INTRO: The top two purposes of every for-profit company
is to offer as much value as possible and bring home as much profit as possible.
Some companies are particularly good at providing value while others are phenomenal at generating
profits, but very few companies are able to strike a balance that pleases the peveryone.
One company that has managed to achieve this, however, is Visa.
Generally, it's the retailer or seller paying credit card and debit card fees, so most customers
never bat an eye.
To them, using a card is much more convenient than carrying cash and change.
And as for sellers, most of them view the 1-3% processing fee as an acceptable investment
because accepting cards brings in so much more traffic.
I mean just imagine where online sales would be if it wasn’t for cards.
On the other side of the coin, Visa is pretty happy as well.
Even though they only make a small fee on each transaction, Americans alone spent $6.7
trillion through credit and debit cards in 2019, and 60% of that was through Visa.
Aside from pulling in massive revenue, Visa has 0 COGS or cost of goods sold which means
that their gross profit margin is literally 100%.
Even after you account for operating expenses and taxes, Visa is able to bring in 51% of
their revenue as net profit.
So, here’s the story of the most profitable company in the world.
BANKAMERICARD: Taking a look back, the origin of Visa dates
all the way back to 1956 to Bank of America.
At the time, credit cards were already quite popular amongst middle class Americans, but
the system was by no means centralized or streamlined.
Generally, merchants issued their own cards that could be used to make purchases at their
stores and be paid off at the end of the month.
But the problem was that each card was specific to the merchant, so people had to carry a
card for every retailer they shopped at.
And at the end of the month, they had to pay off several bills.
Ironically, the situation is basically the same today as people use different cards for
groceries, travel, and gas to maximize on their points.
But theoretically, people can get away with just 1 or 2 credit cards if they wanted to.
In the 1950s, however, this was not possible.
Many smaller banks had already tried to create an all-around credit card, but given their
relatively small customer bases, these never picked up steam.
When Joseph P. Williams, the product development leader at Bank of America, suggested creating
a credit card, executives weren’t quite convinced.
They feared that not enough Americans would adopt the system and that merchants would
fight back, but after a bit of convincing, Joseph was able to get approval for a soft
launch in Fresno, California.
The executives felt that Fresno was big enough to give the system a shot, but it was also
small enough that if things went bad, the company wouldn’t lose too much money.
Something else to note is that Bank of America had 45% market share in Fresno, so they had
the cards stacked in their favor.
Anyway, on September 18, 1958, Bank of America finally launched BankAmericard by shipping
65,000 cards to Fresno residents.
EARLY BACKLASH: The launch in Fresno actually went pretty
well, and Bank of America was feeling comfortable in expanding the program.
But then, rumors started to roll around that another major bank was going to launch their
own credit card in San Francisco.
San Francisco was Bank of America’s home market, so they couldn’t just let some competitor
beat them to market.
Bank of America doubled down on BankAmericard and pumped up card issuance through the roof.
By March of 1959, they had sent out cards in San Francisco and Sacramento.
By June, they added Los Angeles and by October, they had issued over 2 million credit cards.
In terms of popularity, BankAmericard was a massive success as 20,000 merchants were
accepting the card.
In terms of the media and profitability though, BankAmericard was having a rough time.
You see, Joseph had vastly underestimated the number of people who would take advantage
of the service.
Joseph anticipated that only 4% of accounts would become delinquent, but the actual number
came in at 22%.
In the meantime, BankAmericards were the perfect tool for fraudsters leading to the rise of
credit card fraud.
Now, Bank of America had thought about this, and their terms of service specified that
customers would be liable for fraudulent charges.
But the media and politicians just ate this up and destroyed the reputation of BankAmericard.
By 1960, Bank of America had racked up $20 million in losses, and Joseph would throw
in the towel by resigning.
Bank of America, however, was determined to make this work.
They had seen how quickly merchants and customers adopted the system, and they knew that they
had something massive on their hands.
Bank of America sent out an apology to their 3 million customers, and they simply stayed
the course.
By May of 1961, the venture would turn profitable, but Bank of America didn’t make a fuss about
it.
They let the media continue to paint BankAmericard as a tool for fraudsters as this simply deterred
competitors from entering the space.
This strategy worked for a couple of years, but by 1966, it was clear that BankAmericard
was making bank.
INTERNATIONAL EXPANSION: Initially, BankAmericard was only meant for
California because federal laws restricted Bank of America from directly expanding to
other states.
But, an up and coming competitor called Master Charge had figured out a work around.
Master Charge had created an alliance between a bunch of regional banks to circumvent federal
laws.
Seeing this, Bank of America decided to do the same thing, and given their brand power,
this strategy was extremely powerful.
Starting in 1966, Bank of America began signing licensing agreements with banks outside of
the state, but they soon came across another federal hurdle.
In 1970, the federal government would outlaw banks from sending unsolicited credit cards
to Americans.
So, Bank of America could no longer just send the cards to as many people as they could
and hope that people would bite.
But really, this was a bigger problem for competitors than Bank of America.
Bank of America had already sent out over 100 million credit cards by the time this
law came around.
So, the law really just stifled competition.
In the meantime, Bank of America took this opportunity to focus on international expansion.
Between 1968 and 1977 for example, Bank of America partnered with an alliance of Canadian
banks to issue a credit card named Chargex.
Similarly, they would bring out Carte Bleue in France and they also brought out options
in Japan, the UK, and Spain.
But as the card spread around the world, BankAmericard started to become a larger and larger part
of Bank of America.
BankAmericard was no longer Bank of America’s card, it was simply a popular card that was
owned by Bank of America.
In other words, BankAmericard was becoming an independent business that was no longer
reliant on Bank of America.
And, Bank of America was actually stifling the reach of BankAmericard.
BIRTH OF VISA: Here’s the thing, not everyone in the world
is big fans of America especially during the Cold War and the inflation crisis of the 1970s.
Many international customers refused to get a card that was associated with Bank of America.
If the bank was named Chase or Wells Fargo, they might’ve had an easier time with international
customers, but their name was literally Bank of America.
Now, Bank of America isn’t actually a central or national bank like the Bank of Canada or
the Swiss National Bank, but the name does create such an image.
Aside from this association, BankAmericard’s dealings became increasingly messy.
As Bank of America signed deals with various banks around the world, they agreed to varying
transaction fees, varying licensing fees, and varying terms and conditions.
This made the system extremely unorganized and difficult to manage.
So, in 1970, Dee Hock, the chairman of the BankAmericard committee, proposed the idea
of spinning off BankAmericard into its own company.
Bank of America would agree and a new company called NBI or National BankAmericard Inc was
created for domestic relations and Dee Hock would be made CEO.
However, Bank of America retained the right to continue issuing BankAmericards outside
of the US and forming new partnerships.
It didn’t take long for this to turn into a massive mess as well though.
By 1972, international partners were starting to get frustrated with Bank of America and
wanted a more streamlined process.
So, Bank of America would seek help from Dee Hock.
Eventually, they would work out a deal and create a new company called IBANCO or International
Bankcard Company for international relations.
This new system of IBANCO and NBI was actually pretty effective, but by 1976, the companies
came to the conclusion that there was no reason to operate as separate entities.
So, in 1976, the two companies merged and created what we now know as Visa.
MODERN DAY VISA: Now that all of the background issues were
taken care of, Visa could focus on improving the service.
This included supporting more currencies, offering cash withdrawals around the clock,
launching the debit card, and so on and so forth.
But by far their biggest challenge was addressing credit card fraud.
Unfortunately, this couldn’t really be addressed until technology advanced much more, but Visa
introduced fraud protections services as soon as they could.
In 1993, for instance, Visa started utilizing neural network technology to better identify
fraudulent payments.
But their biggest step against fraud didn’t come till 2004 when they introduced advanced
authorization.
Advanced authorization leverages machine learning and risk management tools to assign a risk
score to every Visa transaction in real time.
For example, if you go grocery shopping every friday, and one week you go on a wednesday,
that payment would be assigned a higher risk score.
Similarly, if you live in Austin, but go on vacation to New York and make a purchase there,
that transaction would have a much higher risk score.
While this system is quite effective and has allowed for more consumer friendly fraud policies,
critics have argued that the system is intrusive.
In order to identify these anomalies, Visa needed to know your purchasing habits and
travel life pretty well.
Despite these concerns though, Visa’s growth has never slowed down as consumer spending
just keeps going up year after year.
In 1997, Visa reached $1 trillion in annual payment volume.
Within just 10 years though, this over quadrupled to $4.4 trillion.
Anyway, in 2008, Visa would go public that same year, and since then, the stock has run
over 1100% making them the 13th largest company in the world with a valuation of $438 billion.
And when you control the credit card market and have 51% net margins, that’s really
not that surprising.
Do you guys have a Visa powered credit card?
Comment that down below.
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