Electronic Value Exchange

How did a card mailed to unsuspecting residents in 1958 evolve into a global payment system that handles billions of transactions daily? The answer lies in ingenuity, innovation, and the vision of one man, Dee Ward Hock.

1. The Birth of Modern Credit Cards

The idea of credit cards took a giant leap in 1958 when Bank of America mailed BankAmericards directly to Fresno, California residents. Unlike previous charge cards, this offered revolving credit and the ability to consolidate bills. These features revolutionized personal finance.

BankAmericards followed a path paved earlier by department stores, gas stations, and airlines that issued charge cards to build customer loyalty. What set BankAmericard apart was its widespread acceptance and the backing of a large institution, Bank of America. It was designed to overcome the limitations of one-store cards by enabling use across multiple merchants.

By 1959, this experiment led to rapid growth, with millions of cardholders and thousands of merchants joining the network. However, this success wasn’t without challenges. Rampant fraud and inefficient manual processes created significant losses, sparking a reckoning within the organization in later years.

Examples

• Mailing 60,000 unsolicited BankAmericards in Fresno in 1958.
• The offer of "minimum payments" as a personal loan.
• 2 million cardholders and $460 million in sales volume by 1968.

2. Enter Dee Ward Hock: A Visionary Leader

Dee Ward Hock grew up in poverty during the Great Depression but cultivated a deep understanding of human systems while working his way up from small jobs to leadership. In 1968, he proposed creating a cooperative model to improve BankAmericard's effectiveness.

Hock disliked traditional bureaucracy and centralized top-down systems of power. His leadership embodied a philosophy of decentralized and self-organized systems. He introduced the concept of "chaordic" systems, blending chaos and order into structures where participants acted independently yet cohesively toward a shared goal.

Hock’s cooperative framework unified competing banks under National BankAmericard Inc. (now Visa). His ability to communicate big ideas, listen to stakeholders, and compromise while staying firm on principles made this transformation possible.

Examples

• Growing up in rural Utah in a one-room cottage with no plumbing.
• Coining the term "chaordic" to represent his management style.
• Convincing competing banks to join National BankAmericard Inc.

3. The Challenge of Building Trust Among Opponents

Initially, the BankAmericard system faced skepticism. Hock's mission was to create just enough trust between banks to build a platform they could collectively benefit from. He set about overcoming their distrust systematically.

Hock laid down regulations for trademark use, transaction processing, and dispute resolution. These rules gave banks confidence in the system. He also ran advertising campaigns, addressing fraud concerns and encouraging public trust.

By appealing to stakeholders’ shared desire for success, Hock brought unlikely cooperate competitors together. This shifted the paradigm from conflict to collaboration within the banking industry, propelling BankAmericard forward as Visa.

Examples

• Drafting strict operating rules for participants.
• The tagline “Think of it as money” to assure cardholders.
• Organizing committees to address concerns from regions nationwide.

4. The BASE Systems Revolutionized Transactions

Two major technical hurdles hampered credit card use: long times to authorize transactions and delays in clearing sales drafts. BASE I and BASE II systems, pioneered under Hock’s leadership, solved these problems.

BASE I automated transaction authorizations, reducing approval times from hours to less than a minute. BASE II streamlined clearing and settling processes, which previously required seven to eight days of manual processing, cutting it to just one day.

Through advanced technology, like magnetic strips for data storage, credit card networks became faster and more reliable, vastly improving user experience and reducing fraud opportunities.

Examples

• BASE I introduced in April 1973 for faster authorizations.
• BASE II implemented in 1975 to automate clearing processes.
• Saving member banks $16 million within the first year of BASE II's launch.

5. Expanding into Global Markets

While solving technical and organizational issues domestically, Hock also aimed for international growth. In 1974, he launched Ibanco, a cooperative for global markets.

To avoid dominance by larger nations or regions, Hock structured Ibanco with balanced representation. Clear rules on fees, card standards, and governance ensured consistency across borders, which encouraged banks worldwide to participate.

This move transformed Visa into a truly international network and set the stage for its global dominance in electronic payments by the late 1970s.

Examples

• Founding Ibanco to unify banks globally in 1974.
• Setting rules that allowed seamless cross-border transactions.
• International membership increasing Visa's reach and influence.

6. Visa and Its Rival, MasterCard

Visa didn’t rise without competition. MasterCard, first called Interbank, posed a direct challenge. Duality – allowing banks to join both networks – emerged after a legal battle and benefited Visa immensely.

Initially, Visa had restricted banks from joining competitors. After settling the antitrust case brought by Worthen Bank, dual membership became standard. This served Visa well because many Interbank members, already established, began offering Visa cards too.

This strategy fueled Visa's rapid expansion. By 1978, Visa overtook MasterCard in sales volume, solidifying its position as the leader in global payments.

Examples

• Worthen Bank's antitrust challenge to Visa rules in the mid-1970s.
• Banks offering both Visa and MasterCard under duality rules.
• Visa surpassing MasterCard in sales in the first quarter of 1978.

7. The Visa Branding Shift

Originally BankAmericard, the name change to Visa in 1977 signaled a new international era and a break from its earlier association with one bank. The catchy, universal name simplified marketing and strengthened the brand.

Visa's name reflected its global aspirations, appealing to both banks and consumers worldwide. The concise branding brought clarity and further distanced the network from its chaotic beginnings.

Such rebranding, backed by solid technological and organizational innovations, helped Visa become synonymous with trust, ease of use, and reliability.

Examples

• Rebranding BankAmericard to Visa in 1977.
• The name change coinciding with greater international expansion via Ibanco.
• Visually unified card designs accepted across nations.

8. The Downfall of Dee Hock

Despite his successes, Hock's tenure ended with conflicts. Member banks grew uneasy about his plans for debit cards, traveler checks, and retailer partnerships, fearing new ventures could cannibalize their existing services.

Hock’s innovative push clashed with traditional mindsets, and the tension caused him to lose support. By 1984, he was forced out of Visa. While his exit was marked by discord, his contributions to modern finance remained indelible.

Examples

• Introduced Visa's first failed debit card concept.
• Resistance to partnerships with JCPenney and the traveler’s check model.
• Forced resignation in 1984 due to rising distrust among members.

9. Visa Today: Dee Hock’s Legacy

The principles Hock established – decentralization, cooperation, and technological innovation – continue to underpin Visa’s operations today. It remains the largest payment system, leveraging a blend of independence and collaboration among banks.

Visa now clears and settles billions of transactions with ease, an achievement only possible through its foundational chaordic systems. Hock’s legacy persists in every swipe of a card worldwide.

While he no longer helms this empire, his revolutionary ideas set the stage for modern global commerce.

Examples

• Visa handling over $13 trillion in annual transactions globally.
• Continued reliance on decentralized systems to manage member needs.
• Its adaptability to new technologies like contactless payment and digital wallets.

Takeaways

1. Collaborate with competitors when mutual benefits outweigh rivalry; Visa's inception stemmed from banks working together for shared success.
2. Break groundbreaking ideas into actionable steps. Hock tackled fraud, manual processing, and trust issues systematically to build Visa.
3. Embrace change to stay relevant. Visa's transition to global operations and technological upgrades made it a lasting leader.