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BankAmericard was not the first payment card when Bank of America launched the product in 1958. But 50 years ago, on Sept. 18, the card brand that would morph into Visa nudged the world's largest consumer economies down a path of widely accepted revolving credit cards issued by confederacies of competing banks.
Historians, legislators, merchants, consumer advocates and payments-industry veterans may disagree about the virtues and vices of revolving credit, and the risks and rewards it entails. But beyond disagreement is how radically BankAmericard and its successor have changed how the world pays, not just with credit cards, but with debit, prepaid and other payment forms as well (
In 1954, BofA began studying payment cards issued by around 100 other banks. Most were charge cards accepted at participating merchants within a limited geographic area, but some offered revolving credit for 30 days. Without charging cardholders interest or annual fees, the card programs relied on "merchant discounts," small fees merchants accepting cards paid banks to process card transactions.
Despite the general lack of profitability of some 55 card programs BofA studied, two BofA researchers, Joseph Williams and Ken Larkin, convinced BofA to issue its first BankAmericards in 1958. Cardholders could access revolving lines of credit a variety of merchants would accept, providing an alternative to the cumbersome process of individual stores issuing credit directly to their customers, and cardholders could choose whether to pay off their purchases in full the next month or incur 18% interest on some of that balance while paying it off over time.
By 1966, BankAmericard had become the most widely accepted card in California. With enough market to share, BofA in 1966 licensed other California banks to issue BankAmericards.
"Because of the weird regulatory system for banks in the United States, virtually all banks were prohibited from engaging in interstate banking," says David Evans, an economist, author of the book "Paying with Plastic" and founder of the consultancy Market Platform Dynamics. "So the only way for the banking industry to be able to offer a general purpose credit card was to join forces."
The launch of BankAmericard immediately spawned competing card networks. In 1966, the Interbank Card Association launched a national bankcard network, but one that lacked a single name to span the entire United States. Five California banks, concerned about the development of a card-issuing monopoly in their state, formed the Western States Bank Card Association to issue a card with the name Master Charge.
In 1969, Interbank bought Master Charge from the Western States Bank Card Association, and the national card association horse race was on. BofA, constrained by the prohibition back then of opening branches outside its home state, franchised BankAmericard to other banks across the country.
Rocky Start
Despite BankAmericard's popularity, some industry analysts say it is amazing so many licensees kept issuing the card given that it was just as unprofitable as competing credit cards, many of which issuing banks had discontinued.
A bit of ignorance was one key to BankAmericard's survival during its early years, according to Ronald Mann, a Columbia University law professor and author of the book "Charging Ahead: The Growth and Regulation of the Payment Card Markets."
"Bank of America had very poor accounting procedures at the time," Mann says. "If banks had seen how much they were losing, they would have abandoned [BankAmericard] because it was very costly in the early years."
Evans disagrees. He believes BofA simply was waiting for the portfolio to turn around.
"It's true for pretty much anyone in the card industry that you lose money in the first few years," Evans says. "BankAmericard lost money, Discover lost money, most of the banks that built portfolios lost money."
Meanwhile, BankAmericard issuers grew increasingly discontent with their status as licensees. In 1968, at a meeting BofA convened for its issuers in Columbus, Ohio, the arguments and accusations of a roomful of angry bankers got out of hand.
According to widely accepted industry canon, Dee Hock, a 38-year-old vice president from a BankAmericard licensee bank in Seattle, suggested the group stop arguing and instead systematically analyze causes of the card network's problems and create possible solutions. Hock left the meeting as chairman of a committee to do just that.
'Chaordic' Philosophy
Hock was by all accounts an eccentric man, especially in banking circles. Before moving to Seattle, he had left three other finance-sector jobs, reportedly complaining that their stiff, hierarchical structures squelched collective creativity and initiative, stunting growth of both companies and the individuals who worked for them.
Hock's philosophy of organization, which he later would dub "chaordic," applies chaos theory and shared organized leadership to businesses, nonprofit groups and other entities.
In a 1998 speech, Hock defined groups of individuals as chaords. "By chaord, I mean any self-organizing, adaptive, nonlinear, complex organism, organization or system, whether physical, biological or social, the behavior of which harmoniously blends characteristics of both chaos and order," Hock said.
In 1970, when BofA spun off its card program into National BankAmericard Inc., Hock was the new company's first CEO. The program prospered under Hock's model as a decentralized, collaborative, nonstock, member-owned company of card-issuing financial institutions.
Fran Schall, now head of sales operations at Visa Inc., joined National BankAmericard in 1975. She found Hock an intimidating presence.
"He was very demanding and very intense. There were lots of meetings, and he expected people would be on their game all the time," Schall says. "He expected that as ideas would surface, he would push back and challenge ideas, and the solid ones would rise to the top."
Hock welcomed proposals from anyone, regardless of their position in National BankAmericard, Schall says. "I was pretty young then, but any good idea I was able to put together justification for got the go."
Digital Currency
From the start, Hock pushed the idea of computerized transactions driving universal currency to enable payments from one's assets or lines of credit anywhere in the world. "Hock had this concept that BankAmericard had the potential to be what he called 'digital currency,'" Schall says. "His dream was that it wouldn't matter what kind of a bank account a customer had. A customer with a plastic card would access an account and know which (type of) account was being accessed."
Glacial-slow processing of transactions hampered that dream, though. As paper-based systems, manual processing of credit card transactions was laborious and slow, giving plenty of time for fraud or inadvertent spending over credit ceilings to get out of hand. "Issuers took six to nine months to reconcile transactions," Mann says. "Transaction slips came in and you found out this person had been charging great amounts for months."
Donna Embry, now senior vice president of product development for Payment Alliance International, a Louisville, Ky.-based merchant acquirer and processor, worked for CFC Financial Services, the merchant-processing wing of Citizens Fidelity Bank in Louisville, when the bank began to issue BankAmericards. She says the bank did not initially experience much fraud, but as mail-order companies began to accept credit cards, losses mounted.
CFC Financial began distributing ever more regional fraud bulletins listing bad credit card accounts to its growing base of merchant customers across the country. "It was a pain in the neck to distribute those damn warning bulletins," Embry says. "The more cards that were on there, the smaller the print."
National BankAmericard took a major step toward reducing fraud and overcharging in 1973 when it introduced Base I, the first electronic transaction-authorization system, then Base II, an electronic clearing and settlement system. Both were precursors to the modern-day VisaNet, Visa's transaction switch.
"Investing massive amounts of money in computerizing at an advanced degree of sophistication led to Visa becoming the very efficient payment card system that it became for consumers and merchants," Evans says.
The next step in promoting Hock's dream of multiple payment types accepted around the world was a name change. So in 1976, National BankAmericard changed the BankAmericard moniker to Visa, a word easy on the ear in several languages. The new name also lent a message of travel to languages where derivations of the word visa mean movement and official permission to cross borders. And it did not mention the word "card," as Hock was already thinking beyond plastic, sources say.
Master Charge changed its name to MasterCard in 1979. But the name changes did not alter the competition between MasterCard and Visa.
Alex "Pete" Hart, who later would become MasterCard CEO, credits his first card, a BankAmericard, for helping him get a leg up in his work in the lumber industry in the mid-1960s. And he credits the race between MasterCard and BankAmericard, then Visa, with pushing innovation by both networks.
"The competition that existed between MasterCard and Visa made both a great deal better," Hart says. "That has really been a key to the success of the business."
Until 1978, Visa and MasterCard prohibited their member banks from issuing or accepting the other's card brand. Embry's bank was among those pressuring both networks to abandon that prohibition and adopt duality, allowing issuers and acquirers to dabble in both brands.
"The president of our division, Frank Kanego, sent black roses to the presidents of Visa and MasterCard," Embry says. "The card said 'American Express and Diner's Club thank you for your business.'"
Duality Versus Exclusivity
Hart believes both Visa and MasterCard were ready to open up. "Both were outwardly resistant to duality but inwardly supportive of duality, and that served their interests very well," he says. "They had been confined to some exclusives in some markets, and that was working to their disadvantage."
Visa's expansion around the world also required it to break free of exclusive issuing relationships with some banks. In the 1980s, Sumitomo Credit was the exclusive issuer of Visa cards in Japan, for example, and Visa's plans to expand issuance to other financial institutions there did not sit well with Sumitomo executives.
In 1986, Chuck Russell, then Visa USA's CEO, and Yo Suzuki, the president, chairman and CEO of Sumitomo Credit, were the best men at the wedding of Carl Pascarella, another future Visa USA CEO who then was head of Visa's Asia Pacific region. "As my wife was walking down the aisle, [Suzuki] was still whispering in my ear about how we shouldn't open Visa up to other banks," Pascarella says.
In 1976, Visa launched its first debit card, a signature-debit product called Visa debit, though debit would languish for several years before banks and consumers took to the payment type.
As a fan of debit, Embry secretly rooted in the mid-1980s for the Quest ATM network, of which her bank was a member, to allow issuers to brand signature-debit cards with the Quest network logo and enable the cards to be accepted at Quest ATMs. "I was mandated to vote against allowing a signature-based debit card to be used with our ATM network with a PIN because of the loss of revenue from the issuing income," Embry says.
In 1983, Visa launched a global ATM network, Visa Plus, to provide cash access to its cardmembers by requiring the keying in of personal identification numbers, even for credit cards. At that point, Embry believes, Visa should have extended PIN use for credit and signature-debit cards to the point of sale, which would have reduced the amount of fraud from then on.
"The biggest mistake I think Visa made was not propagating PIN numbers on all their transactions," Embry says. "They've always had the ability to do that, and I don't know why they didn't."
With debit cards now outpacing credit cards in annual transaction volume, it is easy to forget how reluctant banks were to issue debit in the early years. So pitching the virtues of debit was one of Pascarella's top tasks when he returned from Asia to become CEO of Visa USA in 1994.
"I beat on doors until my knuckles were bloody to get banks to do something with the debit card," Pascarella says.
Part of the problem was the name, according to Evans. "Until the early '90s, people associated 'debit' card with 'debt,' so it gave people a bad impression of debit cards," he says.
Visa addressed that problem in 1995 by renaming its debit product the "Visa check card," a welcome branding change for Embry who, working for a bank that was both an issuer and acquirer, had supported debit from the start.
Antitrust Pressure
In the 1990s and 2000s, Hock's vision of chaordic associations of competing banks faced increasing pressure from lawsuits by merchants that charged such cooperation in setting interchange and other policies was the very definition of an antitrust violation. MasterCard abandoned the association model with its initial public offering in 2006, and Visa followed suit earlier this year.
Evans believes the transformation was overdue. "I would say the biggest mistake Visa made was waiting too long to become a publicly traded organization," Evans says. "They exposed themselves to a lot of risk in the 1990s. That led to the interchange litigation, the Wal-Mart litigation."
In the Wal-Mart case, merchants complained the card brands' policies forced them to accept their debit products, which the retailers said imposed unfairly high interchange rates. Visa and MasterCard agreed to settle that case in 2003 for a combined $3.05 billion. They also agreed not to force merchants to accept all of their branded cards if they accepted any one of them, and they agreed to place the word "debit" on their debit cards so merchants could differentiate them more easily from credit cards.
Evans also points to Visa's inability to include Visa Europe in its incorporation as a big loss for the new company. "Visa Inc. is missing the second-largest payment card market outside the U.S., which is the European community," he says.
Antonio Lucio, Visa's chief marketing officer since December 2007, says Visa Europe members declined to join Visa Inc. because they believed an independent network "would be better-equipped to deal with the European idiosyncrasies of the European Union as a separate company." Lucio says the implementation of a Single European Payments Area, for example, will saddle MasterCard with complications in the region that Visa Inc. will avoid.
New Models Emerge
Mann, meanwhile, says interchange continues to be an albatross for Visa. "For me, the big contrast is between what Visa did at the beginning, which was ambitious, energetic and successful, and where Visa is now," he says. "Now Visa is the dominant incumbent in the (payments) industry. Their product is the most expensive payment product, and there's a strong sense they are not leaders in technological innovation."
Mann points to comparatively new payment models that have grown with Internet commerce, including payment models of PayPal, Google Inc., Amazon, Tempo and BillMeLater, and notes that each threatens to disintermediate bankcard networks.
"The business model of card networks is to charge interchange that includes not only the cost of network operations and fraud (prevention) but also a subsidy they give cardholders to use their cards," he says, referring to interchange funding of rewards cards.
As the card association that became Visa Inc. begins its new incarnation as a private company, does Dee Hock, its iconoclastic first CEO, approve of its new, incorporated structure? Hock grants few interviews and makes few public appearances, and Cards&Payments could not reach him for this article.
But Visa says a cadre of Visa executives visited Hock at his home in the Seattle area a couple months ago. Whatever Hock had to say about Visa Inc., Lucio, as a new Visa executive, returned from the meeting impressed with Hock.
"Hock wants to use everything he learned about the chaordic organization that he developed at Visa to solve the fundamental problems facing the U.S. economy today," such as health care, Lucio says.
Visa is renewing its focus on the pillars Hock established early on for the network: universal digital currency, universal acceptance, and security and convenience, Lucio says.
Whatever direction Visa and its competitors take over the next 50 years, the march toward ever more-sophisticated electronic payments seems inevitable. CP
