Introduction
In today's world, we take for granted the ability to use a small plastic card to make purchases almost anywhere. Whether you're buying groceries at your local store or shopping in a foreign country, credit cards have become an integral part of our daily lives. But have you ever wondered how this system came to be? How did we go from cash-only transactions to a global network of electronic payments?
David L. Stearns' book "Electronic Value Exchange" takes us on a fascinating journey through the history of credit cards, focusing on the creation and rise of Visa, one of the world's most prominent electronic payment systems. This book tells the story of how a group of competing banks came together to create a cooperative system that revolutionized the way we exchange value.
At the heart of this story is Dee Ward Hock, a visionary leader who transformed a struggling credit card program into the global powerhouse we know today as Visa. From humble beginnings in rural Utah to becoming one of the most influential figures in the financial world, Hock's journey is as inspiring as it is instructive.
Let's dive into the key ideas and events that shaped the development of Visa and the electronic payment industry as we know it today.
The Early Days of Credit Cards
From Charge Plates to Plastic Cards
The concept of credit isn't new. As far back as the 1920s, department stores and gas stations were issuing charge cards to their customers. These early cards were often made of paper or cardboard and were specific to individual businesses. In the 1930s, airlines joined the trend, and in 1936, the United Air Travel Plan was formed, allowing customers to use a single card across multiple airlines.
Some cities saw groups of retailers band together to create local payment card systems. For example, the Retail Service Bureau of Seattle included over 1,000 retailers by 1936. However, these early systems were largely wiped out by the Great Depression and World War II.
The modern era of credit cards began in 1949 with the introduction of the Diners Club card in New York City. Unlike previous cards, Diners Club was issued by a third-party company and could be used at various merchants. It was also designed to make a profit, setting it apart from earlier loyalty-focused cards.
In 1958, American Express entered the market, introducing the first plastic charge card. This innovation set the stage for the widespread adoption of plastic cards that we see today.
Enter BankAmericard
As charge cards gained popularity, banks began to see an opportunity. Many tried to enter the market, but most failed due to their inability to create a large enough network of cardholders and merchants. However, one bank had the resources and reach to make it work: Bank of America.
In September 1958, residents of Fresno, California, received an unexpected envelope in their mailboxes. Inside was a small plastic card called "BankAmericard," along with a letter explaining that they could use this card at hundreds of local stores and receive a consolidated bill at the end of the month. This mass mailing, known as the "Fresno Drop," marked the beginning of BankAmericard.
The novelty of using a credit card quickly caught on. People gathered around checkout counters to watch others use their new BankAmericards, much like they gathered around new televisions to watch the test pattern. By 1959, Bank of America had issued 2 million BankAmericards and enlisted more than 20,000 merchants.
Expansion and Challenges
The success of BankAmericard in California led Bank of America to expand the program. In 1966, they created the BankAmericard Service Corporation to enroll licensees in other states. By 1968, there were 6 million cardholders, 155,000 merchants, and nearly $460 million in annual sales volume.
However, this rapid growth came with significant challenges. Fraud was rampant, costing banks millions every year. The system relied heavily on paper sales drafts and limited computer accounting, leading to major timing issues in clearing and settling transactions. These problems resulted in substantial financial losses for the banks involved.
The situation became so dire that in October 1968, the licensees demanded a meeting with the BankAmericard Service Corporation. It was at this contentious meeting that a solution emerged, proposed by a man named Dee Ward Hock.
The Rise of Dee Ward Hock
An Unlikely Banking Innovator
Dee Ward Hock was not your typical banker. Born in 1929 at the start of the Great Depression, Hock grew up in rural Utah in a one-room cottage with no plumbing. His early life was marked by manual labor and a love for solitary walks in the woods and reading. These experiences shaped his unique perspective on organization and leadership.
Hock was the first in his family to attend college, albeit only a junior college. After marrying his high school sweetheart, he took an entry-level job at a Los Angeles consumer finance company in 1951 to support his family. It was here that he began to form his unconventional ideas about organization.
Hock disliked bureaucracy and centralized power. Instead, he favored systems that were organic and self-organizing, blending characteristics of order and chaos. He even coined a term for this concept: "chaordic."
Hock's Entry into the Credit Card World
In 1966, Hock moved to Seattle and took a job at the National Bank of Commerce. He was selected to run the bank's newly licensed BankAmericard program. After attending the BankAmericard training session and visiting several card centers, Hock concluded that the program was in serious trouble.
His concerns were confirmed at the October 1968 meeting of BankAmericard licensees. Recognizing the gravity of the situation, Hock stepped up to propose a solution. He created multiple committees of licensees from different regions to examine all of BankAmericard's flaws.
The Birth of National BankAmericard Inc.
Taking the information gathered from these committees, Hock and three committee leaders retreated to the Alta Mira Hotel in Sausalito, California. Over the course of a week, they hammered out the guidelines for National BankAmericard Inc. (NBI), a cooperative of BankAmericard licensee banks that would work together to form a manageable and profitable payment card system.
Rather than creating a rigid formal structure, Hock and his team focused on defining the organization's purpose and principles. The idea was to get all licensees to agree to these fundamentals and then allow them to self-organize. This approach aligned with Hock's "chaordic" philosophy.
Thanks to Hock's persuasive skills and the licensees' desperate need for a solution, the proposal was accepted. National BankAmericard Inc. was born, laying the foundation for what would eventually become Visa.
Building a New System
Assembling the Team
With NBI established, Hock set about hiring a staff that complemented his own skills. One of his key hires was Chuck Russell, an approachable bank operations expert who balanced out Hock's visionary but often harsh style. This team would prove crucial in tackling the major challenges facing the credit card industry.
Creating Trust and Regulations
Hock created operating regulations that governed the use of trademarks, the processing of transactions, and disputes between banks. These regulations were designed to create just enough trust among the competing banks for the new system to function effectively.
To address the skepticism of cardholders, who had become wary due to recent credit card fraud, Hock launched savvy advertising campaigns. One of these campaigns introduced the now-iconic tagline "Think of it as money," which helped to reposition the credit card in consumers' minds.
Tackling Technical Challenges
While the organizational structure of NBI was a significant achievement, it only solved half of the problem. Two major technical issues still needed to be addressed: authorizing transactions and clearing and settling transactions. Both processes relied heavily on manual inputs, making them slow, unreliable, and incapable of handling BankAmericard's growing volume.
The Authorization Problem
At the time, expensive purchases required merchants to call their bank's authorization center for approval before making the sale. If the credit card was issued by a bank in a different region, the process could take anywhere from five minutes to a few hours. This delay made customers less likely to use the card and created opportunities for fraud.
To solve this problem, NBI needed to replace human authorization with an automated system and implement high-speed communication between card centers. The solution came in the form of the BankAmericard Authorization System Experimental, known as BASE.
Introducing BASE I
BASE I was first put into use in April 1973. The system incorporated ideas and technology from other businesses, most notably the magnetic strip containing card information, which was developed by Omnishow. BASE I reduced the average authorization time to just 56 seconds, a dramatic improvement over the previous system.
Clearing and Settling: The BASE II Solution
With the authorization problem solved, Hock and NBI turned their attention to the clearing and settling of transactions. The existing manual process was tedious, prone to mistakes, and often took seven to eight days to complete.
Hock envisioned an "automated clearinghouse" to expedite this process. The result was BASE II, which went live in March 1975. With BASE II, all transactions were cleared and settled in one day. This not only solved a major accounting nightmare but also saved NBI members an estimated $16 million in labor and postage costs in the first year alone.
Going Global
The Creation of Ibanco
While NBI was developing and implementing BASE I and II, Hock was simultaneously working on creating an international version of the organization. This project, which began in 1972, resulted in the formation of Ibanco (short for International Bankcard Company) two years later.
Like NBI, Ibanco was a group of competing banks coming together to form a payment card system that would benefit them all. Hock became the president of both NBI and Ibanco, carefully structuring the Ibanco Board of Directors to ensure that no single bank, country, or region held all the power.
Clear Rules and Structure
Hock created clear rules for Ibanco covering various aspects of the international credit card system, including:
- Reimbursement fees
- Dispute resolution
- Card design
- Format of sales drafts
NBI continued to manage its US members and became a member of Ibanco along with other national associations and individually licensed banks. This structure allowed for a cohesive global system while maintaining regional flexibility.
Legal Challenges and Duality
The Worthen Bank Case
In the mid-1970s, NBI faced a significant legal challenge. At the time, there was another major payment card system in the United States called Interbank (which would eventually become MasterCard). NBI rules stated that no bank could belong to both NBI and Interbank.
However, Worthen Bank and Trust from Little Rock, Arkansas, challenged this rule on the grounds that it was illegal under antitrust laws. A judge agreed with Worthen Bank, and NBI was forced to settle the case. As a result, in 1976, NBI dropped its exclusivity rule.
The Era of Duality
Following the Worthen Bank case, most banks began to belong to both NBI and Interbank, a condition referred to as "duality." This change led to significant expansion for NBI, as Interbank was actually the larger organization at the time.
The Birth of Visa
A New Name for a New Era
In 1977, NBI underwent a major rebranding, changing its name to Visa. This name change coincided with the international growth facilitated by Ibanco and the expansion caused by duality. The new name was chosen for its simplicity, ease of pronunciation in multiple languages, and positive connotations of universal acceptance.
Rapid Growth
The rebranding and expansion strategy proved incredibly successful. Visa took off like a rocket, quickly surpassing its competitors. By the first quarter of 1978, Visa had overtaken Interbank in sales volume and established itself as the world's dominant payment card system.
This remarkable growth was a testament to Hock's vision and leadership. In just ten years, he had transformed a struggling credit card program into a global financial powerhouse.
Hock's Final Years at Visa
New Products and Tensions
Despite Visa's success, Hock's tenure was not without its challenges. He clashed with NBI and Ibanco members over several new initiatives:
- The introduction of Visa's first debit card, which seemed to compete with many member banks' electronic funds transfer (EFT) programs.
- Visa's entry into the traveler's check business.
- A direct business arrangement with retailer JCPenney, which made Visa appear more like a competitor than an organizer to its members.
Power Struggles and Departure
These initiatives, combined with concerns that Hock was trying to build a personal empire, led to increasing tensions within the organization. Gradually, Hock was stripped of his power and influence.
The final blow came in 1984 when Hock was forced out of Visa. Despite the controversial end to his tenure, there's no denying the enormous impact Hock had on the company and the entire electronic payment industry.
Conclusion
The story of Visa, as told in "Electronic Value Exchange," is a remarkable tale of innovation, leadership, and organizational transformation. From its humble beginnings as BankAmericard to its rise as a global financial giant, Visa's journey reflects the broader evolution of electronic payment systems.
Key takeaways from this story include:
The power of cooperation: Visa's success came from getting competing banks to work together for mutual benefit.
Innovative leadership: Dee Ward Hock's unconventional approach to organization and his "chaordic" philosophy were crucial in solving the complex problems facing the credit card industry.
Technological innovation: The development of systems like BASE I and II revolutionized transaction authorization, clearing, and settlement, making electronic payments faster and more reliable.
Global vision: The creation of Ibanco and the transition to Visa demonstrated the importance of thinking globally in the financial industry.
Adaptability: The ability to adapt to legal challenges, like the move to duality, allowed Visa to continue growing and evolving.
Balancing interests: The tensions that arose in Hock's final years highlight the ongoing challenge of balancing the interests of member banks with the need for innovation and growth.
Today, we take for granted the ability to use a single card for purchases around the world. But this convenience is the result of decades of innovation, cooperation, and visionary leadership. The story of Visa, as recounted in "Electronic Value Exchange," serves as a powerful reminder of how transformative ideas, coupled with effective execution, can change the way we live and conduct business on a global scale.
Dee Ward Hock's journey from a one-room cottage in rural Utah to the helm of a global financial organization is not just a personal success story. It's a testament to the power of innovative thinking and the impact that one person's vision can have on an entire industry. While Hock's tenure at Visa ended controversially, his legacy lives on in the electronic payment systems we use every day.
As we continue to see new innovations in financial technology, from mobile payments to cryptocurrencies, the lessons from Visa's early days remain relevant. The need for cooperation among competitors, the importance of building trust in financial systems, and the power of technological innovation to solve complex problems are as crucial today as they were when Hock first set out to save BankAmericard.
"Electronic Value Exchange" offers more than just a history of Visa. It provides valuable insights into organizational management, technological innovation, and the evolution of global finance. For anyone interested in the intersection of technology and finance, or in understanding how our modern payment systems came to be, this book offers a wealth of information and inspiration.
In an age where digital payments are becoming increasingly prevalent, understanding the origins and evolution of electronic value exchange is more important than ever. The story of Visa reminds us that behind every convenient swipe of a credit card lies a complex system built on trust, cooperation, and innovation – a system that continues to shape our financial world today.