Odd bedfellows: the strange history of VISA and bitcoin
When the founder of VISA Dee Hock joined the advisory board of Bitcoin startup Xapo, it seemed pretty strange to me. After all, Bitcoin’s very existence appears to be a reaction to VISA’s shortcomings. VISA represents everything bitcoin fans hate: fees, centralization, archaic design, and more. The VISA network, it seems, is designed to make the banks more money by charging high fees to businesses that have little choice but to accept them. Bitcoin, on the other hand, is designed to empower people to use their money with no intermediary, no fees, and no central authority to get in the way. So what could the founder of VISA want with Bitcoin, and more importantly, what could Bitcoin want with him? It turns out the story of Dee Hock and VISA is more complicated (not to mention stranger) than the dominant narrative today would suggest. In fact, VISA is arguably the best example in the history of business in utilizing Bitcoin’s most vital characteristic: decentralization.
There’s a pretty good chance you have a card with the VISA logo in your pocket/purse/wallet right now. Over 100 million Americans do. But do you know what VISA actually does? After all, your debit card has the VISA logo on it, but your bank gave you the card and handles your money. Your credit card has the VISA logo on it, but someone like Capital One is issuing you the credit. So….. where does VISA fit? Does VISA move money? Manufacture the plastic cards themselves? Build the terminals where you swipe your card to buy things? What does VISA DO and why don’t we know?
It turns out VISA doesn’t do any of those things. VISA doesn’t make cards, sell cards, issue credit, move money, build or sell payment terminals, or anything you generally associate with card transactions. In fact, read VISA’s own description of how a VISA payment works. They describe the “four parties of a VISA transaction”, and VISA is not listed as one of those parties. It turns out that this, along with the fact that you and almost everyone you know doesn’t know what VISA actually does, is by design. VISA does not want people to know what they do, only what they enable.
What VISA actually builds is the network that sends payment messages around the world. Secondarily (but critically), it also guarantees that each transaction it approves will settle, meaning that the bank issuing the credit (“Issuing Bank”) will pay the business’s bank (“Acquiring Bank”) the amount of the transaction. That’s it. A network of bits and a guarantee against banks screwing each other. In a world where bits are a commodity, it’s hard to understand how taking a small amount of risk and building a messaging protocol could result in a $167 BILLION market cap. That’s because the value isn’t in anything VISA actually does, it’s really in what VISA DOESN’T do. The reason VISA is so valuable is based on what Dee Hock did starting around 1970 by creating a decentralized network where THOUSANDS of individual banks and businesses compete and cooperate in near perfect harmony to make global, instant money movement a reality.
VISA started as BankAmericard in 1958, a Bank of America general use credit card. This wasn’t the first general use credit card, however it was the first to be distributed via mass direct mailing of fully approved and functional cards (those “YOU’VE BEEN APPROVED!” cards you get in the mail). It was a breakthrough in an industry that had struggled mightily with consumer adoption. It was also a disaster. The launch of the card caused Bank of America to lose the equivalent of $160,000,000. However, in typical bank fashion, they did not let bad product design and a disastrous marketing campaign shut down a product that could potentially let them increase their consumer debt exposure! They fired the executive in charge of the program and doubled down, issuing more cards and planning both US and international expansions. BankAmericard even became somewhat profitable, and the future looked promising. However, in 1966 a group of competing banks¹ created a new credit card brand called “Master Charge”.
Bank of America basically lost its shit.
The next few years were chaotic. It has been aptly described as a “credit card orgy”, a race to issue bad consumer credit that would arguably not be matched for another 40 years². Bank of America quickly started licensing out its cards to any bank that would issue them, and both Master Charge and BankAmericard started issuing pre-approved cards to every mailing list in existence (including lists with children and pets on them). Predictably, giving a line of credit to completely random people (and dogs) was not the IDEAL way to grow a serious banking product. The BankAmericard partners were getting nervous, and what was worse - they were all competitors and all needed something different from the card program. To address the concerns, the partner banks all met in 1968 to figure what to do. This also did not go well, until the director of a partner bank in Seattle spoke up. His name was Dee Hock, and he had a plan.
Hock suggested the banks start a committee to solve the problems they were having in a systematic and ongoing basis. The banks all agreed, and they created the committee and appointed Mr. Hock the chairman. Two years later, the committee would re-emerge with a radical plan that was somehow not only plausible at solving the problems BankAmericard was having but also reached consensus and gave each partner bank the comfort that it would solve THEIR specific problem. The plan? Break off BankAmericard into a new company called “National BankAmericard Inc” (later re-named to “VISA”). This company would be completely autonomous and would develop standards and protocols for its cards that all member banks would have to adhere to. How the banks sold, issued, branded, distributed, and managed their cards would be up to them, but how the cards worked technically would remain constant.
While the network would still be managed by a central authority, this structure was sufficiently de-centralized to gain two of the major benefits of decentralization. First, the new network took the development of the core card functions away from Bank of America, giving every bank the comfort that the standards would be developed only in the best interests of the network. Since VISA was owned jointly by all the partner banks and extremely limited in function, VISA would focus only on making payments work every time, gaining nationwide customer and merchant interest, and building trust in the VISA brand. No one bank’s interests could trump another’s, because the new company would only succeed if the entire system succeeded.
Second, Dee Hock’s vision for VISA dramatically reduced the amount of TRUST required to scale the VISA system. If any partner bank in the VISA network fails to fulfill their obligations to settle a transaction, VISA covers it for the bank that is owed - every time. No bank selling VISA credit card terminals needed to worry about whether the bank that had given the customer the card was about to default from distributing credit cards to 8 years old and their cats, because any such default was covered by VISA. Instead of each partner bank needing to trust each other, they now simply had to trust American banking as a whole and that VISA’s guarantee was good.
The dramatic reduction in the trust the network required coupled with VISA’s singular focus on increasing network reliability and brand visibility allowed the network to grow 10,000% between 1970 and 2010. VISA became one of the most recognizable brands in the world - despite nobody knowing what exactly they do. Even the fact that consumers generally don’t know what VISA does was part of Dee Hock’s de-centralized vision. According to Hock, “the better an organization is, the less obvious it is,” with the results of the VISA network rather than the organization itself being what people know.
The parallels between Bitcoin and VISA are numerous. Bitcoin is fundamentally about reducing the need for trust entirely by allowing two people who don’t know or trust each other to agree that something is true for the first time. Bitcoin has a two sided network of account holders (cards :: wallets) and merchants that accept Bitcoin that is serviced by service providers (Bitpay/Coinbase :: First Data). They each facilitate instant digital transactions on a network nobody should have to see for it to work. No one institution or provider can take down the network because the network is distributed with protocols no one person can change.
However, Bitcoin takes things a step further. Bitcoin is entirely person to person with no financial intuitions anywhere in the core network. Bitcoin isn’t even developed by a core foundation or company, it’s completely open source for anyone to look at and even contribute to. This is often portrayed, in the US especially, as not just a reaction to centralized banking, but to the centralized card networks (VISA and MasterCard) they created. However, the founder of the first great electronic transaction network Dee Hock sees this not as destruction but rather the furthering of a cultural movement. He says:
“We are at that very point in time when a 400-year-old age is dying and another is struggling to be born — a shifting of culture, science, society, and institutions enormously greater than the world has ever experienced. Ahead, the possibility of the regeneration of individuality, liberty, community, and ethics such as the world has never known, and a harmony with nature, with one another, and with the divine intelligence such as the world has never dreamed.”
To the founder of VISA, this isn’t just a new competitor to the VISA network - this is inevitable and fundamental growth. As we move into an increasingly digital world, de-centralization becomes more and more possible and more and more powerful everyday. De-centralization done right isn’t a weakness, it’s a strength that enables trust, scale, and innovation central authorities could never achieve. The question, then, isn’t what do the founder of VISA and Bitcoin have to do with each other, but rather what will they create together?
I, for one, am excited to find out.
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Originally written for Skekel
This group included Wells Fargo. I find this interesting because at the time, banks could only operate in 1 state. Therefore, no bank was able to get particularly big, and yet the two biggest consumer banks in the US today happened to be the founding banks behind VISA and MasterCard. This isn’t entirely a coincidence but it appears to mostly be, given how little a role MC and VISA played in the growth of BofA and Wells respectively. Related: this footnote has reminded me how ridiculous the things I find interesting are.
The big winner in the 2008 financial crisis? Credit card companies! It turns out, Americans were trained to pay their credit card bill before anything else, and companies like Capital One were not only financially solvent, but also were able to buy a ton of great distressed assets.