and retailers motivations are very different.

• 27:30David Rosenthal?

  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 programs. This is going to be huge operational savings for the bank if they can pull this off. Two, though, the bigger opportunity for B of 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.

• 28:10Ben Gilbert?

  So this is where B of A, 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 of America card, what would happen is you'd have this charge card, not a credit card, and the bill would arrive at the end of the month, and then you would pay it. The innovation baked into the Bank of America card is they say, well, after the 30 days, you can get your statement, you can pay it in full, 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.

• 28:52David Rosenthal?

  And it was already happening at B of A. They were doing these loans. This wasn't actually like new behavior. It was just a way easier, way more streamlined on-ramp into this consumer lending that turbocharged it.

• 29:06Ben Gilbert?

  This product is the combination of three things. The charge card that had been happening over in Diners Club, Amex, 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 hodgepodge of retailers, but now this is issued by your bank. The big takeaway for Bank of America card is it really bundled two different things together. One was convenience, and the other is credit.

• 29:43David Rosenthal?

  And there's one more really, really important subpoint here to what this loan is. And it relates to the banks and why this is so powerful for B of A and for all banks. Think back to the old way that B of A was doing this. A California homeowner wants to go buy a new refrigerator. They walk into a B of A, talk about it with the lending officer, blah, blah, blah, a bunch of operational costs. Who cares about that? At the end of the process, B of A gives them the money. The money is now out of B of A's hands. It's out the door. The consumer then goes to the merchant and gives the merchant the money and buys their refrigerator. What's happening now with credit cards is actually a little different.

• 30:27David Rosenthal?

  The consumer goes to the store, the consumer buys the refrigerator with the credit card. No money has left B of A's hands yet. They get to keep the money.

• 30:38Ben Gilbert?

  Right. A transaction has been authorized, but yes, they get to keep the money.

• 30:43David Rosenthal?

  And because we're talking about California here, there is a very high likelihood chance, and I think at the beginning, I suspect a 100% chance that the merchant also banks with B of A. So that money is never leaving Bank of America's hands, which frees up more capital, which frees up float, which is just like, the B of A management must have been besides themselves with glee about this.

• 31:07Ben Gilbert?

  Well, in theory, if they manage 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.

• 31:16David Rosenthal?

  That's exactly where we're going.

• 31:17Ben Gilbert?

  When you mail 65,000 cards indiscriminately with the same credit limit to every single customer and say, have at it, guys, and this is a brand new consumer behavior that they've heard about, or they might have witnessed in one form or another, but now they have a bona fide ChargePlus credit card sitting in their hands, you're going to lose a lot of money at first.

• 31:38David Rosenthal?

  Yeah, because there's another more pernicious way that this type of lending is different than the previous type of lending that B of A was doing. It's unsecured. If you give a customer a loan to go buy the refrigerator, you don't want to go repossess the refrigerator, but push comes to shove, you can go repossess the refrigerator. This whole consumer credit card land is unsecured lending.

• 32:01Ben Gilbert?

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

• 32:10David Rosenthal?

  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 Fresno, 65,000 unsolicited cards go out to unsuspecting consumers. Fraud is out of control. $20 million of fraud within the first pilot program. 22% of the credit that they issued to that initial Fresno cohort ends up being default or delinquent, which I think is like five or six times what their delinquency rate was before on traditional lending.

• 32:47Ben Gilbert?

  Yeah, it is pretty crazy. So it's worth pointing out, you know, we're talking a lot about credit and debt at this point in time. And now in 2023, some of these kind of sound like bad words. And frankly, it's because of the situation that the society has sort of like pushed Americans to. 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

• 33:32Ben Gilbert?

  company, or a credit union, or a department store, or a loan shark for that matter. There isn't another Western country that has relied so heavily on consumer credit. Between 1958 and 1990, there was never a year where the amount of outstanding consumer debt wasn't higher than the year before. Years later, a Bank of 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 that they're in.

• 34:11Ben Gilbert?

  It's 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 led us to today, where because the growth of the American economy and 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 going to be better than today.

• 34:37David Rosenthal?

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

• 34:49Ben Gilbert?

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

• 34:54David Rosenthal?

  Yep. So back to what I was saying about why B of A is so important. B of A can absorb this loss. No other consumer bank at the time, if they had seen $20 million of losses in like a set of months, they would have pulled the ripcord 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 ripcord, they expand. They roll it out quickly across the whole rest of California. Over the next year, all within the first year, they sign up 20,000 merchants in California. And get this, do you know how many cardholders they sign up in that first year?

• 35:38Ben Gilbert?

  No.

• 35:39David Rosenthal?

  2 million California cardholders signed up using the card in the first year. It took Diners Club years to get to a million. Amex was so proud in the first year or two, they get to 700,000. B of 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.

• 36:07Ben Gilbert?

  This is like Meta launching Threads or Microsoft launching Teams. You can sort of 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 ram it through your distribution channels when you invent one of your own.

• 36:23David Rosenthal?

  Yep. And it's even more than that. As we said, this really was a big innovation. Like, it wasn't just that they copied Amex and Diners Club or anything else. Like, they were adding credit to this. This was a huge innovation.

• 36:34Ben Gilbert?

  Yep.

• 36:35David Rosenthal?

  So by 1961, year three of the program, they're able to get fraud under control enough that the whole program is profitable.

• 36:43Ben Gilbert?

  But they keep that under their hats.

• 36:45David Rosenthal?

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

• 36:47Ben Gilbert?

  So there's been all these newspaper articles about all this money that B of A 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 going to work, but clearly it's not working for B of A. So people were shutting down their efforts. There was rumors that another bank was going to launch in LA and San Francisco. And B of 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 it was such a gigantic failure. Here's a crazy stat. From 1960 to 1966, so this whole era is actually a profitable era for B of A, but no one else knows it.

• 37:28Ben Gilbert?

  There were only 10 new credit cards introduced in the entire United States because they did such a good job keeping what became a cash gusher for them quiet. But secret comes out in 1966 and from 1966 to 1968, just two years, approximately 440 credit cards were introduced by banks, large and small, throughout the country.

• 37:51David Rosenthal?

  Yes, and it is specifically 1966 when the secret gets out because phase two of Bank of America's grand master plan here gets unveiled, which is maybe worth a quick setup. As we said, this was transformative for their business in California. But they're the biggest bank in America and they have been itching for any kind of way to expand to truly be the Bank of America. Like, why the hell did they change the name to Bank of America? It's not because they wanted to be the bank of California. So they're like, maybe this is our path. And California is only like 10% of the US population. In 1966, they create the Bank America Card Service Organization.

• 38:37David Rosenthal?

  With the express purpose of licensing out the Bank AmeriCard program and network to banks across the country, across all 50 states. And this is the seed of Visa.

• 38:52Ben Gilbert?

  All right, listeners. Now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF. Then everyone would nod and you're done. But in an AI-first world, that doesn't hold up anymore.

• 39:11David Rosenthal?

  Yep, your risk surface changes every week now. A vendor turns on an AI feature or someone writes in a new model without telling IT. And your posture is different than it was last week, let alone at your last audit. Vanta's own research found that around 70% of companies have this quote unquote "shadow AI" running with no security review at all.

• 39:32Ben Gilbert?

  Right, and that's where Vanta comes in. They're the leading agentic trust platform, meaning they've built the thing that closes the gap. And the way that they close that gap is Vanta Agent. Think of it as a GRC engineer, that's Governance, Risk and Compliance, except that it's software and it doesn't sleep. It finds the issues, drafts the fixes, and cuts the time that you'd spend on vendor assessments in half.

• 39:54David Rosenthal?

  In half, which is exactly why more than 16,000 companies today run on Vanta. Companies like Ramp, Cursor, and Snowflake all stay audit-ready and catch the risks that crop up between audits across every vendor, every AI tool, the whole environment.

• 40:12Ben Gilbert?

  And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance, and the work to earn and prove trust. We're huge fans of Vanta over here, and literally hundreds of Acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at vanta.com/acquired. That's V A N T A dot com slash acquired for $1,000 off. And just tell them that Ben and David sent you. Okay, David, so how do we get to Visa? You have been telling me about the Bank of America card from Bank of America. And I opened this show saying Visa's not a bank and Visa doesn't have direct relationships. This is this big indirect thing where they work with other banks. This is a big mismatch.

• 40:57David Rosenthal?

  This story is so wild because this first chapter that we just told, there's only one entity in the world that could have done this, Bank of America. In this second chapter, there is also only one person in the world that could have taken Bank of America card and turned it into Visa, and that is D. Hawk. So here we are in 1966. 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 of America licenses. And the deal is that you pay B of A a $25,000 franchise fee to get your franchise of the Bank of America. This is like a Wendy's or something.

• 41:41David Rosenthal?

  Plus then you pay them a percentage of the gross transaction revenues. It literally is like a McDonald's. This is wild. I mean, I get the executives must have just been throwing party after party because A, this whole thing turbocharged their own business. B, now they're like, oh, we're going to make all the other consumer banks in the country essentially into like serfs on our kingdom here.

• 42:04Ben Gilbert?

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

• 42:34David Rosenthal?

  It was also an intensely like- Private thing, kind of taboo thing, right? Because when you were using a credit card in these days, you were implicitly saying, I'm using debt to buy this transaction. And so you didn't want other people to necessarily know that.

• 42:48Ben Gilbert?

  Right, it's 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 is kind of leaning into it and saying, 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 advantage of the fact that now all these consumers have the card and all these merchants out there and accept the card is this weird franchising thing.

• 43:14David Rosenthal?

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

• 43:21Ben Gilbert?

  Yes.

• 43:22David Rosenthal?

  But at the outset, these other banks see the power. And now that B of A is telling them of what this has done for B of A. And they're like, 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 B of A offers exclusivity to banks in geographic areas too, to start. That eventually, of course, gets dropped, but it does tempt a lot of people. So within two years, by 1968, a couple hundred banks have signed up. There are 6 million cardholders across the country and beyond the country. Actually, Barclays Bank in the UK had signed up to be a franchisee of Bank of America back in the day.

• 44:03Ben Gilbert?

  Whoa, what year is this?

• 44:05David Rosenthal?

  This is like in the mid 60s.

• 44:08Ben Gilbert?

  Whoa, that's way earlier than I realized for international expansion.

• 44:11David Rosenthal?

  Yeah, it was already out of the US. Because the system is a great system. But as this expands beyond B of A, it becomes clear that a bunch of stuff that were either just assumptions or ways of business within B of A, or things they didn't have to worry about, ain't going to scale to hundreds of banks, all 50 states, multiple countries around the world. One of the examples, I alluded to this earlier. In California, in the Bank of America owned and operated Bank AmeriCard system, usually all parties in the transaction were Bank of America customers.

• 44:52David Rosenthal?

  So like, there wasn't really any difference between the bank of the consumer, the cardholder, and the bank of the merchant. And B of A controlled both sides. Once they expand the network and let other banks in, all of a sudden, that's almost never the case.

• 45:07Ben Gilbert?

  Right. You know, B of A realized the sort of cardinal sin of many entrepreneurs, which is, my particular situation is actually not a pattern of several other customers. It's actually an N of one. I'm idiosyncratic. 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.

• 45:26David Rosenthal?

  Yep. So B of A has 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 of A.

• 45:41Ben Gilbert?

  Yes. And these merchant banks, we'll come back to some of this terminology later, has gone on to become the acquiring bank because this is the bank that acquires the merchant relationship as a customer.

• 45:52David Rosenthal?

  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.

• 46:12Ben Gilbert?

  Yeah. And this is the first moment that we start to see a departure from what American Express was doing. The original Bank AmeriCard was very similar to American Express and Diners 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 bank's closed-loop network. And now with this new Bank AmeriCard licensee system that they're starting to sort of develop here that would become Visa, it's an open-loop system. It's, hey, there's one bank on one side who owns the customer, who owns the cardholder, and one bank on another side, and we're going to enable those systems to talk to each other, but they're not the same party. This is open-loop now.

• 46:52David Rosenthal?

  So this interchange thing, all of the other banks that are now signing up to become, you know, B of A franchisees for the Bank AmeriCard system. They come to B of A and they're like, 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.

• 47:15Ben Gilbert?

  Oh, so the problem they're experiencing is like, hey, Bank of America, how did you build all the technology?

• 47:20David Rosenthal?

  To do this. And Bank of America's response is like, we didn't have that problem because in our corner of the world, we're the bank on both sides.

• 47:29Ben Gilbert?

  Right, we're closed loop.

• 47:30David Rosenthal?

  So, I don't know, you guys figure it out. This sounds like a you problem, not a me problem.

• 47:35Ben Gilbert?

  I see. So when these banks are coming to Bank of America, they're not actually complaining about price in any way. They're literally just saying, how do you solve this problem?

• 47:43David Rosenthal?

  No, I don't think price was an issue. I think it was this and like a set of other things along these lines where the franchisees were like, hey, we signed up for a franchise. You operate the whole system, right? And Bank of America was like, no, no, no, we sold you a marketing system.

• 47:58Ben Gilbert?

  I see. So it's like, you know, you buy McDonald's franchise and they ship you some golden arches and they're like, good luck figuring out how to make cheeseburgers.

• 48:05David Rosenthal?

  That is exactly right.

• 48:07Ben Gilbert?

  Okay.

• 48:08David Rosenthal?

  Now, to be somewhat fair to Bank of America here, the golden arches are worth a lot. The Bank of America card, three colored bands, the blue, white and gold are also worth an incredible amount here.

• 48:23Ben Gilbert?

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

• 48:28David Rosenthal?

  Yes, of course. The network has incredible value. But back to the brand and the marketing. So as all these other banks are considering whether to become franchisees of Bank of America card. And some of them are like, no, I'm not going to do that. Some of the ones who do become franchisees, well, really all the ones who do become franchisees become very frustrated. Of course, people are going to start competing systems and. Right in this time, over this kind of year or two period, a bunch of local geographical competing credit card systems by various bank consortiums come together. Those pretty quickly all merge into a national association called Interbank, which, spoiler alert, Interbank is Mastercard.

• 49:13Ben Gilbert?

  Ba-da-da.

• 49:14David Rosenthal?

  But at this point in time, Interbank is a Franken-network. There's 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 card that I got from XYZ, you know, I don't know, Bank of Illinois, that's part of the Interbank network supposedly, now I go somewhere, I've got that card, it 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 Mastercard Interbank network.

• 49:53Ben Gilbert?

  I see. It's like when I'm trying to figure out, like, I have to keep pulling up Alaska Airlines' partner network to figure out what international airline I should fly since I pay no attention to anything other than, well, it's Alaska, you know, is it One World? I don't, I still don't even know what the...

• 50:06David Rosenthal?

  One World, yeah.

• 50:07Ben Gilbert?

  Yeah.

• 50:08David Rosenthal?

  And, you know, that's today with the internet. You can do that. Back in the 1960s, there's literally no way for a prospective customer of a merchant to know by looking at their card and looking at the sign on the door if that card is gonna be accepted, unless they all have the same brand and mark.

• 50:26Ben Gilbert?

  It's so funny. This is the original problem of Diners Club too, because Diners Club, they, 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 booklet 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.

• 50:44David Rosenthal?

  That's right. But now, like, the scale that these networks are starting to be at, like, obviously, that's not tenable. So, back to the mark. What these franchisees 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 of America card name, brand, and importantly, mark. So what are the colors of Visa? I'm sure everybody listening, probably around the world, knows this. It's blue, white, and gold.

• 51:11Ben Gilbert?

  Which is the hills of California, right?

• 51:13David Rosenthal?

  There's this amazing origin story to this. It's super reminiscent to the Windows XP Bliss wallpaper, you know, that is the most viewed photo in the world. You know, the hills. It's actually in Sonoma, California.

• 51:25Ben Gilbert?

  Huh.

• 51:26David Rosenthal?

  So the story is the B of A team, when they were first rolling out the program, the guy tasked with card design, he lived in Pleasanton, California, in the East Bay, the San Francisco Bay area, where, you know, it's pleasant. And one fine spring morning, he looks out his back door at the local hillside. The sky is this beautiful blue with white puffy clouds, very much like the Windows XP Bliss background. And the hill is covered with beautiful, golden-colored California poppies in bloom. He rushes back inside. He paints an abstracted version of his beautiful hillside. Voila, the three bands, blue, white, gold. Bank of America card, Visa.

• 52:06Ben Gilbert?

  And this would go on to be incredibly valuable to plaster on your storefront and say, "We accept Bank of America card here, and that just means your sales are going to go up." Friction to purchase goods goes down. Customers are excited to spend with you because their shiny, cool thing that they like spending money on works there, and it's good for your business to be able to accept it.

• 52:26David Rosenthal?

  It's so wild that today, you know, we would think, "Oh, what's a moat? What's a competitive advantage? What's durable? You know, you need technology advantage." You know, even how we think of brand, all the companies we've covered on the show, it's so much more than this. But it was so simple back in the day. It was just, could you create a two-sided network where there was a common signal of acceptance?

• 52:48Ben Gilbert?

  Yep.

• 52:49David Rosenthal?

  So from B of A's perspective, they're like, "Yeah, we did all the work. We created this. This is what you are franchising from us. Take it or leave it." From the franchisees' perspective, as we were talking about, they're like, "You gave us a marketing program. How do we run this damn thing?"

• 53:05Ben Gilbert?

  Okay, so they got this marketing program. How did it literally work? Because this is pre-magnetic stripe.

• 53:11David Rosenthal?

  Yeah, there's no technology here.

• 53:12Ben Gilbert?

  I mean, this is literally like, cool, I've become a Bank of America licensee. What transactions does that let me do and how does that happen?

• 53:19David Rosenthal?

  So the banks, they have to resort all the way back to how checks worked back in like the, you know, 1800s, early 1900s in the US, where it was all decentralized.

• 53:31Ben Gilbert?

  The bank would go sign up a merchant in their local town.

• 53:34David Rosenthal?

  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 around the country to the issuing banks, the cardholder banks, to get the money. And they just, the way they financed all this was a discount fee, just like checks back in the day. Like, oh, hey, this sales draft is for $100. This is all really hard to figure out. So like, okay, you give me $97 instead, or you give me $90 instead. And there was no standardization. It wasn't like a set discount fee. It was just whatever they negotiated with one another.

• 54:12Ben Gilbert?

  So the sales drafts get handed to the licensee. So you've got, let's say you're running a department store and keep going with the Illinois example that you said. So you're running a Chicago department store. After a whole day of sales, you've got a bunch of sales drafts where you say, "All these customers came in with Bank of America. They said they're good for the money, so I gave them the goods. And now I'm holding the sales drafts. 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'm going to get my, you know, 93 cents on the dollar or whatever." So then the bank is responsible, probably?

• 54:54David Rosenthal?

  Yeah. So the merchant bank, that acquiring bank.

• 54:56Ben Gilbert?

  Mails all those effectively invoices to all the other banks.

• 55:01David Rosenthal?

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

• 55:08Ben Gilbert?

  Ah, this is ludicrously expensive.

• 55:11David Rosenthal?

  Totally. I mean, it's chaos. People are so pissed. And again, B of A is like, yeah, whatever.

• 55:16Ben Gilbert?

  Yeah, whatever. For us, we just moved a few numbers internally. We actually didn't have to do any of this.

• 55:20David Rosenthal?

  And you all are paying us now money. So like, our empire dreams are coming true.

• 55:25Ben Gilbert?

  Wow.

• 55:26David Rosenthal?

  This is maybe painting Bank of America into poor light. 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 of America had been operating for a couple of years internally to B of A in California, now it's going across state lines. This had never been a problem before. You know, the merchant banks versus the consumer banks, the issuing banks, et cetera.

• 55:52Ben Gilbert?

  Right.

• 55:53David Rosenthal?

  So, all of these tensions come to a head. In October 1968, when the licensees, all the franchisees of Bank of America, all these other banks across the country, they demand a summit. They need to air their grievances with, you know, the parent with Bank of America. This is untenable. We can't operate like this. We gotta fix this. B of A says, okay, fine. We'll all get together in Columbus, Ohio.

• 56:21Ben Gilbert?

  Really? No way?

• 56:22David Rosenthal?

  In the middle of the country. You didn't know this?

• 56:23Ben Gilbert?

  No.

• 56:23David Rosenthal?

  Oh, amazing. I thought you knew this. Yeah, Columbus, Ohio, Ohio State.

• 56:27Ben Gilbert?

  Oh, wow. Amazing.

• 56:30David Rosenthal?

  This is where the birth of Visa happens. So the summit gets organized. And for the franchisee banks, this is sort of becoming existential 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, everybody's converging in Columbus. B of A sends two, like, mid-level marketing managers to go face the angry mob. None of the senior executives from B of A could be bothered enough to go deal with this.

• 57:00Ben Gilbert?

  Wow.

• 57:01David Rosenthal?

  Which just says everything. And these poor guys who show up, I mean, they are literally facing like pitchforks. The franchisees are incensed. And they're incensed both because the situation sucks and they're like, god damn it, B of A, take us seriously. You have meddled in our entire businesses. This is in chaos. Like, we gotta fix this. So, what do these two poor B of A guys do? Right before lunch on the second day, they're like, yo, we gotta save our skins. We gotta get out of here. Let's do the smart thing to make sure that everybody gets placated, but nothing actually happens. Because they don't have any authorization from Bank of America to do anything. They're just the people sent to face the mob.

• 57:46David Rosenthal?

  Let's appoint a committee of licensees to quote unquote, "investigate all of the operating problems and report back to us." You know, they can come out to San Francisco. They can meet us at B of A headquarters and we'll 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.

• 58:17Ben Gilbert?

  In the long term, at least.

• 58:18David Rosenthal?

  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 of America Card Franchisee Program Manager from a small bank in Seattle, the Seattle National Bank of Commerce, which would go on to become Rainier Bank. And then ironically, do you know what happened to Rainier Bank? You can't make this stuff up.

• 58:43Ben Gilbert?

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

• 58:45David Rosenthal?

  Yep. Once interstate banking regulations get loosened up, they get acquired by Bank of America, of course, in the 1990s. But for the moment, the person running their Bank of America Card Franchisee Program is one Dee Hock. And I think you could really say on this day, the founder of Visa.

• 59:09Ben Gilbert?

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

• 59:19David Rosenthal?

  No, and we're going to talk much more about Dee in a minute. But just to keep the story going, so we don't leave you all in suspense on this day. During the lunch break, Dee has gotten put on this committee. He goes up to the two B of A guys and he's like, hey, rather than us just putting together a list of grievances and reporting back to you at B of A, what if instead, we do examine all the problems in this system?

• 59:46David Rosenthal?

  But what if we ourselves, this committee, we design and propose a new way of operating the whole thing? And after some convincing, the B of A guys are like, eh, 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, sure. And probably, almost assuredly, I mean, this is a committee we're talking about. Nothing is going to come of this.

• 1:00:19Ben Gilbert?

  Yep.

• 1:00:20David Rosenthal?

  So the whole summit reconvenes after lunch. And D gets up on stage, not the Bank of America guys. And he proposes this idea to the group. Say, hey, we've got this committee. Rather than us taking a list of grievances back to B of A, 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 this disaster of a meeting. They all get on planes. They all leave, most of them probably thinking that nothing is ever going to come of this. Certainly, the B of A guys thinking nothing is ever going to come of this.

• 1:01:05David Rosenthal?

  But D kind of thinks he just got authorization to go create Visa.

• 1:01:12Ben Gilbert?

  Whole new system. And he has no power at this point, but he kind of thinks he does. All right, listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team and deploying them is no longer the hard part.

• 1:01:32David Rosenthal?

  Yeah, the hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making. AI security for an enterprise at scale is not a small concern. Like, the risks are real.

• 1:01:46Ben Gilbert?

  Exactly. And the challenge with AI is governing it, securing it, measuring it, and making sure that it actually delivers value. That is why ServiceNow built the AI control tower.

• 1:01:56David Rosenthal?

  Yep. AI Control Tower gives enterprises a single place to see, manage, govern, and optimize AI across the entire business. And it works with any AI, not just theirs. Every device on your network, every permission across every system, every AI agent, visible and secure in one place.

• 1:02:14Ben Gilbert?

  And ServiceNow can do this because they've spent more than 20 years building the operational backbone of the enterprise. The workflows, governance, approvals, security controls, and institutional knowledge that power how work actually gets done across IT, HR, customer service, finance, and security.

• 1:02:30David Rosenthal?

  ServiceNow already runs more than 100 billion workflows annually and trillions of transactions for more than 85% of the Fortune 500. So when companies need a place to govern AI at enterprise scale, they're building on a platform at the center of how their business already operates.

• 1:02:47Ben Gilbert?

  And in a future that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company. But the question is, who's managing them all?

• 1:02:56David Rosenthal?

  So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely, at scale, go check out servicenow.com/acquired and tell them that Ben and David sent you.

• 1:03:07Ben Gilbert?

  Okay, so David, D-Hawk thinks he's got a mandate to go change things up in a big way and create some big, crazy new proposal.

• 1:03:14David Rosenthal?

  Yeah, and he's not wrong. Fortune favors the bold, you know, might you say?

• 1:03:19Ben Gilbert?

  Yes.

• 1:03:20David Rosenthal?

  So to say a few more words about why this is so hard to organize this group of now competing banks to collaborate with one another. You've got multiple banks in a same state that are part of this system. Let's take Illinois again 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 intimately linked with their banking operations. If I'm any one of those banks, I would want to say like, hey, no, I want to be the only bank in Illinois doing this. And, okay, maybe there are a few others here with me, but I sure as hell want to shut the door to anybody else coming in and being part of this network. Whereas when you think about growing the value and power of the network, you want as many merchants

• 1:04:02David Rosenthal?

  and cardholders in the system as possible. And the merchants obviously want as many cardholders as possible, and the cardholders obviously 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.

• 1:04:19Ben Gilbert?

  And you basically want it to happen as fast as possible. So maybe if you only allow, you know, 20% of the banks in America, or 20% of the banks in a state to be members of this thing, eventually they could sort of bootstrap the whole network. But it 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 banking relationship. They already have one, they're good.

• 1:04:42David Rosenthal?

  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.

• 1:04:49Ben Gilbert?

  Yep.

• 1:04:50David Rosenthal?

  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 going to get the DOJ to let you do that? Antitrust is going to be an issue here for sure. But, you know, and this is D, he's like, okay, if though, if we could do this, what is the opportunity?

• 1:05:34David Rosenthal?

  Well, we've seen what the opportunity is for Bank of America. That is the shining case study. So at a minimum, this could do for all the other banks in the world, what it 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 franchising this out to other banks. But other banks signed up for this and they were willing to pay both a franchise fee and a percentage of transaction volume to Bank of America because the siren song, the reward of doing this was so great to them.

• 1:06:18Ben Gilbert?

  And frankly, all powered by the fact that this is what consumers want.

• 1:06:21David Rosenthal?

  Yes, absolutely. So in a certain way, this is sort of, I don't want to say inevitable, because this is definitely not 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 Dee 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 volume for doing that. The value that you would unlock and generate, it beggars the imagination to think about what this could be.

• 1:07:04Ben Gilbert?

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

• 1:07:11David Rosenthal?

  So there's this great passage from him in his book, One for Many. He says, "Any organization that could guarantee, transport and settle transactions in the form of arranged electronic particles," that's what he calls digital information.

• 1:07:24Ben Gilbert?

  Amazing.

• 1:07:25David Rosenthal?

  "24 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. 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 dwarfed the resources of most nations. Jointly, they could do it. But how?

• 1:08:09David Rosenthal?

  It would require a transcendental organization, linking together in wholly new ways, an unimaginable 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 Dee, because this situation is nuts. Dee is a banker. He is running the Bank of America franchise program at what would become Rainier Bank in Seattle. But he's 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.

• 1:08:52David Rosenthal?

  He didn't go to a four-year college. He only has an associate's 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 insubordinate. He, now walking into the boardroom in Bank of America, which is what he's gonna do, and standing toe to toe with the vice chairman of Bank of America and saying, "I think you should give me the Bank of America 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 boardroom, is just absolutely wild.

• 1:09:31Ben Gilbert?

  Fortune favors the bold.

• 1:09:32David Rosenthal?

  Fortune favors the bold.

• 1:09:34Ben Gilbert?

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

• 1:09:44David Rosenthal?

  And this is the thing. Dee is an odd duck for sure, but he is amazingly smart. He's like basically all self-taught. He's incredibly well-read. He started reading every book on, you know, his little farm in Utah that he could get his hands on when he was seven 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 when he did his associate's degree. And so he uses all of the techniques that he learned from competitive debate and persuasion. 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

• 1:10:28David Rosenthal?

  and adamantly refuses another word on the subject, they are in the process of saying yes and don't know it."

• 1:10:37David Rosenthal?

  I mean, Dee basically is the prototypical Silicon Valley founder. He's just a generation too early and in the wrong industry.

• 1:10:47Ben Gilbert?

  I once had a Silicon Valley founder give a talk at a startup weekend I ran 10, 12 years ago, who said, until your company shuts down, you are just in the act of succeeding.

• 1:10:56David Rosenthal?

  Totally. I mean, cut from the same cloth.

• 1:10:59Ben Gilbert?

  Yep.

• 1:10:59David Rosenthal?

  Right down to every single stitch. There's one other important aspect to Dee that I think we should highlight here that enables him and all of Visa to succeed. And that's that he's about as far from the man and image of JP Morgan as you could imagine. That is what enables this because if he were the CEO of another bank or a senior executive or some well-respected person, marching into the Bank of America boardroom 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 it would work.

• 1:11:42David Rosenthal?

  Of course, Bank of 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 subordinating themselves to somebody who could conceivably be their equal. So Dee's just gone into B of A 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 thereof will be so much greater than what it could be on its own. And miraculously, that works.

• 1:12:19Ben Gilbert?

  Like, would you rather own a few percent of something that is the default global way that commerce is produced? Or would you rather own 100% of, you know, Bank of America cards?

• 1:12:30David Rosenthal?

  Yep. Totally incredible that Dee 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 hasn't actually figured out how to architect this thing such that it works. So he's got to go do that. Two, though, then, now he has to go back to all of the soon to be former franchisee banks and convince them why they should do this. And this is a different argument from what he made to B of A. B of A, he's trying to get them to give him the asset. With the other banks, he actually needs to get them to change their

• 1:13:10David Rosenthal?

  behavior. He needs to be able to go to, say, the couple banks in Illinois that are existing franchisees of the Bank of America card system and say, hey, the new regulations, the new operating laws for this organization are going to be all the banks in Illinois can join, and we actively want to go convince all of your competitors to come join this system.

• 1:13:34Ben Gilbert?

  I see. So he's basically coming to them with a waiver and saying, I want you to waive your exclusivity to some territory because in our new construct here where we're all working together, you and everyone else is agreeing that it's good for the value of us all if we waive our exclusivity.

• 1:13:50David Rosenthal?

  You know what this is like? This is like back in our NFL episode.

• 1:13:54Ben Gilbert?

  Yes, that's exactly right.

• 1:13:55David Rosenthal?

  When the NFL started negotiating national television rights collectively as an organization.

• 1:14:01Ben Gilbert?

  Yep.

• 1:14:01David Rosenthal?

  A bunch of the individual teams hated that because they were like, if I'm the Jets, I'm making more money in my New York metro area doing my own TV deals than I'm going to get as a share from you, the NFL, of a national deal. But in the long run, it was absolutely the right decision and value accretive to everybody, including the Jets, that the NFL centralized this.

• 1:14:22Ben Gilbert?

  You'd rather be the Jets with their proportional share of the $14 billion a year TV deal that the NFL has today than whatever their very fat contract was alone in, what, the 60s, 70s?

• 1:14:36David Rosenthal?

  Totally. It is exactly the same thing here. Okay, so how's this whole thing gonna work? Dee and a few of his other fellow committee members, they go to Sausalito, California, just north of San Francisco, just across the Golden Gate Bridge, and they do an off-site for a couple of days at a hotel in Sausalito. And there, they come up with a number of operating regulations, guidelines for this hypothetical new entity, four of which we're gonna talk about here that are super critical. One, ownership of this new organization that's gonna be called National Bank Americard, Inc., the new owner of the Bank Americard program, is going to be in the form of irrevocable,

• 1:15:18David Rosenthal?

  non-transferable rights of participation. So you're not gonna own stock in this thing, there's no equity, the way that you have ownership and the percentage ownership that you have in the network is by participating in it and the amount of volume that you are contributing to the network.

• 1:15:39Ben Gilbert?

  Oh, interesting.

• 1:15:41David Rosenthal?

  So this means a couple of things. One, it's sort of like a representation and ownership according to value contributed. Two, it's non-transferable, so you can't sell it. Any individual bank, if they were to say like, "Ooh, this is valuable now, I'm gonna go sell it, 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 and the network will lose value. So there's no way to do that.

• 1:16:07Ben Gilbert?

  So it's basically designed for you to kind of break even on it. If you're putting in 17% of the transactions on the whole network and you're paying in fees on 17% of the transaction, well, good news, for all of the leftover profits from running the network, 17% of them go back to you.

• 1:16:23David Rosenthal?

  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 of all time.

• 1:16:34David Rosenthal?

  You are contributing 17% of the volume to this. You are entitled to 17% of the profits.

• 1:16:39Ben Gilbert?

  I see.

• 1:16:40David Rosenthal?

  That we are extracting from the merchants and the cardholders.

• 1:16:43Ben Gilbert?

  Yep, because this is the natural business model of interchange 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 discount, I don't mean a beneficial one. I mean, I'm discounting the amount of money that I am giving you off of the 100% that you would have received by the customer, basically taking that old check courier business model and carrying it into sort of a network form.

• 1:17:08David Rosenthal?

  Yep, exactly. So the actual legal structure that Dee and his fellow committee members land on for this is a for-profit, non-stock, membership corporation.

• 1:17:20Ben Gilbert?

  That is a mouthful.

• 1:17:21David Rosenthal?

  It is. There's a myth out there that Visa was originally a nonprofit and then was converted to a for-profit before the IPO in 2008. That's not true. It was always for-profit. It was just a non-stock, membership corporation. And that was to get around banks selling their interest. So you don't participate in it, you don't own it.

• 1:17:44Ben Gilbert?

  So say it one more time. It is a for-profit.

• 1:17:46David Rosenthal?

  A for-profit, non-stock, membership corporation. Your ownership is your membership.

• 1:17:55Ben Gilbert?

  Fascinating.

• 1:17:55David Rosenthal?

  It's like a co-op. It's like REI or something like that.

• 1:17:58Ben Gilbert?

  Yeah, yeah.

• 1:17:58David Rosenthal?

  The way that Dee describes it to all 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 all the subordinates.

• 1:18:10Ben Gilbert?

  There's actually another NFL analogy here. The NFL doesn't own the teams. The team owners own the NFL.

• 1:18:16David Rosenthal?

  Yes, but the NFL sets all the regulations for how the game is played and all the teams submit to it.

• 1:18:22Ben Gilbert?

  That's actually probably the best analogy for Visa is the NFL league organization.

• 1:18:27David Rosenthal?

  I think it totally is. Okay, so that's point number one, maybe the most important one. Point number two, it is a self organizing body with irrevocable governance rights for each member. And this is, well, I guess also how it's like the NFL. 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, budgets, fees, all this stuff, every single member bank will have a vote. And importantly, every single member bank can

• 1:19:09David Rosenthal?

  call a vote at any time. I mean, it's literally like a pure democracy.

• 1:19:13Ben Gilbert?

  Wow. You could imagine nothing happening if everybody has the right to do that.

• 1:19:18David Rosenthal?

  Well, they set the threshold at 80% for anything to happen.

• 1:19:21Ben Gilbert?

  I see.

• 1:19:21David Rosenthal?

  So there's a strong incentive not to call a vote and waste everybody's time unless you really think you can round up 80% of the votes.

• 1:19:28Ben Gilbert?

  Fascinating.

• 1:19:29David Rosenthal?

  Which, in practice, just gives D all of the control and power of the company. Because everybody's going to listen to him as the CEO. Point three, we've basically already discussed, and that is that the mission of this organization is to facilitate cooperation and trust among competing institutions to grow the Bank of America card payment network larger than any one institution could on its own, which is the pitch he gave to Bank of 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

• 1:20:12David Rosenthal?

  allowed. Everything happens on the main network.

• 1:20:16Ben Gilbert?

  I see. So none of these banks are members of Interbank at this point. These banks are exclusively members of whatever the heck Visa's predecessor name is?

• 1:20:28David Rosenthal?

  National Bank of America Card, Inc.

• 1:20:30Ben Gilbert?

  National Bank of America Card, Inc.

• 1:20:31David Rosenthal?

  Yes. At this point in time, a antitrust lawsuit would change that very shortly.

• 1:20:37Ben Gilbert?

  I see.

• 1:20:37David Rosenthal?

  But at this point in time, it's like, nope, you are part of MBI exclusively. You don't go join Interbank, Mastercard, and you also don't go start your own networks or peel off parts of the network. Everything that you are doing in payment card operations needs to route into this network.

• 1:20:56Ben Gilbert?

  That's a big contract to sign.

• 1:20:57David Rosenthal?

  Totally. Again, this is why D needed to paint the picture, both to Bank of America and all the other banks. The prize is worth it.

• 1:21:05Ben Gilbert?

  Yep.

• 1:21:06David Rosenthal?

  And then finally, point four, there will be a singular, universal set of operating and governing procedures that, much like the US Constitution, is infinitely modifiable by a threshold vote of all members. This is the 80% I talked about. And two, also like the US 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're 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.

• 1:21:49David Rosenthal?

  This is a democracy, but you can't go leave the democracy.

• 1:21:53Ben Gilbert?

  Right. You're signing up for something that might change in the future and you don't get to know today if it's going to change in the future. But at least you have some say in it.

• 1:22:00David Rosenthal?

  That is exactly the pitch. And amazingly, even describing this now, having done all the research, read all the books, written the script that we're talking about here, I still can't believe this actually happens. D goes on like a tour across the country. He goes and meets with all the banks. Bank of America helps him out. They bring senior executives too, to help convene, you know, meetings with all the banks to persuade them. Every single member bank of the previous Bank of America franchisee organization, every single one of them signs up for the new organization led by D. Not a single person jumped ship.

• 1:22:39Ben Gilbert?

  How many banks were at this point?

• 1:22:40David Rosenthal?

  Over 200. Wow. Isn't that wild?

• 1:22:44Ben Gilbert?

  I mean, once you get to like 70 or something, then it kind of seems likely that everyone's going to tip. But in those first 20, the fact that nobody was out is crazy.

• 1:22:53David Rosenthal?

  Totally. And Dee writes about this, too. Bank of America helped him out. They identified the 13 most influential banks and they convened the first summits with them of like, hey, what do we got to do to horse trade to get you guys involved? And then you kind of spiral out from there. But yeah, every single one, nobody jumped ship.

• 1:23:12Ben Gilbert?

  And when is this, like 1970 ish?

• 1:23:14David Rosenthal?

  The process starts in 1968. It all wraps up in either 1970 or 1971. Importantly, we've talked about antitrust and DOJ a bunch 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 Dee 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 profoundly useful and important to the American consumer and American businesses that it is worth you

• 1:23:58David Rosenthal?

  letting us do this. So they actually get a letter from the DOJ saying like, hall pass, you're good on this one.

• 1:24:06Ben Gilbert?

  Wow.

• 1:24:07David Rosenthal?

  Yeah.

• 1:24:07Ben Gilbert?

  It's just like the presidential exceptions for the NFL, like an antitrust exemption where, yeah, we're amenable to the fact that you're collaborating, potentially colluding, but it is actually one of the things that we believe will make the country better. So go for it.

• 1:24:20David Rosenthal?

  America wants both its football and its credit cards.

• 1:24:25David Rosenthal?

  Amazing. And that was a key point in then going and 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 DOJ on our backs? And Dee is able to say like, nope, got the letter right here. We're good.

• 1:24:40Ben Gilbert?

  Wow. Amazing.

• 1:24:42David Rosenthal?

  So very shortly after this, after the creation of NBI, National Bank of America, Inc. Dee, in 1972, he's thinking globally from the get go. He goes and creates a parallel, similar organization of international banks using the Bank of America system. Visa was global from basically day one. And it wasn't just Barclays in the UK. It was Sumitomo Bank in Japan. It was other banks throughout Europe. It was Canada. It was Latin America. We won't go into all the detail here, except one amazing story we're going to tell. This was actually harder to pull off, if you can imagine that, than forming NBI because it really is not clear for some of these international banks that it is better for

• 1:25:27David Rosenthal?

  them to be part of the global network than if they could run the table on their entire country. Say you're, I don't know, I'll pick Sumitomo Bank in Japan. You have to decide, do I want to buy Dee's pitch of it's worth it to me to be a proportional owner of Visa? Or I could be the singular dominant credit card network in my own country? Which is more valuable?

• 1:25:52Ben Gilbert?

  And for many of them, they'd be right in saying it 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.

• 1:26:04David Rosenthal?

  Totally. So, once again, in Sausalito, this all comes to a head. Dee knows that probably not all of the international banks are going to agree to this, and some of them are going to go their own way. So he calls, you know, a final summit in Sausalito. They're going to vote the next morning, final vote, on who's going to join the soon to be Visa network and who's going to go it on their own. And Dee gives this nostalgic speech at the end of dinner, saying like, here in Sausalito, looking out at the bay, this is where me and 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

• 1:26:48David Rosenthal?

  payment monetary system. But we're all gathered here. We should celebrate having accomplished so much and had a chance at this dream. Just having the chance is worth it. He's really good with his debate skills. And then he's like, so before we meet one more time tomorrow to obviously disband this whole venture and have the dream just 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 a little box out from under their seat.

• 1:27:29David Rosenthal?

  They unwrap it and inside are a pair of pure gold cuff links that on each of the two cuff links, there is one half of the globe. And under one side, it says in Latin, studium ad prosperandum, which translates as the will to succeed. And the other side says voluntas in convenendum. Apologies to Latin speakers out there that I'm butchering that. Translates as the grace to compromise. And D explains this all and somebody from the crowd yells out, D, you miserable bastard. Because he just pulled on everybody's heartstrings.

• 1:28:10Ben Gilbert?

  Oh.

• 1:28:10David Rosenthal?

  And like, he gets the votes. And the next morning, all the holdouts reverse course. They all join and

• 1:28:17Ben Gilbert?

  What?

• 1:28:18David Rosenthal?

  You can't make this stuff up. It literally happens. The cuff links are out there. You can Google them. He did this.

• 1:28:23Ben Gilbert?

  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 and you were the reason that you killed it.

• 1:28:34David Rosenthal?

  D is just such a character. So the other thing along these lines that he does, which is just hilarious. Once this is all set up, this, the international part of Visa becomes first IBANCO, I B A N C O. Shortly after this, they rebrand the whole thing into Visa, which we'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 25 people on the board. D holds board meetings all around the world, you know, different city, all the time. It's a global organization, whatnot. He invites the spouses of all the board members to come to each location. He's, oh, it's a family trip, you know, et cetera.

• 1:29:16David Rosenthal?

  And then he gets the idea, he invites the spouses into the board meeting itself.

• 1:29:22Ben Gilbert?

  Oh, what a nightmare.

• 1:29:23David Rosenthal?

  So 25 board members plus their spouses in his board meeting. This means two things. One, nothing is going to get done. There are 50 people in the room. Two, though, he needs all these people to behave well together and, you know, be generous and gallant. What better way to make sure they're on their best behavior than to have their spouse sitting behind them?

• 1:29:42Ben Gilbert?

  Wow.

• 1:29:43David Rosenthal?

  So like, are you really going to act like an asshole in front of not only your spouse, but the spouses of all these other global bank heads?

• 1:29:50Ben Gilbert?

  That's so funny. I'm going to start doing that.

• 1:29:53David Rosenthal?

  We should have our wives in the room while we record.

• 1:29:55Ben Gilbert?

  Definitely not.

• 1:29:57David Rosenthal?

  Amazing, amazing.

• 1:29:59Ben Gilbert?

  I think neither would join for that.

• 1:30:00David Rosenthal?

  Totally not. They'd be like, no.

• 1:30:03Ben Gilbert?

  Okay, so how does the name Visa come about? How does the sort of joining of the international and the domestic?

• 1:30:08David Rosenthal?

  Okay, Visa is so important. It's not just a rebrand. It has to happen once this international organization is set up.

• 1:30:17Ben Gilbert?

  Yeah, America can't be the name.

• 1:30:19David Rosenthal?

  Bank of America card ain't going to work. And importantly, as we'll 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 this global vision, we need a truly global brand and mark. Remember back to the blue, white and gold three stripes? That's iconic. It works internationally. Obviously, the name does not. So Dee holds a contest internally within NBI slash IBanko to generate a new name. And he offers a $50 prize for the winning entry that is chosen. And as legend goes, there are so many submissions of the name Visa that when they finally unveil it, Dee makes a big deal and writes out a $50 check. Check, why are they using a check?

• 1:31:04David Rosenthal?

  Made out to everyone in the company.

• 1:31:08David Rosenthal?

  Which is funny, but then they changed the name to 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.

• 1:31:22Ben Gilbert?

  It's interesting it's in English. I mean, I guess it makes sense. It's the most spoken language, but.

• 1:31:26David Rosenthal?

  Well, no, it's not just in English. The name Visa in every, if not almost every language on earth.

• 1:31:32Ben Gilbert?

  And when you're traveling and you need a visa for a country, they call it a visa in other languages, too.

• 1:31:37David Rosenthal?

  That's what it is. But when you are traveling internationally, when you're going through customs in any country, it is identified as a visa. That is the name.

• 1:31:44Ben Gilbert?

  Yeah, the universality, it's sort of a presumptive close. Cause at this point, you know, they've got what? Three, four, 500 banks, you know, and they have 16,000 today. It's quite the presumptive close that it will be universally accepted everywhere. The way that Visa would imply.

• 1:31:59David Rosenthal?

  Just every dimension, the presumptive close, the implication that this is a global network, that you can bring your Visa with you when you're traveling to other countries and it'll work. The actual definition of the word Visa, that it 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.

• 1:32:22Ben Gilbert?

  Yeah.

• 1:32:23David Rosenthal?

  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 interbank, that was a problem until they standardized on Mastercard. They've got the three bands, 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, too. So Visa says, okay, here's the operating regulations. Every card has to have the blue, white and gold. In the middle white band, Visa logo goes there. Nothing but the Visa logo.

• 1:33:09David Rosenthal?

  On the top blue band, you can put whatever you want. You can put your own bank logo. You banks get creative. You can do literally whatever you want. Banks start going around. They do affinity card programs with NFL teams, with merchants. This is how you get the Southwest card. This is how you get the San Francisco 49ers card. This is how you get the XYZ everything that they're a bazillion of now.

• 1:33:35Ben Gilbert?

  So in the blue stripe on the top of the top third of the card, the banks start co-branding with the name of their bank and some affinity.

• 1:33:43David Rosenthal?

  Yep. And this is kind of the brilliance of the Visa model. They were like, it's open. Do whatever you want up there.

• 1:33:51Ben Gilbert?

  Right, that seems good for us. We're happy with that.

• 1:33:52David Rosenthal?

  Of course, it's great. The whole goal is just get more consumers and more merchants on the network. So anything that's going to do that, great. While maintaining the universality of Visa, great. We got the middle, you got the top. Go wild, do whatever you want.

• 1:34:07Ben Gilbert?

  Wow. And that's how I end up with BB8 on my card today.

• 1:34:13David Rosenthal?

  Maybe the most important thing, though, for Visa really pulling away and 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 of America cards, need to be migrated to Visa 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 this still exists.

• 1:34:57David Rosenthal?

  Because consumers now, they know and Visa runs a national advertising campaign. Hey, your Bank of America card is going to switch to Visa. So some banks, in a version of the Fresno drop, they start sending unsolicited letters to consumers who are already Visa, Bank of America customers with another bank. They're like, oh, hey, it's time to switch over to your Visa card. Here's the application. Sign up with this.

• 1:35:21Ben Gilbert?

  Nice of them to, at this point in history, offer applications. I think 100 million cards got dropped in the United States before the government made it illegal to just start randomly issuing credit to people without their awareness or asking for it.

• 1:35:35David Rosenthal?

  Totally wild. But because of this, a whole bunch of consumers start sort of unconsciously switching the bank that issues their Visa card. And then, once this starts happening, this kicks off a total arms race where all the banks in the network are now like, shoot, we got to blanket the whole country and 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 1977, and the next year in 1978, the number of banks participating in the Visa system grows by 20%, because everybody who's not in the system now is like, I gotta get in the Visa system.

• 1:36:14Ben Gilbert?

  By the way, this is the thing that pushes Visa ahead of what was, I believe, then called Master Charge.

• 1:36:21David Rosenthal?

  Yes.

• 1:36:22Ben Gilbert?

  The interbank had changed to Master Charge. They hadn't yet turned it to MasterCard. But in 1976, Master Charge was actually bigger. They had 7,400 banks. And at this point in history, Visa had about 7,000 banks. Master Charge also had more cardholders, 37 million versus Bank of America's 31 million before they changed to Visa. So this, despite all the deck chair rearranging between the member banks, it was great for Visa to leap ahead of MasterCard.

• 1:36:49David Rosenthal?

  Totally. So that was, number of member banks grows by 20%. The number of active cardholders in the Visa network in this one year grows by 45%.

• 1:36:58Ben Gilbert?

  Wow.

• 1:36:59David Rosenthal?

  Isn't that wild? So as you say, they blow way past MasterCard thanks to this. They're already way bigger than AMEX, because AMEX is a different customer segment, which we'll talk about in a sec. And this really puts them on the path to becoming the dominant global network that they are today.

• 1:37:17Ben Gilbert?

  Yeah, and it's worth a moment on Amex 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 Amex win with their closed-loop system where they own the whole thing end-to-end and can provide the most incredibly custom experience for everyone on their platform, on the merchant side and on the consumer side? And one of the answers of why this open-loop system beat the closed-loop system is Visa adopts this strategy of the network of networks.

• 1:37:59Ben Gilbert?

  They go sign up one bank, that bank can go sign up 100 billion customers or 2 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 Amex. Amex also is a bank themselves, so is highly regulated, and they're a bank, by this point in history, I believe, on both sides of the transaction. So they're both a card-issuing bank and they are a merchant-acquiring bank. And so in terms of scaling internationally, you mentioned their name holds them back. Also, they have to become a bank in another country in order to expand to that country, whereas Visa just needs to go tap a few banks and say,

• 1:38:43Ben Gilbert?

  why don't you go figure out how to grow for us there? So this network of networks thing, the open-loop system, well, it creates a little bit more of a kluge user experience because there's sort of the lowest common denominator of data getting passed through the network. It's sort of open source versus something that's wholly owned and operated by a company, or a protocol versus fully-owned application. Anytime that you have something that's more distributed, you're going to be compromising a little bit on the user experience because you can't sort of rule by fiat when you want to make a change. But it does potentially come with much better scalability, which is the reason why Visa and Mastercard have become the dominant way versus the closed-loop systems.

• 1:39:25David Rosenthal?

  Yep. It's also worth closing the loop on Mastercard here, too. I mentioned that the DOJ eventually came after both Visa and Mastercard and prevented them from being exclusive systems. That does happen in 1975, and so this concept of duality takes hold for the bank's duality, meaning they can multi-home on both Visa and Mastercard. In all the testimony and case with the DOJ, D is obviously 100% against this happening. He doesn't want his banks to be able to join Mastercard too. But he also makes the surprisingly correct argument. He's like, look, this would be a huge mistake because US government, if you do this, you are going to freeze the payment networks in the US.

• 1:40:10David Rosenthal?

  Nobody is ever going to develop a new competing, open-loop payment network because now there's no more competitive vector between Visa and Mastercard. We'll all have the same features. Banks will be members of both. They're kind of going to operate in lockstep.

• 1:40:25Ben Gilbert?

  The prices should be identical for both.

• 1:40:28David Rosenthal?

  All this stuff. And the DOJ is like, no, no, no, no, we're going to do it anyway. Irony of ironies, later in 1988, the DOJ again sues Visa and Mastercard for being a duopoly and not competitive enough. So D was right. D was right.

• 1:40:43Ben Gilbert?

  And to this day, D has been right. There have been many attempts that we'll talk about toward the end of this episode of displacing Visa and Mastercard or inventing new payment systems. And like, they never work or they haven't worked yet.

• 1:40:55David Rosenthal?

  Great point. They're in the process of working.

• 1:40:59David Rosenthal?

  So great.

• 1:41:00Ben Gilbert?

  It's probably actually worth sharing the Amex thing. So Amex tried this crazy strategy in the eighties and I'm flashing forward 10 years here. But they would basically cut their interchange, the discount rate that they were charging merchants massively if those merchants would go exclusive to Amex. And this actually continued until 1991 for many of their merchants. And for Costco, went all the way to 2016, where they had the exclusive agreement with Amex. And if you were going to use a credit card at Costco, it had to be Amex. But interestingly, Visa and Mastercard cried foul when, you know, all of their banks were multi-homing. And Amex, with their virtue of a slightly different business model,

• 1:41:43Ben Gilbert?

  was allowed to go and try to lock up merchants to be exclusive to them. So eventually the whole thing kind of stopped. And, you know, flash forward to today, all cards are accepted at basically all locations.

• 1:41:54David Rosenthal?

  Yep. So this basically concludes the full Visa story. Like, how did this incredible thing happen? You know, we've answered D's 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 organizational, social, human behavior innovations that Visa and Dee created.

• 1:42:27Ben Gilbert?

  Yeah, as Dave puts it in Electronic Value Exchange, there's a socio-technical aspect to this company. And we've talked about the socio, but not the technical.

• 1:42:36David Rosenthal?

  Something that is also true, and also I think really underappreciated about Visa, is it's also a technology company. And there is a whole technology story in parallel with this too, that enabled the Visa we know today. To Dee's question of where is Visa headquartered and nobody knowing that, it's headquartered in the Bay Area. It's a Silicon Valley company. It was started in the same place and time as Intel, Atari, Apple. The only thing that is different about it versus those other companies is it wasn't funded by venture capital, and it thus didn't make anybody rich, except the banks who owned it, and thus we're already rich. But there's an incredible technology story.

• 1:43:20Ben Gilbert?

  Yeah, great point. All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, Logora, the agentic operating system that is redefining how the world's best legal teams work.

• 1:43:35David Rosenthal?

  Yep. It's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Logora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 1:43:51Ben Gilbert?

  So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done.

• 1:44:06David Rosenthal?

  And that's how you get features that customers love, like Tabular Review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Legora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

• 1:44:30Ben Gilbert?

  And they recently launched Legora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.

• 1:44:49David Rosenthal?

  And Legora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Legora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Legora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months.

• 1:45:19Ben Gilbert?

  Truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at legora.com/acquired and just tell them that Ben and David sent you. Okay, so David, what does Visa's technical infrastructure look like? And how did this come to be?

• 1:45:50David Rosenthal?

  So, everything we just described, up until now, amazing, incredible, unlikely, one in a million.

• 1:45:59David Rosenthal?

  But all it really bought D and Visa was the opportunity.

• 1:46:05Ben Gilbert?

  Yes.

• 1:46:06David Rosenthal?

  To actually realize what he sold to Bank of America and the other banks of a instant global payment network that a large percentage of global commerce runs on. You had to build a lot of technology to make that happen. And if you asked the question of D back in 1968, okay, let's assume we do this. And we put one of these soon to be Visa cards in the hand of every consumer on the planet. Do they actually want to use them instead of cash and checks? And the answer to that was probably not.

• 1:46:49Ben Gilbert?

  Fascinating.

• 1:46:50David Rosenthal?

  Now, they wanted to use them in specific use cases, like Ben, you pointed out, when you want to make a credit purchase, when you want to essentially do what installment financing was before, when you have any number of XYZ other set of factors, in the case of Diners Club and Amex, when you want to impress your colleagues and your business partners, there were use cases, but it wasn't like it is today, where obviously you're going to use your credit card, which is probably a Visa and maybe a MasterCard to pay for everything that you do everywhere instantly.

• 1:47:23Ben Gilbert?

  Yes, and to illustrate, we will link this in the show notes, but there is an old TV segment from 1993, not that old, pretty recent.

• 1:47:33David Rosenthal?

  Ben, I have really sad news. 1993 was 30 years ago.

• 1:47:38Ben Gilbert?

  Yeah.

• 1:47:38David Rosenthal?

  We remember it, but it's old now. 1993 to today is like the 1950s were to us when we were kids.

• 1:47:45Ben Gilbert?

  Not good, not good, David.

• 1:47:47David Rosenthal?

  Not good.

• 1:47:49Ben Gilbert?

  This 1993 TV segment, "The News Is That Burger King Has Just Rolled Out Credit Cards." That should tell you a lot. Burger King, prior to 1993, did not accept credit cards, or at least, this commercial makes it seem that way. And they interview this woman, and she 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 1993. And, a second guy is interviewed and says something to the effect of, "I just hope it 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 it doesn't slow things down." And it's like, the prevailing idea is that cash is fast, cash is easy-

• 1:48:34David Rosenthal?

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

• 1:48:41Ben Gilbert?

  Yes. But even at this point in history, it was viewed as this cumbersome thing, rather than a convenient thing, to bust out the card, rather than, you know, like, I actually think Burger King corporate crunched the numbers, and they were like, "Jeez, for the amount of time we spend handling change, we just want to encourage everyone to be swiping the card all the time, even if they're, you know, losing some money on the interchange."

• 1:49:00David Rosenthal?

  It's crazy. That was 1993. I mean-

• 1:49:03Ben Gilbert?

  Yeah.

• 1:49:04David Rosenthal?

  Compare that to today, and, I mean, I don't know about you, but I get pissed when somebody ahead of me in line starts breaking out cash and coins. I'm like, "Oh, my god."

• 1:49:12Ben Gilbert?

  Oh, 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 drafts, and then starting to mail it around.

• 1:49:23David Rosenthal?

  Yes. So, to get from there to today, three major pieces of technology needed to be built by Visa. One was transaction authorizations. So, when we were talking about transactions happening earlier, and the person in Burger King was referencing, like, "Oh, they got a call to New York, and they got to authorize the transaction and all that." We glossed over one sort of stopgap slash Band-Aid that Visa and 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

• 1:50:06David Rosenthal?

  called a floor limit. And the floor limit was any transaction over that limit could not be authorized directly on the floor. And say it was, I don't know, 50 bucks or something like that. Anything paid with a credit card under $50, it was basically within the judgment of the cashier to say yes or no. And so, everybody just said yes. I mean, the reality was, this was the threshold below which the banks and Visa were willing to say, okay, we'll accept a certain amount of fraud.

• 1:50:37Ben Gilbert?

  Interesting.

• 1:50:37David Rosenthal?

  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. Then 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 cardholder bank.

• 1:51:00Ben Gilbert?

  Oh my god.

• 1:51:00David Rosenthal?

  Get somebody on the horn there, say, hey, I've got your cardholder Benjamin Gilbert, his card number is XYZ, you know, 123, can you look up his credit and, you know, he wants to buy a $500 refrigerator, can you tell me if he's good for it?

• 1:51:16Ben Gilbert?

  Right. And this effectively would be like, have they hit their limit yet?

• 1:51:19David Rosenthal?

  Yes, have they hit their limit? The issuing bank would go look that up, the person there, literally the person, talk on the phone to the person at the merchant bank, give them the answer. The merchant bank then switches the line back to the cashier at the store and says like, yeah, Ben is good for it, or no, Ben is not good for it.

• 1:51:35Ben Gilbert?

  So you had banks talking to banks?

• 1:51:38David Rosenthal?

  People at merchants, talking to people at their bank, talking to people at the cardholders' bank, and then reversing the whole chain.

• 1:51:46Ben Gilbert?

  But importantly, you had a person at the merchant's bank calling a person at the cardholders' bank?

• 1:51:53David Rosenthal?

  Yes.

• 1:51:54Ben Gilbert?

  Today, that is known as VisaNet. There's this piece of technology that sits in the middle that eliminates that bank-to-bank phone call.

• 1:52:01David Rosenthal?

  And so this is a big part of one of the first things that Visa builds. And that process that we just described, that could take like 20 minutes. And it just didn't work outside of business hours for those banks. So say, you know, now that Bank of America Card is nationwide, soon to be international. Imagine you're trying to buy something in Japan and the Japanese merchant bank calls your cardholder bank back in America, closed for business, just no way for that transaction to happen.

• 1:52:32Ben Gilbert?

  Wow, that's crazy.

• 1:52:34David Rosenthal?

  Not good, definitely not good. So D and Visa know that this is like the first thing that they have to address. In 1971, right after NBI is formed, D starts a project called the Bank of America Card Authorization System Experimental, or BASE, 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 NBI, I think it was literally the evening before the first board meeting, Bank of America comes up to D and they're like, can we take you aside? There's something you need to know.

• 1:53:15Ben Gilbert?

  Oh, God, that's always fun before a first board meeting.

• 1:53:18David Rosenthal?

  And they're like, well, it's kind of hard to tell you. We've been 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 card systems across the whole country. And we're going to do this. So, you know, D, if you want us to remain part of NBI, remember, this is Bank of America, the most important part of NBI.

• 1:53:48Ben Gilbert?

  Oh, my God.

• 1:53:49David Rosenthal?

  I know, you know, that part of the operating agreement is like, you know, we can't really operate outside of the bounds of NBI, but this isn't really outside the bounds of the NBI. This is a separate thing. This is authorization systems. We're gonna do this, and if you say we can't do this, we're out.

• 1:54:03Ben Gilbert?

  Whoa.

• 1:54:04David Rosenthal?

  So, not good.

• 1:54:06Ben Gilbert?

  And it's true. It's not really like they're issuing new cards or acquiring new merchants. They're being a technology provider.

• 1:54:14David Rosenthal?

  Because they and American Express both see that, hey, this is a really, really, really valuable piece of technology.

• 1:54:20Ben Gilbert?

  Hmm.

• 1:54:21David Rosenthal?

  D is, of course, pissed, but what's he gonna do? B of A says, "Take it or leave it." D takes it. As D then tells the story, Bank of America and Amex go out and they try and pitch the other banks in NBI and Interbank and 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 morphs into a tripartite consortium of Interbank, American Express, and Bank of America, and thus by association, NBI. Our old friends, the Department of Justice, start sniffing around, and they're like, "All

• 1:55:06David Rosenthal?

  right, now this is actually collusion and anti-competitive behavior, so if you go forward with this, we're gonna sue you." And they all abandon the project. And this is huge for Visa, because this means they can build it on their own.

• 1:55:21Ben Gilbert?

  Fascinating.

• 1:55:22David Rosenthal?

  So they do the natural thing at the time. I mean, these are bankers. Even though they're based in San Francisco and Silicon Valley, these aren't tech folks. They put out an RFP to folks like IBM, systems integrators, you know, the accentures of the day, to go build this technology for them. Go build a computerized authorization system for the Bank of America Visa network. All the bids come back, and of course, they are all way over budget and way over time. So D says, "Well, screw it. We're gonna do it ourselves. How hard can it be?"

• 1:55:55Ben Gilbert?

  Wow.

• 1:55:56David Rosenthal?

  So in his very D way, he goes and he recruits the guy from the firm that impressed them the most throughout the bidding process, was a firm named TRW and a guy named Aram Tutulian. D goes back to him, and he's like, "I like you." You come work for me. Leave TRW. I'm gonna hire you. You build this here in-house.

• 1:56:18Ben Gilbert?

  Wow.

• 1:56:19David Rosenthal?

  And I'll give you the resources. You come join us and you'll build out your own tech team here within NBI/Visa. Aram comes and joins and starts the core of the Visa tech team. Dee 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 so that the electronic communication can happen. Two, installing computer systems in each of the member banks around the country so that instead of 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,

• 1:57:04David Rosenthal?

  building a new centralized data center for Visa in the Bay Area. And this becomes the San Mateo campus. You can see it right off of 101 as you're driving between San Francisco and Silicon Valley. It is, I believe, still the headquarters of Visa today now. Huge campus in San Mateo where they build the data center.

• 1:57:22Ben Gilbert?

  Until, I think, next year, it's gonna go back up to San Francisco when they finish a new building.

• 1:57:26David Rosenthal?

  That's right. I think it's going to Mission Bay. So miraculously, Aram and his new Tiger Visa tech team, they do it. They do it in nine months and it works. So Dave Sterns writes in his book about this whole situation and about Dee. Dee 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.

• 1:58:00Ben Gilbert?

  They will just consume it.

• 1:58:02David Rosenthal?

  They'll just consume it.

• 1:58:03Ben Gilbert?

  Fascinating. Okay, so they build what becomes VisaNet in-house. At this point, you know, there's no internet, so it's all just working over telephone communication.

• 1:58:13David Rosenthal?

  Yep, direct networking.

• 1:58:14Ben Gilbert?

  Amazing. And so they're just operating the whole network out of this data center in California.

• 1:58:20David Rosenthal?

  Yep. Now importantly, this is only for transaction authorizations. So the cards and the point of sale have not been digitized yet. That's going to be the final third piece of the stool of technology that 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 then the interbank communication.

• 1:58:46Ben Gilbert?

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

• 1:58:49David Rosenthal?

  So that's what's next. That's the next big operational, technical problem that Visa needs to solve.

• 1:58:55Ben Gilbert?

  Is like literally moving the money when it needs to be moved.

• 1:58:58David Rosenthal?

  Reconciling the transactions, moving the money, getting everything wrapped up at the end of the day, week, month, sending out statements, all this stuff. You could 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 end piece consumed a lot of phone time and people. The back end piece consumed a lot of paper and time, too. Maybe more time, but like a lot of paper.

• 1:59:28Ben Gilbert?

  Because you're effectively mailing checks.

• 1:59:30David Rosenthal?

  And even more perniciously, as the network grew, and at this point in time, soon to be Visa is growing explosively, the complexity of this settlement piece also grows sort of exponentially. Every new bank node 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.

• 1:59:56Ben Gilbert?

  It's an n squared problem.

• 1:59:57David Rosenthal?

  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.

• 2:00:05Ben Gilbert?

  N squared is much worse when you're doing it with paper than with computers.

• 2:00:08David Rosenthal?

  Yes. So what you really need to do this efficiently, to bring it all the way back to the beginning of the episode. Is a clearinghouse. You need an automated clearinghouse. And this is unbelievable. A few people had referenced 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 clearinghouse for themselves to do settlement electronically over the network. They end up calling this project base two 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

• 2:00:53David Rosenthal?

  their own ACH system for checks, you know, automated clearinghouse, ACH, everything in the banking system that was built by the San Francisco branch of the Federal Reserve in the exact same years in the seventies when Visa was building their own essentially automated clearinghouse system.

• 2:01:11Ben Gilbert?

  That is wild.

• 2:01:12David Rosenthal?

  Now, I've never read anything. I couldn't find anything. I've never heard anybody say that they like talked to each other, that they knew anything about what was going on, that they were sharing practices. I assume they probably didn't, but it's wild. The same place, the same time.

• 2:01:26Ben Gilbert?

  Solving the same problem.

• 2:01:27David Rosenthal?

  Solving the same problem.

• 2:01:29Ben Gilbert?

  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 100 bucks 500 times and I paid you 100 bucks 400 times, what is the net that actually needs to get transferred? And that is a far more efficient way, you know, batching them up is a far more efficient way than transferring the money back and forth every single time, but still can be a complicated problem, especially when you have thousands of banks on each side of that equation.

• 2:02:03David Rosenthal?

  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 wild. Once Base 2 is done, and again, it also happens in less than a year, that it's 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 know, like some good, some bad between the banks, between the merchants, the issuing banks.

• 2:02:41Ben Gilbert?

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

• 2:02:44David Rosenthal?

  Yes, exactly. Exactly. Also importantly, this is from Dave's book, it ends up saving about $15 million in labor and postage costs to the banks by automating this just in year one.

• 2:02:58Ben Gilbert?

  Wow.

• 2:02:59David Rosenthal?

  And imagine if this were done manually today. It wouldn't be possible to do this manually today.

• 2:03:04Ben Gilbert?

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

• 2:03:10David Rosenthal?

  Yep. It is also during this project that one of the most famous Visa tech team stories in history happens.

• 2:03:21Ben Gilbert?

  This is a good one.

• 2:03:22David Rosenthal?

  This is in Dave's book. So one of the guys, I think he was working on Base 1 and then maybe got transferred into Base 2. He is thinking about the system and reliability is so important. You know, this network can't go down. He's like, huh. We actually have a pretty serious vulnerability in this system. So he goes to see Dee. And I mean, the whole Visa organization, I think, is like less than 50 people at this point in time.

• 2:03:52Ben Gilbert?

  Wow.

• 2:03:52David Rosenthal?

  Just wild. And he's like, Dee, you know, all this technology we're building, you know, we've got authorizations running, we're 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 perched on a cliff. And we're also about a mile from the San Andreas Fault.

• 2:04:23David Rosenthal?

  So, you know, we really might want to think about having some sort of redundant parallel site, a data center out there. And D, it is very D way he thinks about it. He's like, all right, let me think about this over the weekend. He comes back on Monday and he's like, all right, 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 it done within six months.

• 2:04:55Ben Gilbert?

  And invent the technology to keep these things synchronized so they are actually redundant.

• 2:05:01David Rosenthal?

  Yes. So now D is not technical enough to talk about that, but this is super important. Up until this point in time, state of the art in the sort of fledgling data center world was yes, to have redundant other location backups. But the way that it was typically done was you had your primary data center that operated at full capacity all the time. The backups were just like cold storage. They were like dormant backups that only were there to come online if you had to fail over from the primary system. Visa though, and the Visa tech team, they're like, you know, if we're going to go through all this trouble and expense of building another data center.

• 2:05:43Ben Gilbert?

  Let's use it.

• 2:05:44David Rosenthal?

  Let's use it. So they re-architected base one and completed architecting base two to run concurrently across multiple data centers 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.

• 2:06:07Ben Gilbert?

  Wow.

• 2:06:08David Rosenthal?

  Totally wild, right? I don't know that it was the first, but it was definitely not state of the art before. This whole data center world was still pretty new and Visa definitely like through ingenuity invented a way to do this.

• 2:06:23Ben Gilbert?

  Fascinating.

• 2:06:24David Rosenthal?

  And of course, this is now how every data center in the world runs today. Pretty amazing. So that was data center innovation, which sort of happens in concert with settlement digitization. The third big leg of the technology stool that Visa 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 digitizing the point of sale terminal in the merchants.

• 2:07:00Ben Gilbert?

  Those Veri Phone, you know, traditionally, they had a huge market share.

• 2:07:04David Rosenthal?

  Well, this is when Veri Phone gets built. There was no Veri Phone before this.

• 2:07:09Ben Gilbert?

  Yep.

• 2:07:10David Rosenthal?

  This is huge. This is the holy grail. The base one authorization system, that was still only for transactions above the floor limits at the merchants. So, you know, above 50 bucks or 100 bucks or whatever. It replaced the need for phone calls, but it didn't digitize the transactions themselves.

• 2:07:29Ben Gilbert?

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

• 2:07:35David Rosenthal?

  Exactly. Not only authorization, but just think about all the things that happen digitally around transactions, the data, you know, 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 them machine readable. So before this, the cards were just pieces of plastic with embossed numbers on them. Like you had to say or type the numbers into something.

• 2:08:02Ben Gilbert?

  And the nice thing about the embossing is that if you run a shunk shunk on it.

• 2:08:06David Rosenthal?

  A zip zap.

• 2:08:07Ben Gilbert?

  With the, uh, the zip zap or the card imprint reader, you actually can get the numbers off of it without writing it down yourself. That was a huge productivity gain when they launched the sort of imprint reader machines.

• 2:08:20David Rosenthal?

  Yep. So Visa makes the decision, they end up going with the MagStripe technology. This is the magnetic strip on the back of still to this day, almost everybody's cards out there. There's a whole bunch of drama around this. Citibank had financed a proprietary magnetic solution that they were trying to push on the industry. I think there are a bunch of lawsuits.

• 2:08:41Ben Gilbert?

  And didn't they try to like hack the magnetic stripe? And then they did just to prove that like the proprietary thing would have been more secure.

• 2:08:48David Rosenthal?

  Yes, but it was proprietary. So Visa's like, hey, we're not going to pay you Citibank a skiff on everything that we do here. We take.

• 2:08:55Ben Gilbert?

  You pay us a skiff on everything.

• 2:08:57David Rosenthal?

  Exactly.

• 2:09:00David Rosenthal?

  So they standardized on the MagStripe for the cards. The next step then is they have to create a digital point of 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.

• 2:09:21Ben Gilbert?

  That is outside their circle of competence.

• 2:09:23David Rosenthal?

  Yes. We mentioned earlier, and you alluded to, this is when Verifone 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. Verifone ends up becoming the large dominant, I actually don't know what their market share was or is.

• 2:09:45Ben Gilbert?

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

• 2:09:47David Rosenthal?

  Yeah. And it's pretty crazy. They come up with this sub $500 device that can sit pretty easily on a merchant countertop that already has a bunch of other stuff on it and not a lot of space and get it distributed and installed at all these merchants. Now, the merchants didn't exactly want this thing necessarily. But the way Visa incentivized 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.

• 2:10:22Ben Gilbert?

  I see. If you use this instead of the Zip Zap, you'll get cheaper fees.

• 2:10:25David Rosenthal?

  Yep, exactly.

• 2:10:27Ben Gilbert?

  Which that business model carries through to today. I mean, the way that you charge a card massively affects the interchange that gets charged, whether it's keyed in with numbers, or whether it's swiped, or whether it's an e-commerce transaction.

• 2:10:39David Rosenthal?

  Totally. One really fun piece of implementation detail around this, just like with Base One and authorization, where Visa had to build out a telecommunications network amongst all the banks. Now Visa needs a telecommunications network amongst all the merchants around the whole world, the country and the world. That's another whole step change.

• 2:11:02Ben Gilbert?

  That's like, single-digit millions of nodes.

• 2:11:04David Rosenthal?

  Yes. So what are they gonna do? For the pilot program, they work with one of the big telecom vendors and essentially like build it out themselves. We're now in the 1980s here, but they realized during this that there's this new fledgling kind of consumer networking service out there called CompuServe. And for folks who either weren't alive in the US at this time, or are not Americans, CompuServe was like an AOL competitor in the early days of the internet.

• 2:11:34Ben Gilbert?

  I think they invented the GIF.

• 2:11:36David Rosenthal?

  Oh, I think that might be right. Yeah.

• 2:11:38Ben Gilbert?

  Yep.

• 2:11:39David Rosenthal?

  So as a consumer, you would pay a monthly fee to CompuServe or AOL or whatever, and it would be your internet service provider, but also like your email and, you know, your portal to the web.

• 2:11:50Ben Gilbert?

  It was a proprietary internet.

• 2:11:52David Rosenthal?

  So they somehow get in touch with CompuServe, and they realize 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 merchant point-of-sale terminals. And I think this goes on for like, years.

• 2:12:25Ben Gilbert?

  That's crazy. I had no idea. That's fascinating.

• 2:12:28David Rosenthal?

  Totally wild.

• 2:12:29Ben Gilbert?

  Normally, you run into the problem where with spare capacity, where like, the time where people want your extra capacity is when you have none. So it's kind of amazing to find two complementary use cases for the same infrastructure that when one is waxing, the other's waning.

• 2:12:45David Rosenthal?

  Yeah, pretty 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 like tons of fraud was happening below the floor limits. You know, if you're charging a $5 transaction to a card, it's just not worth it to the banks and Visa to like, figure out whether that's fraudulent or not. Now, because it's all digital and instant, they can figure out whether that's fraudulent or not.

• 2:13:18Ben Gilbert?

  Hmm.

• 2:13:19David Rosenthal?

  So during the pilot, banks and merchants that were participating in this program reduced chargebacks to the system by 82% relative to what was happening before. So it's just like, a massive amount of fraud gets eliminated.

• 2:13:36Ben Gilbert?

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

• 2:13:46David Rosenthal?

  Absolutely.

• 2:13:47Ben Gilbert?

  In many ways that, hey, we're going to, you know, reward you with lower interchange to install these terminals. Like, at the end of the day, Visa probably could have maintained a margin, and all the banks could have maintained a profit margin, and not lost any margin percentage because just implementing this technology lowered the cost of running the whole thing.

• 2:14:02David Rosenthal?

  Yep. 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 card, or you tap into whatever, and it just works, and it gets authorized, and you get your thing immediately. This is the backbone to all of that being possible. Two, though, for Visa as a company and Visa as a business, they are now fully digital. They can scale infinitely with essentially zero marginal cost.

• 2:14:41Ben Gilbert?

  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 make every dollar after this basically fell to the bottom line.

• 2:14:57David Rosenthal?

  Yes, this unlocks just like an unfathomably good business model. Before this, some element of adding scale into the system required manual labor. Now it's all just ones and zeros.

• 2:15:11Ben Gilbert?

  Now the toll booth is fully built. It is a high functioning toll booth. It's a immovable toll booth.

• 2:15:19David Rosenthal?

  It's digitized. It doesn't, no longer has a human sitting there. They've got the fast pass system or whatever.

• 2:15:25Ben Gilbert?

  Yep. 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's obviously the IPO event that we want to talk about in 2008 and sort of how the structure of the whole thing changed. But I think you've got a marketing thing that you want to talk about too.

• 2:15:48David Rosenthal?

  Yeah, there's one more really fun marketing piece that I want to come back to before we move on to today, and that's the Olympics. A lot of people, probably everybody listening now knows Visa is associated with the Olympics.

• 2:16:03Ben Gilbert?

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

• 2:16:08David Rosenthal?

  But that's only in America. NBC doesn't mean anything around the globe. Visa is the Olympics everywhere. So this happens right around the same time as the digitization of point of sale and the cards. It's 1986. 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 sponsor the Olympics in specific countries. You could sponsor whatever broadcast, whatever television, radio was covering the Olympics in certain countries. You could have billboards and whatnot, but you couldn't do a global sponsorship. And there's no event like the Olympics that could really do this.

• 2:16:52David Rosenthal?

  I mean, 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 going to reach everybody in the world. And up until this point. One of the mainstay largest Olympic sponsors in America was American Express.

• 2:17:13David Rosenthal?

  Because this fits perfectly with American Express. It's for American business people who are traveling abroad. Olympics, great, amazing. The Olympics, the IOC, goes to Amex to try and sign them up to take this marquee global sponsorship slot. They think it's a no brainer. They give Amex a sweetheart introductory offer deal. You're the first people we're going to, $14 million. Amex declines. Whoa. So they had their bite at the apple and they missed it. A couple of years before this, right as the Visa empire was being completed with the full digitization of the network, Dee ends up getting ousted from the company.

• 2:17:55David Rosenthal?

  I think, you know, if he were still alive today, he would probably agree with the characterization that Dee was one of the most amazing zero to one entrepreneurs in history. Not so much a one to N kind of guy, especially when the industry in which you're going from one to N and your shareholders and board is all some of the most conservative financial institutions in the world. A lot of conflict starts to erupt, ends up with Dee leaving the company in 1984. After this happens, Visa brings on a new global chief marketing officer, a guy named John Bennett, who came from 20 years at American Express.

• 2:18:38David Rosenthal?

  So he and his team see that Amex has passed on this new amazing global opportunity with the Olympics. They're also formulating the new Visa marketing strategy. Up until that point, the marketing strategy had been mostly generate category awareness for consumers around the world. To the extent we competed with anybody, we competed with Mastercard, so we positioned against them. John comes in and he's like, no, no, no. The path to victory here is not positioning against Mastercard. The path to victory is positioning against American Express. Not because we want to kill American Express. We don't actually care. We're way, way, way bigger than American Express.

• 2:19:22David Rosenthal?

  But we need global ubiquity and adoption and people to get comfortable with using Visa and using credit cards. Remember, there's still this social stigma. That woman in 1993 in Burger King who's like, oh, it's sad if you're using debt to buy a hamburger.

• 2:19:39Ben Gilbert?

  Which is so interesting because a signature piece of the Bank of America card 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 it into a loan. But I have never elected that option. I hold these things called credit cards, but that's a misnomer. I've never once used any credit.

• 2:19:59David Rosenthal?

  Right. And if this were certainly 1986 and still 1993, 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.

• 2:20:09Ben Gilbert?

  Right. Although I should say, it's probably false to say I've never used any credit. The bank does float you the money for a month, but they have a one-month grace period where you have no interest.

• 2:20:17David Rosenthal?

  Yes, you are using debt. You're just not paying interest.

• 2:20:20Ben Gilbert?

  Yes.

• 2:20:21David Rosenthal?

  Which, you know, hey, that's a great thing to do.

• 2:20:23Ben Gilbert?

  That's an amazing gift that these banks give the world.

• 2:20:26David Rosenthal?

  It's the American way. So, John had just started. The strategy is use American Express to eliminate the stigma around Visa. And by association, paint Mastercard as 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 25% the size of Visa's. So they design a whole marketing campaign around going after American Express. And the tagline of the campaign, you know, they show these exotic locales, the type of customers who would be using American Express, that they would be dining at these

• 2:21:09David Rosenthal?

  restaurants or going to these events or going on these vacations. And the end, folks who are of our similar age probably remember exactly the words here. If you go there, remember to take your Visa card because they don't take American Express. So great. And then the second tagline to it was Visa, it's everywhere you want to be. So the Olympics come up after Amex declines, John and the team get in touch with the IOC. The price tag has gone up to $17 million just for the rights. That's before any media buys, no advertising, that's just for the right to be a global sponsor of the Olympics. They pull the trigger, they become the founding like global Olympic sponsor.

• 2:21:54David Rosenthal?

  They spend another $23 million in media for the 1988 Olympics. So $40 million in total on one global event. Well, the two, there's the summer and the winter Olympics, but like one year of global events.

• 2:22:10Ben Gilbert?

  That's about $110 million in today's dollars.

• 2:22:13David Rosenthal?

  Yeah, wild, way more than they spent on any of the technology projects that we were just talking about.

• 2:22:19Ben Gilbert?

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

• 2:22:22David Rosenthal?

  Yeah. What's the line? First time founders focus on technology. Second time founders focus on distribution.

• 2:22:28Ben Gilbert?

  Yep.

• 2:22:29David Rosenthal?

  And then the real kicker, 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 they're training all these people that are going to the Olympics year after year after year. It has now been 37 years that Visa is the exclusive payments global sponsor of the Olympics. They're contracted through 2032, so it will be at least 46 years where Visa is the only card accepted at the Olympics.

• 2:23:14Ben Gilbert?

  Which that's not that big a deal because there's not that many people that go relative to the people that see the media and understand the brand association.

• 2:23:20David Rosenthal?

  Of course, of course. But the reason we're talking about this, A, it's an awesome story. But to the last outstanding piece of enabling the global 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 was it. Position against Amex, go to the Olympics. It's the perfect event. You're around the world, the type of people who go to the Olympics, the type of people who use Amex. They use their Visa cards and they're proud of it.

• 2:23:50Ben Gilbert?

  Love it. So David, take us to the IPO. This thing was an organization that was owned, but not with stock.

• 2:24:00David Rosenthal?

  A for-profit, non-stock, membership organization.

• 2:24:03Ben Gilbert?

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

• 2:24:07David Rosenthal?

  Yep, just about a half a trillion dollar market cap. So the precipitating event wasn't actually the banks trying to get greedy and monetize their asset, although they did monetize the asset.

• 2:24:20Ben Gilbert?

  They were monetizing it just fine, the way that they currently owned it.

• 2:24:22David Rosenthal?

  Yes, the profits being spit out of the system were justified. In 2005, there finally was another huge antitrust lawsuit, I think against both Visa and Mastercard.

• 2:24:35Ben Gilbert?

  It actually is a class action lawsuit that the merchants brought. And they basically got fully fed up with interchange. And you know, every 10 years or so, there's some meaningful merchant push to try to change interchange. And they either do it in Congress or they do it in a class action case. You know, there's a variety of different ways. And this particular class action suit in 2005 is still running today. And the numbers have mostly been figured out of how much Visa will owe from a 2012 ruling that then got appealed. So it's sort of still going on. But basically, there was a lot of uncertainty in the 2005 and 6 timeframe of geez, what's the liability here going to be?

• 2:25:20Ben Gilbert?

  And Mastercard had gone public and did not sort through this issue at all. They just said, oh, we're going public and shareholders, yep, there's lots of uncertainty in our future and like, we'll see, but buy 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. Amex was already public. You can reward and retain talent easier. There's just like lots of reasons why you would want this thing to be sort of a standalone entity, especially at this point in history. And what they had to do was they created these B shares and they isolated all the liability

• 2:26:03Ben Gilbert?

  from this class action suit to the B shares. So while Mastercard had a pretty flubbed IPO, Visa had a great IPO because they said, whatever the courts rule, the banks who own the B shares, the pre-existing shareholders 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.

• 2:26:24David Rosenthal?

  Oh, that's awesome. I didn't realize that in the research. It finally happens in 2008. Visa goes public right as the financial crisis is starting, which obviously wasn't planned, but ends up being great for the banks and probably for Visa, too. It becomes the largest US IPO in history. Up to that point, they raised $18 billion at a $90 billion initial market cap. But that $18 billion wasn't primary capital to the company's balance sheet because obviously Visa was incredibly profitable, did not need capital.

• 2:27:00Ben Gilbert?

  It prints money. Why would you want to raise capital and dilute?

• 2:27:03David Rosenthal?

  That $18 billion was secondary selling to the banks that owned the company, which I think for many of them proved to be a total lifeline through the financial crisis that helped them survive.

• 2:27:17Ben Gilbert?

  Yep. I mean, now Visa is owned mostly by big institutional shareholders, the vanguards and fidelities of the world, and the banks are much smaller shareholders.

• 2:27:26David Rosenthal?

  Well, at this point, Visa's market cap is significantly larger than any of its former member banks.

• 2:27:33Ben Gilbert?

  It's wild. I mean, D. Hawk basically was right. That's the TLDR on this is this thing, this information network, that doesn't have to take on any of the risk of any of these transactions. It's 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 listeners, you can decide. So David and I have made passing references to the idea that this is this ludicrously cash generative business. And I think it's time to actually examine interchange fees today, how they've changed over time, how they flow, who benefits, what's Visa's cut, all of that, so you can kind of understand it. So.

• 2:28:18Ben Gilbert?

  Visa's business model. The first thing to know is, almost nothing has changed since the 80s 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 VisaNet, who checks with the issuer's 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 know, within milliseconds, unbelievably short period of time, no matter where you are in the world, no matter what currency you are transacting in, your transaction

• 2:29:03Ben Gilbert?

  can happen. Pretty unbelievable, amazing that within seconds, you can know for certain that someone is vouching for the customer's money and paying in full. Well, nearly in full, minus a merchant discount rate. So, what is this merchant discount rate? There are a few things at play here. There are interchange fees, and those interchange fees go to the issuing bank. There are assessment fees, or network fees, and that network fee goes to Visa, Mastercard, etc. And then, there are payment processing fees, and those go to the acquiring bank, the bank that acquired the merchant, this is the merchant's bank, and the technology provider of whatever they're using to process their payment.

• 2:29:44Ben Gilbert?

  So, three fees: interchange, network fees, payment processing fees. Here's what those could look like. And, again, I say "could" because they are different in every scenario. There's a very long PDF on Visa's website that is available with every different concoction you could 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, US credit card. The merchant is charged a 2% discount off the sale price. So it was $100 a pair of shoes. You're now making $98. And what happens to that 2%? So that 2%, the lion's share of it is the interchange,

• 2:30:29Ben Gilbert?

  the 1.6%. That goes to the bank that issued the card.

• 2:30:34David Rosenthal?

  To the cardholder, to the consumer.

• 2:30:36Ben Gilbert?

  Right. So when everybody on the planet is marketing credit card offers to you, they get the lion's share of the interchange. So they actually have a lot to play with in customer acquisition for their cards because they make the lion's share of the transaction, the interchange. There's a lot of costs in there, too, because they bear all the fraud risk. There's a lot of things they gotta do, but you know, they get most of the money. A small amount, on the order of like 0.2% or 20 bips for you finance people out there, goes to the bank that acquired the merchant. This could be Chase, Fiserv, Wells Fargo. This is, you know, the merchant's bank. It is important to know, this may also get split with a technology provider.

• 2:31:19Ben Gilbert?

  So sometimes the financial institution directly has technology that you can use. But other times, the checkout terminal or software that you're using is not actually the financial institution behind it. So that 0.2% can kind of get split between the financial institution and the technology provider.

• 2:31:36David Rosenthal?

  And those are folks like First Data and stuff like that, right?

• 2:31:39Ben Gilbert?

  Yes. 0.15 to 0.2% goes to the network. This number is actually quite hard to find. You read Visa's entire annual report and you're like, wait, but what part of the split do you actually get? And it's because they get it in a variety of different ways. I would say, I don't know if the Visa people would tell you this is intentionally obfuscated or if it just ends up being kind of obfuscated. But it's not super easy to figure this out. So Visa, let's round it to 0.2%, gets 20 cents of that $100 shoe sale. But the cool thing about their 20 cents is there's basically no variable costs. Yes.

• 2:32:22Ben Gilbert?

  It's not dealing with fraud, it's not moving heavy data around. I mean, merchants are allowed to have a 20-character name in Visa's network. Like, this is tiny amounts of data. Stack as much metadata as you want on top of that. We are not shipping around huge payloads here. There is not like Nvidia 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 infinitesimally small relative to the amount that technology has progressed. This 0.2%, the 20 cents on the $100 transaction, very low variable costs associated with that. So, a few caveats on this.

• 2:33:07Ben Gilbert?

  Debit is significantly less in most cases, and often thanks to regulatory reasons. And the logic here is, nobody'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's account. So, debit cards are going to be less. Smaller merchants often pay closer to 3% than 2% because they're just doing lower volume. And for these small businesses, the acquiring bank actually has to do a lot more work. Think about how difficult it is to market a credit card to an individual. Well, small businesses kind of behave like individuals. So, because the acquiring bank actually has to do a lot more work and incur costs,

• 2:33:51Ben Gilbert?

  they get to make more money. So, there's sort of this very interesting thing that has happened where interchange is intentionally quite flexible. This is a playbook theme that I want to pull forward. This business is probably the greatest masterclass in the entire world on incentive alignment. And I was talking with Lisa Ellis at Moffett Nathanson, 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 kind of figure out exactly how it should flow in each of these particular types of transactions.

• 2:34:33Ben Gilbert?

  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 interchange is that it's intentionally flexible.

• 2:34:43David Rosenthal?

  Yep. Which brings up, you know, an obvious point that we perhaps didn't highlight as specifically as we should have earlier. This network is actually a five sided system. There's the consumer that is buying something. There's the merchant that is selling that something to them. There's the Visa network in the middle, that's the third party. But then there also are the fourth and 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 to split up the value. And depending on who is doing what work, it should be split different ways.

• 2:35:29Ben Gilbert?

  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 don't we come up with other types of Visa cards that just have higher interchange? And merchants are like, what do you mean, just have higher interchange?

• 2:35:49David Rosenthal?

  Your new product is you charge me more?

• 2:35:51Ben Gilbert?

  And Visa says, well, the cool thing about higher interchange 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 tier, this Visa signature, you actually get more money. Well, then they turn around and say, cool, I'm going to go and I'm going to give better rewards to higher spending, you know, more credit worthy customers. And then Visa's argument back to the merchant is, well, hey, because we're actually taking more money on this fancier card, you're getting Access to customers that we've now brought onto our network, who are much better customers that you really want to have at your establishment.

• 2:36:37Ben Gilbert?

  And so it's this very interesting, again, envelope of value, I think, is the way to describe it. Where, you know, I'm sure the merchants wish they could be more a part of the decision process. But it does theoretically enable incentives to be spread around that benefit everyone in the ecosystem.

• 2:36:56David Rosenthal?

  Yep. And for merchants of scale today, they're cut in on this too, right? There's the Alaska 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.

• 2:37:16Ben Gilbert?

  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 oftentimes we're 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 rewards, but it's effectively a marketing channel for the issuing bank. So they get to split some of those economics.

• 2:37:54David Rosenthal?

  And I guess at the absolute very highest levels of scale, you have something like the Amazon and JP Morgan Chase relationship, where JP Morgan Chase is the merchant bank, and JP Morgan Chase is one of the largest issuing banks for cards in the world. And so the Amazon Chase 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 5% cash back rewards. So Amazon or JP 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.

• 2:38:40David Rosenthal?

  They can control so much of that envelope of value.

• 2:38:43Ben Gilbert?

  Yes. It is worth pointing out, the system today is pretty tough to change absent 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 issuers 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 account information, typically, consumers won't do it unless they get some very high number of percent back. And that's actually more expensive than the interchange.

• 2:39:27Ben Gilbert?

  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 non-economic. Like, you have to believe that there is some long-term benefit to doing it.

• 2:39:42David Rosenthal?

  Yeah, and famously Walmart and Target, too, I think, have been trying to do this for years and years and years. And they never can make it work.

• 2:39:50Ben Gilbert?

  Nope, 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 behavior.

• 2:40:00David Rosenthal?

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

• 2:40:08Ben Gilbert?

  Totally. I mean, the most negative way someone could paint the ecosystem as it exists today is that the whole credit card system is a wide-scale bribe of the American consumer to like extort the world's retailers using the retailer's own money. But that is like a very cynical way to view it.

• 2:40:25David Rosenthal?

  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 to compensate for it.

• 2:40:33Ben Gilbert?

  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 interchange.

• 2:40:52David Rosenthal?

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

• 2:40:55Ben Gilbert?

  Right. If you aren't someone that has a rewards-based credit card, then your stuff just got more expensive. And so 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 pays $149 inflated prices because all prices, no matter how you pay, have to go up in order to make it so that paying in cash and cards is equivalent. Because in most states, it's actually illegal to charge a meaningful premium to people who are using credit cards. So on average, a cash-using household pays $149.

• 2:41:34David Rosenthal?

  Effectively in subsidy.

• 2:41:36Ben Gilbert?

  Yes. But a card-using household receives $1,100 in value.

• 2:41:42David Rosenthal?

  $1,100. I mean, I guess that makes sense. I think about the value of the rewards I get every year.

• 2:41:46Ben Gilbert?

  It's on average, what is it, 2% of everything you put on your card?

• 2:41:49David Rosenthal?

  Yeah. Which, I mean, especially us running a business, like, yeah, we put a lot of stuff on cards.

• 2:41:54Ben Gilbert?

  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 penalizes. The other reason why it's really hard to change the system is this whole thing is a chicken or the egg problem. I mean, every two-sided marketplace is a chicken or the egg problem. Bank of America cards solved this when there were no regulations by dropping 65,000 credit lines on unwitting Americans. And you can't do that now. So how do you bootstrap one side of the marketplace when you can't do something like a drop?

• 2:42:27David Rosenthal?

  And they were in a 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.

• 2:42:39Ben Gilbert?

  Right. So what you're basically relying on now is some sort of extrinsic paradigm shift, probably a technology paradigm shift, that enables a new entrant to bootstrap one side of the marketplace in one way or the other to create a new system. And without a new paradigm emerging, this is the system. Let's say a new paradigm or the government intervention. This kind of is the system that we've made our bed and we're stuck with. For good and for bad.

• 2:43:09David Rosenthal?

  Yep. I mean, I love my rewards cards.

• 2:43:12Ben Gilbert?

  Right. And look at all of the economic value that it created by enabling e-commerce. It is truly astonishing that without UPS 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, look, people spend more when they use a card. There's a broader range of buyers that use a card. A very cool feature of these credit card and debit 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,

• 2:43:57Ben Gilbert?

  which that wouldn't happen in checks. There's a cost to checks.

• 2:44:01David Rosenthal?

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

• 2:44:10Ben Gilbert?

  Yep. And if you're saying you better come in here bearing cash or a cashier's check, you're gonna have way fewer customers. Not to mention, like, there's totally a cost of facilitating 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 $150 to $250. There's a pretty meaningful amount of cash that piles up in your establishment. And so you need to make sure that you have security or like, you 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.

• 2:44:43David Rosenthal?

  Totally. The operational overhead associated with that.

• 2:44:45Ben Gilbert?

  There is a value to providing payment and there is a cost to whatever the payment method is. And so, am I saying that the cost is 3% or in the old days, 5% or 7%? No, absolutely not. But there certainly is some cost, no matter what form of payment is used.

• 2:45:03David Rosenthal?

  Absolutely. All right, listeners, now is a great time to talk about one of our favorite companies, Statsig.

• 2:45:11Ben Gilbert?

  Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale.

• 2:45:22David Rosenthal?

  Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers and how fast you can use that signal to guide what you ship next.

• 2:45:42Ben Gilbert?

  This is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system so teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved.

• 2:45:54David Rosenthal?

  So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com/acquired to get started.

• 2:46:05Ben Gilbert?

  So, the business today. What does Visa look like? Well, last year Visa processed $14 trillion of volume through their network, which is an almost meaninglessly large number. How do you even think about that?

• 2:46:21David Rosenthal?

  One fun way to think about that that I calculated is if you start from 1971, the first full year that the Bank of America network was liberated from Bank of America, the growth in payment volume on the network since then has been 17.3% compounded annually for 51 years.

• 2:46:45Ben Gilbert?

  Oh, my God.

• 2:46:46David Rosenthal?

  Wild.

• 2:46:47Ben Gilbert?

  It turns out the world eventually did want to pay with frictionless, fast, and often credit extending methods.

• 2:46:55David Rosenthal?

  Yep.

• 2:46:56Ben Gilbert?

  Wow, 17% compounded for 51 years.

• 2:46:59David Rosenthal?

  Yeah, I mean, this is like Berkshire levels of compounding that is happening here.

• 2:47:04Ben Gilbert?

  Yep.

• 2:47:05David Rosenthal?

  And it's not like, you know, people may think, oh, 17% like, oh, I have seen IRRs greater than that. Have you seen them greater than that over 51 years?

• 2:47:14Ben Gilbert?

  Right.

• 2:47:14David Rosenthal?

  Not many of those.

• 2:47:15Ben Gilbert?

  It's amazing. The number of transactions they processed last year was over 190 billion. So that is 27 transactions per person on earth, including young children, every single year.

• 2:47:29David Rosenthal?

  Hey, man. Young children require a lot of commerce, let me tell you.

• 2:47:33Ben Gilbert?

  So I hear. There are 4.1 billion Visa cards in circulation. Their net revenue is $29 billion. 29. That's up from 22 billion two years ago. So there's an interesting thing that I didn't really realize with Visa, which is it's had a hell of a decade.

• 2:47:56David Rosenthal?

  Yeah.

• 2:47:57Ben Gilbert?

  In my head, Visa has been this steady state thing in the world, as has Mastercard. But the last decade has been the story of Visa's incredible dominance in revenue and transactions and 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 6 billion. So look at their overall revenue number of 29 billion. Their value-added services is 6 billion. We'll talk about what that means. The most shocking thing about the business is they have 50% net income margins. So of the 30-ish billion that they made in revenue, their net income was 15.

• 2:48:41David Rosenthal?

  Yeah. This is absurd. All the picture we painted in the whole story, it was all building toward that climax of they have created something with essentially zero marginal costs in perhaps the largest market out there, certainly one of them.

• 2:49:00Ben Gilbert?

  Global commerce.

• 2:49:01David Rosenthal?

  Both e and non-e-commerce.

• 2:49:04Ben Gilbert?

  And as Visa would argue, both consumer, but also B2B commerce.

• 2:49:09David Rosenthal?

  Yeah. 50% net income margins on 30 billion in revenue. There it is.

• 2:49:14Ben Gilbert?

  And you might say, so wait, if they have 50% net income margins, what is their gross margin? Because is it SaaS level good at 75, 85%?

• 2:49:23David Rosenthal?

  Nope.

• 2:49:24Ben Gilbert?

  Their gross margins are 98%.

• 2:49:27David Rosenthal?

  Unreal.

• 2:49:28Ben Gilbert?

  There are no variable costs in this business. There are no costs of goods sold.

• 2:49:33David Rosenthal?

  Unreal.

• 2:49:34Ben Gilbert?

  It's crazy. So I think with 50% net 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 10 times smaller, that have over a 50% net income margin, including Mastercard, which is 43%. And just to throw some numbers out for people that are like not, you know, looking at financial statements all the time. Microsoft, 34% net income margins. Microsoft sells software. They ship bits. Apple, 25%. They have an incredibly marked up product that is differentiated wildly by brand. 25% net income margins.

• 2:50:16Ben Gilbert?

  Google, Google has a monopoly in a market of information. What are the costs involved in that business? 21% net income margins.

• 2:50:24David Rosenthal?

  Wow, I would have thought Google would be higher. As we were talking, in my mind, I was like, well, Google's probably the only one that can come close. But wow, Microsoft is higher. I didn't realize that.

• 2:50:35Ben Gilbert?

  Yeah, it's nuts.

• 2:50:36David Rosenthal?

  It's nuts.

• 2:50:37Ben Gilbert?

  They do have 27,000 employees. In some ways, it feels like an oddly large number. And in other ways, it feels 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 $30 billion in revenue and has 27,000 employees. Do you know what it is, David?

• 2:50:57David Rosenthal?

  That would be Nvidia.

• 2:50:59Ben Gilbert?

  Yeah, it's a weirdly mirror image.

• 2:51:01David Rosenthal?

  Even Nvidia doesn't have gross margins like Visa.

• 2:51:06David Rosenthal?

  It is the ultimate solution. I think that is the takeaway.

• 2:51:09Ben Gilbert?

  Yes. Visa does 707 million transactions per day. That is 8,600 transactions per second, every second throughout the year. So a big takeaway should be like, my God, they have built high throughput infrastructure globally. That's an unbelievably impressive thing with almost no downtime. It is 99.999% uptime, which I am not a site reliability engineer, but I think that is five nines.

• 2:51:39David Rosenthal?

  Which is wild. I mean, you hear about AWS going down more frequently than you hear about Visa going down.

• 2:51:44Ben Gilbert?

  Totally. That's 16,000 banks in 200 countries. They have six data centers distributed across the world. It's kind of amazing. It's only six, to be honest, with that kind of reliability and uptime.

• 2:51:56David Rosenthal?

  You know, related to that, though, you raised a good point earlier. The data envelope, as opposed to the value envelope, although I guess it is sort of the same, is also not that large relative to the importance and the value.

• 2:52:11Ben Gilbert?

  Right. This is not YouTube.

• 2:52:13David Rosenthal?

  Yeah. The transactions themselves, in part because this was all architected in the 70s.

• 2:52:18Ben Gilbert?

  Right. That is definitely why.

• 2:52:20David Rosenthal?

  Yeah.

• 2:52:21Ben Gilbert?

  Lots of people in this ecosystem would love it if you could send entire receipts in machine readable form across this network. You can't. We're stuck with a lowest common denominator protocol that we're shipping very crude pieces of information across.

• 2:52:35David Rosenthal?

  Yep.

• 2:52:36Ben Gilbert?

  I will say, there are other people that are participants in this 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 running transactions across their network all the time. All it knows is my card number. It has no notion of identity. Isn't that crazy?

• 2:53:08David Rosenthal?

  I didn't realize that. Yeah, that is crazy.

• 2:53:11Ben Gilbert?

  And the banks like that because then the banks get to say, no, no, no, this is my customer. Visa, we will use your network because it is the way that I need to accomplish something for my customer, but I'm not just going to like turn my customer into your customer. Why would I do that?

• 2:53:24David Rosenthal?

  And one of the things we didn't talk about in the story, because it was long enough as is, is the whole debit card struggle. Obviously debit cards are a big part and 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. Hawk's ouster.

• 2:53:40Ben Gilbert?

  Hmm.

• 2:53:40David Rosenthal?

  The banks were like, no, no, no, no, no. Debit 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. Uh-uh. And obviously debit cards did eventually become part of the system, but not in the way that, you know, it was looking like Dee initially wanted them to.

• 2:54:05Ben Gilbert?

  It's pretty fascinating that debit 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 a loan at the end of 30 days.

• 2:54:20David Rosenthal?

  It's a debit card with a lot of benefits.

• 2:54:22Ben Gilbert?

  Right. And obviously, like, I get to keep the money for 30 more days, so it's not quite the same thing. But debit is a simpler 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.

• 2:54:42David Rosenthal?

  Right. That was the domain of the banks. And actually, there was a big fight between Visa and all the ATM networks. And Dee wanted your Visa card to also be your ATM card. It makes sense, right? Like, why would you have different cards?

• 2:54:54Ben Gilbert?

  Mine is today. They basically are now.

• 2:54:56David Rosenthal?

  But for many, many years, they weren't. And they certainly weren't back in Dee's day.

• 2:55:01Ben Gilbert?

  Right. And I think part of the reason why debit cards were sort of like forced into existence was that 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 a loan? 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 $93 billion in Visa and MasterCard credit card fees last year, according to the Nielsen report, an industry publication.

• 2:55:44Ben Gilbert?

  That $93 billion was up from $33 billion in 2012.

• 2:55:49David Rosenthal?

  Wow, that's a lot more billions.

• 2:55:53Ben Gilbert?

  That's a lot more billions. So we've talked a lot here about the interchange 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 are around 22%.

• 2:56:11David Rosenthal?

  Oof.

• 2:56:11Ben Gilbert?

  David, you and I learned 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-usury laws, like no one was allowed to make usurious loans. And North Dakota 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 22% loans made to consumers and have that be entirely fine. So that's the sad history of why your credit cards always get mailed from there.

• 2:56:40David Rosenthal?

  And there's no denying that 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, oh, obviously, tripling the amount of fees that merchants are paying for credit card processing over 10 years, like, that's ridiculous.

• 2:57:00Ben Gilbert?

  But transaction value has meaningfully gone up, too. Like gross volume is way up.

• 2:57:03David Rosenthal?

  Yes, transaction value. But also, I have to imagine a big part of that is share of commerce that's happening as e-commerce versus traditional commerce. The credit card networks really are providing a huge amount of value to e-commerce, as you were saying earlier. They are to physical commerce, too. Nobody wants to pay with cash or check anymore these days. But like, e-commerce, there's no other way that that can happen. So does it make sense that the credit card networks and their associated parties take more value in that world? I think so.

• 2:57:38Ben Gilbert?

  Yeah, there's been downward pressure on interchange for a long time. I think industry average right now is down around 2.24, which is, you know, compelling considering we started at 7%.

• 2:57:48David Rosenthal?

  Right.

• 2:57:49Ben Gilbert?

  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, oh, actually, we have a really high interchange for that area. So Visa 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 margin that give us a lot of room to run in the future?

• 2:58:26David Rosenthal?

  Yep. And it makes sense. Just do the thought exercise, right? Let's say you're a physical merchant, and you decide to walk away from Visa and all the credit card networks. Say your only cash or check. I mean, you probably are committing suicide as a business, but like, you could operate. If you're providing enough value, like, ATMs exist, you know, you can operate.

• 2:58:48Ben Gilbert?

  There's plenty of cash-only bars.

• 2:58:50David Rosenthal?

  Yeah, exactly. Bars, 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.

• 2:58:59Ben Gilbert?

  Right.

• 2:59:00David Rosenthal?

  I mean, you could use PayPal, I guess.

• 2:59:02Ben Gilbert?

  But you're paying just as much for that.

• 2:59:04David Rosenthal?

  Yeah, totally.

• 2:59:05Ben Gilbert?

  Unless you are literally getting people to type in their account and routing numbers, you are paying credit card-like fees to accept payments on the internet.

• 2:59:12David Rosenthal?

  Yep.

• 2:59:13Ben Gilbert?

  It's worth sharing, so while we're in the revenue streams here, the money that card issuers make, only a minority of it is actually from the interchange. And keep in mind, the card issuers are the ones that make that 1.6%, the bulk of the transaction. Most of the money that card issuers make is from interest payments.

• 2:59:36David Rosenthal?

  Right. I mean, they're banks. That's the thing. All the way back to the beginning of the episode, what was the motivation for Bank of America in the early days? It was turbocharge my banking operations. What is your banking operation? It's taking deposits, make loans with them, make money on the interest rates on those loans. Nothing has changed in the banking industry.

• 2:59:56Ben Gilbert?

  Totally. Visa's incentives are more transactions, because we want more 0.2%. And the issuer's incentives are a carry of balance, because that's where we make most of our money.

• 3:00:06David Rosenthal?

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

• 3:00:14Ben Gilbert?

  And anti-fraud measures and other value-added services that they have to buy from Visa. Probably a good time to introduce that $6 billion that Visa is doing in value-added services. That is all brand-new, high-margin products that they've sort of invented in the last 10 years or so that they're trying to sell to merchants. High-margin product. There's no higher-margin product than the core product. Right. Brand-new, also-high-margin products. Right. Merchants, banks, they're basically trying to sell products to people in the ecosystem, anti-fraud, analytics, and it's working very well. They're making a lot of money on that, and they view that as a high-growth area 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 interchange, and we can demonstrate to you that interchange is

• 3:00:59Ben Gilbert?

  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. Hmm. All right. So that basically covers the high-level stats on the business today so that we can go into analysis. And you can have a general shape of the business we're talking about. But, you know, 11th-largest company in the world, valued at half a trillion dollars, around $30 billion in revenue, and they get to keep half of 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 half of that after taxes at the end of the day. That's wild. There's actual cash in the bank. Right. This is not EBITDA. This is net income. Crazy. All right, David, power. Does that sound good to you? Oh, let's talk power.

• 3:01:44Ben Gilbert?

  All right. So, 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 it to achieve persistent differential returns and be more profitable than their closest competitor and do so sustainably? It's an interesting one here. This is a lot like the Lockheed Martin 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-enabled duopoly. And the way that we did this in the Lockheed Martin episode was we said, let's look at the five defenders.

• 3:02:23Ben Gilbert?

  Contractors as one entity and say, what enables the five of them collectively to out compete new entrants? And I think that's the right thing to do here with Visa and Mastercard too. At the end of the day, Visa and Mastercard have basically no sustainable competitive advantage over each other. It's just operational excellence, who's slightly more clever on the bets they're willing to make for these value-added services or next product lines. So, yeah.

• 3:02:51David Rosenthal?

  I think the one area where there is difference between them, and is probably less so today, but was quite strong through the 90s and 2000s was brand. I do think Visa made a genius move, positioning against American Express, going up market in perception and partnering with the Olympics.

• 3:03:11Ben Gilbert?

  It's funny, even though it's a commodity, like them and Mastercard are a commodity, they somehow position themselves as more premium.

• 3:03:17David Rosenthal?

  Well, sugar water is a commodity too. That's why brand matters in these markets.

• 3:03:21Ben Gilbert?

  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 or Mastercard. That is not how you decide what card to get.

• 3:03:30David Rosenthal?

  Well, 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 Visa over Mastercard, they'll demand it from the banks.

• 3:03:42Ben Gilbert?

  No, they're just not differentiated enough to demand it. I just so don't see that any consumer ever has sway there. I got the Chase Sapphire Reserve card five years ago, because it 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, which I'm sure is one of their high-fee things, which is why they can pass on so many rewards.

• 3:04:05David Rosenthal?

  I think today that's true, but I do think, based on the research, and this may be too biased towards Visa, but I think Visa did accelerate past Mastercard. And I think there was a strong brand element of that. I think it's more equal today.

• 3:04:20Ben Gilbert?

  Yeah, it's interesting. It's funny how it 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 Mastercard on it.

• 3:04:35David Rosenthal?

  Yes. Totally agree.

• 3:04:38Ben Gilbert?

  Or a merchant. I mean, when you have the Alaska card, you feel like you have the Alaska card. You're like, sorry, there's a bank behind this and like, oh, is it Visa or MasterCard? I don't know. I don't care. It's the Alaska card.

• 3:04:46David Rosenthal?

  Yep. I think there's totally also a story that's beyond the scope of this episode, but how banks and in particular Chase ate American Express's customer base over the last set of years.

• 3:05:00Ben Gilbert?

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

• 3:05:20David Rosenthal?

  Well, they missed the generational transfer. I think they did retain their highest value, highest margin customers. I think those customers are just 80 years old now.

• 3:05:27Ben Gilbert?

  Yeah, it's true. I think there are less affluent people in our generation who have Amex's versus the premium products from banks or merchants.

• 3:05:35David Rosenthal?

  Yep.

• 3:05:36Ben Gilbert?

  Okay, so Visa and MasterCard together, which of the seven powers do they have today? And if you want to also do the analysis, which did they have early days? And I will start, I think there's an easy no brainer that you have scale economies. Any investment that Visa or MasterCard make get amortized across 16,000 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 cost investment that Visa is going to make. It'll pay back instantly if it works to the extent that they can roll it out to any tiny fraction of their customer base. It's just so huge that it fits the scale

• 3:06:19Ben Gilbert?

  economies thing where, you know, if Netflix goes and buys a piece of content, they can pay more for it because they can show it to more people. Visa is the exact same thing with all of their fixed R and D costs.

• 3:06:29David Rosenthal?

  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 75, 80%.

• 3:06:44David Rosenthal?

  And you are of a certain revenue scale threshold, like our gross margins exceed 75, 80%, but like we're a two-person company with a, you know, de minimis 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.

• 3:07:01Ben Gilbert?

  Right. It's almost stupid to say this one because it's 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.

• 3:07:10David Rosenthal?

  Yes, of course, of course.

• 3:07:12Ben Gilbert?

  Yeah.

• 3:07:12David Rosenthal?

  But yeah, you must, you simply must, if you have those margins at that revenue scale, have scale economies.

• 3:07:18Ben Gilbert?

  Right. That's a great point. Okay. Explain to us the network economies.

• 3:07:23David Rosenthal?

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

• 3:07:29Ben Gilbert?

  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 motion.

• 3:07:37David Rosenthal?

  Yep. I think this is also true. With network economies and network power, the more participants in a network, the greater complexity grows and the harder it is to actually pull off the network. There's plenty of single-sided networks, like Facebook is a single-sided network, at least on the user-based side. There's advertisers, you could argue that's a second side, but everybody's the same node in the network. Then there's two-sided networks, like Airbnb is the classic one, you know, something like that. There are three-sided networks out there, probably some four, and clearly this is an example of a 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.

• 3:08:19Ben Gilbert?

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

• 3:08:23David Rosenthal?

  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 effect business and it's basically unbreakable.

• 3:08:37Ben Gilbert?

  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 mean, in fact, that's probably a bear case to any card company today is that, especially with digital payments, you don't even have to carry cards with you anymore. I should go get approved for 50 cards and write a script to make it so that whatever the most interesting card for that given transaction is pops to the top of my wallet. I think there's almost no switching costs anywhere, really, because when any of these banks have their contract up, they just go and talk to Visa and Mastercard and say, who gives me a better deal because you guys are both the same?

• 3:09:12David Rosenthal?

  This is true after the first antitrust lawsuit when duality was introduced and banks could multi-home. Before then, yes. After then, zero.

• 3:09:21Ben Gilbert?

  Well, yeah, I mean, before then, there's interesting analysis to do between Visa and Mastercard. Now there is none.

• 3:09:27David Rosenthal?

  Yep, which is exactly what D. Hawk predicted.

• 3:09:30Ben Gilbert?

  Yep. But yeah, is there switching costs between the Visa, Mastercard oligopoly and someone else? I suppose, yes, there isn't another option.

• 3:09:39David Rosenthal?

  Yep.

• 3:09:40Ben Gilbert?

  Like, if you were a bank that wanted to issue a bunch of cards that weren't Visa or Mastercard.

• 3:09:44David Rosenthal?

  I mean, I guess there's Discover.

• 3:09:46Ben Gilbert?

  No, that's a closed-loop network, too.

• 3:09:47David Rosenthal?

  Oh, yeah, right.

• 3:09:48Ben Gilbert?

  They are their own bank.

• 3:09:49David Rosenthal?

  Yep.

• 3:09:50Ben Gilbert?

  Pretty interesting.

• 3:09:51David Rosenthal?

  Nobody else. Counter-positioning, the last one, none now, I think.

• 3:09:56Ben Gilbert?

  Right. Well, you almost can't have it as an incumbent.

• 3:09:58David Rosenthal?

  Right. But there was incredible counter-positioning back in the day with Bank of America. They were the only institution in America that could pull this off, that could absorb the losses, that had minimum viable customer base 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 was so fragmented there that none of the banks had enough power to pull this off. They were literally the only one who could do this.

• 3:10:27Ben Gilbert?

  Yep. That's absolutely right. All right, I think that's it for power.

• 3:10:31David Rosenthal?

  Yep.

• 3:10:32Ben Gilbert?

  Playbook?

• 3:10:33David Rosenthal?

  Let's do it.

• 3:10:34Ben Gilbert?

  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 charge the same toll.

• 3:10:46David Rosenthal?

  Well put. I'm gonna do my best Charlie Munger. I have nothing to add on that one.

• 3:10:52Ben Gilbert?

  There you go. The next one that I think is pretty interesting is Visa. As I read their whole annual report, they have a narrative around these new things that they're launching, especially the value-added 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, is they figure out what is something that we can sort of advertise as a benefit to you that also helps us either increase number of transactions, margin, or lock-in. And that is the way to analyze their entire product suite. You hear something is launched, you're like, okay, why, which of those three needles is it moving for them? That's my main one. I've got more analysis

• 3:11:37Ben Gilbert?

  to do in Bear Bull, but what do you have?

• 3:11:40David Rosenthal?

  The two that jump out to me are, one, just like our NFL episode, just like our Benchmark episodes, communist capitalism.

• 3:11:49Ben Gilbert?

  Yes, the best example.

• 3:11:51David Rosenthal?

  Yes. A, it is the best example of communist capitalism, certainly that we've ever studied, probably in the world, hard to imagine one better. And two, it's like a special breed of communist capitalism, you're gonna laugh at this, that I force out as democratic communist capitalism. The ultimate irony, right? It's this idea of like, yes, it's capitalism, it's competitors banding together to create more value than they could alone. But this is at a massive scale. Like with Benchmark, it's five partners. With the NFL, it's 30, 32 teams, something like that.

• 3:12:26Ben Gilbert?

  Yeah, this is our whole global financial infrastructure that has decided to do this together.

• 3:12:32David Rosenthal?

  Right. This is thousands of banks that have decided to do this together. It is its own separate class of this, I think. Way, way, way harder to pull off than like... Yeah, Ben, you and me together acquired his communist capitalism for sure. If we were starting a venture capital firm with three of our friends, could we pull it off with five people? Sure. Could we pull this off with 200 banks? No.

• 3:12:58Ben Gilbert?

  Right. Especially when you're not starting from scratch. I mean, the 200 banks that they pulled it off with, they all had an agreement in place where they owned a franchise. And you had 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 from zero, you're starting from negative.

• 3:13:17David Rosenthal?

  And Bank of America, the franchisor, Dee had to go to them and say, hey, you're going to forfeit the whole asset.

• 3:13:23Ben Gilbert?

  That's a great point.

• 3:13:25David Rosenthal?

  Totally. So that's one. And then the other two, I think it's the twin stories of innovation here, which really, hat tip to Dave Sterns for tipping us off on here. The socio-technical innovation, the organizational stuff, the communist capitalism, the democratic capitalism, everything we're 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 which are just world-class, incredible stories.

• 3:13:59Ben Gilbert?

  Yeah, super true.

• 3:14:01David Rosenthal?

  And right here in Silicon Valley.

• 3:14:03Ben Gilbert?

  Who would have thought? A success story out of Silicon Valley. They've gotten so beat up over the last few years, they really deserve this nice...

• 3:14:11David Rosenthal?

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

• 3:14:16Ben Gilbert?

  Do you ever run into Visa people hanging out around San Francisco?

• 3:14:19David Rosenthal?

  Exceedingly rarely. Well, I take that back. In the tech and venture capital world, exceedingly rarely. In the corner of San Francisco that very much exists, which is the old money, finance, the legacy of Bank of America. Absolutely in that world and Jenny's in that world because those are the folks who are on the board of the ballet, who are the patrons, who are the donors. The longtime chairman of the board of the ballet was the CEO of Visa USA for many years. Like, there are a lot of Visa people in that world here.

• 3:14:56Ben Gilbert?

  Hmm.

• 3:14:56David Rosenthal?

  It's funny, though, that like you would think it would have bled more into the Silicon Valley world, but it really hasn't.

• 3:15:02Ben Gilbert?

  You would think. Every tech company would love to be Visa. The financial profile of Visa's business is more tech than any of the tech companies. It is what they all wish they could have.

• 3:15:14David Rosenthal?

  Yes.

• 3:15:16Ben Gilbert?

  Fascinating. All right. You want to do value creation, value capture?

• 3:15:19David Rosenthal?

  Yes.

• 3:15:20Ben Gilbert?

  So originally interchange was supposed to cover the costs 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 than is necessary to cover their costs. 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 it can position itself to do so in a market.

• 3:16:03David Rosenthal?

  We're looking for high gross margins to invest in.

• 3:16:06Ben Gilbert?

  Right, exactly. But it's interesting that because of the multi-layered 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 than it costs them to create.

• 3:16:48David Rosenthal?

  Yep.

• 3:16:49Ben Gilbert?

  Seemingly indefinitely.

• 3:16:50David Rosenthal?

  There's a lot more to talk about in Bear Bull there.

• 3:16:53Ben Gilbert?

  Yes. I mean, the worst place that this kind of shows up is the couple percent plus 30 cents that kind of feels small.

• 3:17:00David Rosenthal?

  Yeah. The 30 cents is really pernicious.

• 3:17:03Ben Gilbert?

  It's pernicious, especially for small transaction items. So like coffee shops. There's an example of a piece that we'll link to in the episode sources of 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.

• 3:17:24David Rosenthal?

  Wow, that's crazy.

• 3:17:26Ben Gilbert?

  Even large retailers that run at pretty thin margins, it is often the case that their EBITDA is the same size as their card processing fees.

• 3:17:35David Rosenthal?

  I mean, anytime where your average transaction value is less than 10 bucks, that 30 cents is a killer.

• 3:17:43Ben Gilbert?

  That's where the 30 cents kills you. But anytime that you are a low margin business, which many retailers are, if you're a discounter, if you're a Walmart, you're paying 2%, 3% of the whole transaction. But when you look at the margin profile, the way that that gets amplified is that you're paying 15% or more of your available gross 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's when you can be like, eh, card fees, whatever. But if you're selling too high priced of goods, then you often get into a scenario where you are doing less frequent transactions, more considered purchases, and you can go around

• 3:18:26Ben Gilbert?

  the system. This is a bear case on Visa is, are they ever going to participate in real estate or cars? Or no, not at these interchange rates. Why would anyone ever buckle to pay these sorts of things for things that cost $1,000 or more?

• 3:18:40David Rosenthal?

  Yep. Well, before we go into bear and bull where I know you and we have a lot to talk about what could potentially disrupt Visa and Mastercard, I think it is worth just one minute on the value creation side of this. And I really think you hit the nail on the head a while back when you said e-commerce. Yes, all that other stuff we were just talking about, the 30 cents, you know, everything, that is a lot of value capture. There's a lot of value capture that Visa is doing and Mastercard too. On the other hand, I don't think e-commerce really would have happened, you know, alone. There's plenty of other value creation out there, too. Lots and lots and lots, but let's just take e-commerce. I feel like this is Passover. Like, you know, that would have

• 3:19:22David Rosenthal?

  been enough. E-commerce would have been enough. Because I don't think it would have happened without credit cards.

• 3:19:29Ben Gilbert?

  Or at least it would have been many years behind because you needed to sort of invent some new mechanism to enable payments over the internet.

• 3:19:36David Rosenthal?

  Yeah. And yeah, you know PayPal and all that, but that would have been a long slog if PayPal had to get an adoption for all payments on the internet to happen.

• 3:19:46Ben Gilbert?

  Yeah, it's a good point. Which, by the 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.

• 3:20:01David Rosenthal?

  Really? Oh, I missed that in the research. That's quite surprising to me.

• 3:20:05Ben Gilbert?

  Yeah.

• 3:20:05David Rosenthal?

  Well, that leads us right into bear and bull.

• 3:20:07Ben Gilbert?

  Yeah. PayPal's an especially interesting company right now because they're strategically 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.

• 3:20:18David Rosenthal?

  Yeah. Okay, bear and bull. Let's do it.

• 3:20:21Ben Gilbert?

  Well, okay, bear. And before I actually go into it, tongue in cheek joke is if they ever get to stop making the insane margins that they do on FX transactions, that's the ultimate bear case. It's something like 100 times the margin that they make on domestic ones.

• 3:20:37David Rosenthal?

  Wow.

• 3:20:38Ben Gilbert?

  If you look at how Visa breaks out segments, you're like, oh, my God, the international transactions are ludicrously 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 business is 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 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 50% of consumer payments to merchants go on cards now. It took forever to get here, 40 years

• 3:21:17Ben Gilbert?

  or something like that, 50 years. But we will start decelerating because we've already shifted more than half the payments to happen on cards.

• 3:21:28David Rosenthal?

  Right. We're on the back half of the adoption curve.

• 3:21:31Ben Gilbert?

  Right. So that is this tailwind that has been with Visa forever. Like anytime you could come up with any bear case, it was always just trumped by the idea that, well, more people are going to do digital transactions. So they're just going to outrun any headwinds in their way. That will start to slow. It's not like Visa's core business revenue is going to like flatline or decline or anything like that, but they will have less of the growth tailwind from this amazing secular thing that's been happening, which is people shifting payments to cards and digital methods, you know, as the years progress.

• 3:22:01David Rosenthal?

  Yep.

• 3:22:02Ben Gilbert?

  My next one is closed loop systems like Alipay and Tencent's ecosystem. To the extent that super apps actually happened in the US the way that they did in China, well, you'd be telling a very different story. I mean, the amount of volume that flows in the mobile ecosystem there that is not a part of the credit card ecosystem. I actually don't know if it could have happened here, but the rise of that is super dangerous. And people often will cite like, well, the Starbucks app is a very good example of people using a digital wallet that's native to a retailer here. How many people do you know that reload their Starbucks app with their direct checking account routing and account number? Everyone actually loads it using a credit card.

• 3:22:45David Rosenthal?

  Totally.

• 3:22:46Ben Gilbert?

  That is not bad for them at all. It only becomes bad for them if they actually get disintermediated where a bank and a merchant go direct to the merchant's consumer and manage to initiate a payment flow digitally that doesn't involve a card network.

• 3:22:59David Rosenthal?

  Yep. The two things I would want to investigate on the, could what happened in China happen here? One, just the build out of infrastructure happened more concurrently in China. Like payments infrastructure is already built out here. Technology infrastructure got built out afterwards, whereas it all happened all together in China.

• 3:23:17Ben Gilbert?

  Hmm.

• 3:23:18David Rosenthal?

  Two, though, maybe more important is just the government influence. Right? I doubt the Chinese government wanted Visa, you know, ostensibly American corporation powering their payments.

• 3:23:29Ben Gilbert?

  There's actually this really interesting weird deal that got cut between China Union Pay and Visa.

• 3:23:34David Rosenthal?

  Yes, yes.

• 3:23:35Ben Gilbert?

  If you use a Cup card in China, CUP, it uses the CUP rails. But if you go internationally where like there is no China Union Pay terminal at, you know, my local coffee shop here in 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.

• 3:23:58David Rosenthal?

  Yep. Which, you know, I mean, I guess that is an associated bear case, right? China in and of itself. And could other governments around the world start adopting similar postures?

• 3:24:08Ben Gilbert?

  Yep.

• 3:24:10Ben Gilbert?

  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 is a prominent one. Like when you just initiate a bank transfer, there's no sort of insurance around the chargeback or a refund or anything like that. But you could build payment type features on top of it. 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 it has happened in other countries.

• 3:24:53Ben Gilbert?

  In Brazil, PIX has had very fast uptake. UPI in India is another one. The UK has something called Faster Payments. And this can get especially scary for Visa when these start working across geographies. Like Singapore and India have already linked theirs up. And so that is a method of transferring money between countries that has nothing to do with Visa. And that's, I'm sure, something they're keeping a very close eye on 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?

• 3:25:29David Rosenthal?

  And, you know, I mean, technology and infrastructure and ecosystem is getting built on this, obviously around the world and here too. And great friends of the show, Modern Treasury, like they are enabling a lot of this.

• 3:25:39Ben Gilbert?

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

• 3:25:46David Rosenthal?

  Specifically, Apple Pay, right?

• 3:25:48Ben Gilbert?

  Yeah. So on a Apple Pay transaction, I'm pretty sure Apple makes about as much as Visa does because they stack an extra 15 basis points on top of the other three fees that we talked about. The one to go to the issuer, the one to go to the merchant's bank and the one to go to Visa. Itself. And so if Apple has convinced merchants that it's fine to lose another 15 basis points on every transaction because it's so freaking convenient that users get to tap their phone or their watch, that is just step one in an equation. Here's the like really extreme Apple payment bull case. If Apple were to have payment terminals, then they could totally run

• 3:26:33Ben Gilbert?

  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 Amex or 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 run on Visa's network? And so Apple doesn't make point of sale hardware today, but if they were to acquire Square, or if they were to do something way out of their DNA and go acquire like Verifone or a legacy provider, they could create their own closed loop network where they're actually

• 3:27:18Ben Gilbert?

  the payment method and the merchant's technology provider.

• 3:27:24David Rosenthal?

  Yep. I actually don't even think they'd need to do that. I mean, they're Apple, right? They just use iPads and they would have as part of Apple Pay, they would have Apple Pay for merchant software that would be on the iPads.

• 3:27:36Ben Gilbert?

  No, that's too hard. That adoption curve sucks. I think they would pay the, what's Square's market cap or Block's like 30 billion or something right now. Apple could totally just go buy Block and do this overnight and light up all the existing merchants.

• 3:27:49David Rosenthal?

  Hmm. Yeah, true, true.

• 3:27:51Ben Gilbert?

  Like, what else are you gonna do with 250 billion of cash?

• 3:27:54David Rosenthal?

  Yep.

• 3:27:55Ben Gilbert?

  I mean, maybe they would try, but Apple is not going to be in the business of directly having a sales force to sign up all these merchants. I don't think.

• 3:28:04David Rosenthal?

  Agreed. I have a counterpoint to that, but I'll save it for the bull side of the ledger here.

• 3:28:09Ben Gilbert?

  Okay. I mean, the other thing, the lighter weight thing on Apple is even if they don't try to build their own closed-loop thing, who really cares what's in your wallet when your wallet is your phone? For consumers now, if you're using your phone, in your head, your payment method is your phone. And it's like, the card underneath it is not terribly important, other than the fact that you need to remember to auto-pay it. And like, ideally, it has the one with the best rewards. And that's not what most people are thinking, because I think actually, the majority of people don't have rewards-based credit cards. But they loaded some card in there, they kind of forgot about it, and they pay. And Apple is actually the means of payment, not the card.

• 3:28:52Ben Gilbert?

  Even though it's flowing over their rails, consumers don't think of it that way.

• 3:28:55David Rosenthal?

  Yep.

• 3:28:56Ben Gilbert?

  So I don't know exactly how that will manifest in chiseling away at Visa's value, but it certainly is fair to say that the card network and the card issuer have less of a role in the consumer's mind than they used to, based on the fact that we now have mobile payments.

• 3:29:13David Rosenthal?

  Yep. And Apple Pay and Google Pay along with it are, I think, by like, many, many, many orders of magnitude, the most successful quasi-alternative payment systems that have actually gotten installed bases.

• 3:29:31Ben Gilbert?

  Right. Google Pay is very popular, too.

• 3:29:33David Rosenthal?

  Yeah, yeah, yeah. But like, what else? I mean, there've been other alternative payment systems over the years, and none of them match, at least domestically in the US, Apple and Google Pay.

• 3:29:42Ben Gilbert?

  Yep. So my TLDR on the bear case is, the core business matures, so that tailwind lessens, the debit networks get sort of chipped away at, more rails emerge for each use case that sort of, again, has further chipping away at their 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 it out. But, I don't know, those are the best bear cases I can come up with. And the funniest thing is, when I asked, we'll thank a bunch of people at the end of the show that we had conversations with, when we would ask people, "Hey, what's your bear and bull on Visa?", basically, everyone just gave us a bear case, because they're like, "The bull case is obvious."

• 3:30:25David Rosenthal?

  Yeah, totally. And I think the obvious bull case is, this is just an incredibly powerful network effect that's 50 years in the making and is five-sided and... Lord knows, I can't think of any other five sided network effects.

• 3:30:40Ben Gilbert?

  Riding a secular increasing market.

• 3:30:43David Rosenthal?

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

• 3:30:53Ben Gilbert?

  Yep. The corollary to that, too, is lots of people have had lots of similar bear cases that they've said five years ago, 10 years ago, and like, none of those things have come true. Visa has just continued to grow at, you know, low double digit percent growth every single year, or I guess to your calculation of 17% over 51 years. People in the past have said many of these bear cases, but have never come true. So that's kind of the most obvious. Here are the 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 talked about all the way from 7% down to 2 and change. And so they do these interesting other things.

• 3:31:38Ben Gilbert?

  One benefit to them of digital payments, we talked about the potential drawback with Apple being able to maybe disintermediate in some way that's not exactly clear yet, is tokenization. So the way that Apple Pay works is that your card doesn't actually get sent to the merchant, your card number. None of the identifying information on there goes. Instead, your card gets tokenized and a token representing your card does, which is, as Visa will tell you, amazing for security and privacy. What it also does is 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 card. They could choose what network

• 3:32:22Ben Gilbert?

  to run it on. There was sort of more optionality with it when you had the raw information. And now Visa's like, hey, we got your token. Do you want us to do any of the cool token based services that we have with it? And like, those are high margin for us. And so that's sort of the tokenization is good for them. They now have more digital tokens than card credentials. That's been growing really fast. It doubled last year, their sort of tokens on their network. So, you know, Visa's quote on this is, "This marks a huge milestone, 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.

• 3:33:05Ben Gilbert?

  Remember the Nvidia slide of the trillion dollar TAM? Yep. So here's Visa's version. Payments, all of payments is about $200 trillion of volume. And cards are only $20 trillion. So here we've been playing in this tiny little fraction of the available market. And there's a few things that they call out that they want to move into. That B2B payments is about 120 trillion if they can access it. B2B commerce is actually just much larger than B2C commerce. If you think about the amount of money that flows over invoices that are paid via ACH or wire. Visa, I think, is intensely aware that they're not going to take 2.5% interchange

• 3:33:48Ben Gilbert?

  on a company invoicing another company for a million dollar services provided thing. But you know, there are elements of B2B that do have interchange. I mean, if you're issued a Ramp or Brex card and you go swipe that, that's a B2B transaction. So they're very excited about addressing B2B, both in their further push in cards, but also developing B2B specific products that have more appropriate monetization models. 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 $30 trillion TAM or a $30 trillion volume addressable opportunity.

• 3:34:31Ben Gilbert?

  And you can think of that as like insurance company needs to like pay a payout after a car insurance and they need to make that happen fast. Or 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 thing is, there's a whole business they've 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 cross-border payments. If they can do more international transactions, that is hugely, hugely profitable. So those are my, that is me trying to faithfully represent the bull case that Visa paints for their shareholders. Because David, these bull cases are so easy. You should read the annual report. The whole thing's a bull case. Yeah, right.

• 3:35:15David Rosenthal?

  One other additional I said I was going to add on bull case sort of as a response to the Apple and by association, Google bear case, you know, pretty much everybody we talked to pointed out as the number one most obvious bear case for Visa right now is Apple and Google and the incredible progress and inroads that they have made into rails and transactions. But as you say, all those transactions are still just tokenized Visa MasterCard cards.

• 3:35:42Ben Gilbert?

  Right. It's a bull case today.

• 3:35:45David Rosenthal?

  Yeah, it's a bull case today. You know, there may be nuance that I'm 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?

• 3:36:04Ben Gilbert?

  Yeah.

• 3:36:04David Rosenthal?

  Amex is a closed loop system. It's a bank. Discover is closed loop system. It's a bank. Does Apple want to be a bank?

• 3:36:11Ben Gilbert?

  Well, they could become like a Stripe.

• 3:36:13David Rosenthal?

  Yeah, I guess so.

• 3:36:15Ben Gilbert?

  Or like a Square. They're the technology providers and they have merchant acquirer banks behind them.

• 3:36:20David Rosenthal?

  Yeah, sure. They could do that. Apple's finance and fintech operations do not exist in a vacuum. Is Apple going to take on the risk to the Apple franchise of all the regulation and scrutiny that comes from that?

• 3:36:36Ben Gilbert?

  It depends. Apple will eventually saturate their market and they are looking for what the next frontier is and $200 trillion of volume moving around the global economy.

• 3:36:48David Rosenthal?

  I think, yes, absolutely. And so I'm not saying this won't happen, but Tim Cook board level discussion on this, right? Let's play out the D-Hock thought exercise. Apple succeeds. They do it. They eat Visa. Visa's market cap is now added to Apple's market cap. Great. Apple's market cap just grew by 25%.

• 3:37:10Ben Gilbert?

  Well, 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.

• 3:37:19David Rosenthal?

  Great point. Great point.

• 3:37:20Ben Gilbert?

  And they will. I mean, the Vision Pro will come out and we'll have to see if that is the future or not. But post that, like, they're gonna do a car, or they're gonna go into payments.

• 3:37:29David Rosenthal?

  Right. They gotta keep going after bigger and bigger markets. You're right. You're right.

• 3:37:33Ben Gilbert?

  The cute apple that we know of years past is gone. And we just have to think about, like, what would a good capital allocator do with their strategic position?

• 3:37:40David Rosenthal?

  True. I'm not making the argument that they're still the cute apple. I'm just saying, like, I think actually entering this arena introduces a significant amount of risk to the whole franchise that they have to weigh, in a way that some of these other markets don't.

• 3:37:53Ben Gilbert?

  Yep. That's super true. Okay, I have one trivia thing for you before carve-outs. You may already know this, but did you know that you can get a Bank of America card today?

• 3:38:05David Rosenthal?

  I did not. Is it like a branded Visa product from Bank of America?

• 3:38:10Ben Gilbert?

  It is a branded product from Bank of America, available on bankofamerica.com. There's no annual fee. Click on their website to apply now. And the beautiful irony that we'll tie a bow on this whole episode is the Bank of America card, credit card by Bank of America, runs on MasterCard's network.

• 3:38:29David Rosenthal?

  Well, as you started to set that up, I was like, I know where you're going with this. I know where you're going with this. Enter Bank for the win.

• 3:38:36Ben Gilbert?

  We'll link to it in the show notes. Get yourself a Bank of America card and run your transactions over MasterCard's beautiful stellar network.

• 3:38:44David Rosenthal?

  Wow. That is hilarious. What a great place to leave the story.

• 3:38:49Ben Gilbert?

  There can't 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 nostalgia purposes.

• 3:38:56David Rosenthal?

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

• 3:39:00Ben Gilbert?

  Ah, truly. Okay, carve-outs?

• 3:39:03David Rosenthal?

  Carve-outs.

• 3:39:04Ben Gilbert?

  Mine is available on Netflix. It is a show called I Think You Should Leave. I have not laughed this hard in a long time. Each episode's like 15 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.

• 3:39:21David Rosenthal?

  Oh, we were talking about this at our Drinks in New York.

• 3:39:23Ben Gilbert?

  Yes. If I were you, listeners, and you haven't watched this yet, I would go to season three, episode one. My favorite skit of them all starts approximately six minutes in. Actually, the whole episode's good, but the skits 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 cinematographer, but using a completely different set of lenses, lighting sets, post-production, such that everything that they're trying to emulate, whether it's a game show or a dating show or a commercial, feels like the appropriate thing that they're

• 3:40:08Ben Gilbert?

  trying to emulate. It's just really good.

• 3:40:10David Rosenthal?

  That's amazing. I'll have to check it out. My carve out is a book. I think this is my first fun fiction book in a while. Mistborn by Brandon Sanderson. It is a awesome fantasy novel, the first in this series, but you can read it as a standalone, 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 Pajani, the founder of Sneak.

• 3:40:36Ben Gilbert?

  Oh, nice.

• 3:40:37David Rosenthal?

  Last time we got together, which was super fun. Sneak is an amazing, very large cybersecurity company that I'm sure many of you know about.

• 3:40:42Ben Gilbert?

  Focused on developers, right?

• 3:40:44David Rosenthal?

  Yeah, developer security. You see their billboards all up and down, one on one here in San Francisco. But yeah, he recommended it to me a while back, and it took me a while to get to it, you know, toddler parenting. But I read it. I thought it was awesome. Jenny read it. She loved. She's, of course, now done the whole series because she's a voracious reader. The world building, the magical system, all the core fantasy elements are really great. The political intrigue, highly recommend.

• 3:41:10Ben Gilbert?

  Awesome. Well, we definitely have a few thank yous on this one. Huge thank you to Dave Sterns for spending the time with us and recanting his academic thesis. And it was just awesome reading the book. I have a personal thank you to a good friend of mine, Jason Pate of Plaid. Very helpful to get just general high level thoughts on payments industry. Thank you to Lisa Ellis from Moffett Nathanson. Lisa did an amazing interview with Ben Tom. A few weeks back, if you are a Stratechery subscriber, that is totally worth reading, and I prefer listening. So go listen to that. After I read that, I shot her an email and I was like, we're about to do Visa. I would love to talk to you about some of this. So huge thanks to her. Good friend of the show, Dimitri from Modern Treasury, for helping us quickly get up to speed on payments. And good friend of mine and David's both,

• 3:41:55Ben Gilbert?

  Ben Idelson, 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 going to be, and hear the follow ups and corrections after we learn them from you. You should join the Slack, acquired.fm/slash/Slack. You should check out ACQ2. In particular, our next episode, it is not out yet, is going to be a follow up to this episode on Visa. Our buddy Garav from Thrive Capital is joining us for a follow up to analyze the payments landscape today. And Garav has spent his entire career as a founder and investor in fintech companies. And he actually gave a talk on the history of credit cards that we used for research in this episode.

• 3:42:39Ben Gilbert?

  So check out ACQ2, search and subscribe in any podcast player. And then the next week, maybe two weeks, our interview with Garav will come out. And be sure to check it out. With that, check out the merch store, acquired.fm/store. Can sport some of this sweet, I'm wearing the shirt right now, sweet swag around. And pay some interchange fees. That's right. That's right. And with that, listeners, we'll see you next time. We'll see you next time.