In 1958, Bank of America jumpstarted what became the Visa network by mailing 60,000 live credit cards to Fresno residents. This aggressive, and now illegal, tactic instantly created a user base and merchant incentive, solving the classic two-sided market problem that plagues new payment platforms.
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Visa's moat is threatened less by traditional competitors and more by sovereign payment systems. Government-backed networks like India's UPI and Brazil's Pix facilitate direct bank-to-bank transfers, bypassing Visa's rails. In China, state control and super apps like Alipay have effectively blocked Visa from the market.
To counter the rise of free, government-backed account-to-account (A2A) payment systems, Visa is building its own A2A network. It then monetizes these flows by adding value-added services like real-time fraud detection and global interoperability—features that basic, local bank-transfer systems cannot match, turning a commodity threat into a premium offering.
Building a network effects business with financial institutions represents an extreme version of the 'cold start problem.' The initial phase of getting the first ~20 participants is excruciatingly difficult due to trust deficits, regulation, and inertia. It's described as 'the worst idea of all time,' but the value captured after achieving liftoff is immense.
Major tech and fintech players, including Apple, Google, and Stripe, have opted to integrate with Visa's network rather than build a competing one from scratch. This dynamic turns potential disruptors into partners, reinforcing Visa's deep moat and demonstrating the prohibitively high cost of replicating its global infrastructure.
Bryan Johnson reveals his strategy for Braintree was to first capture the merchant side of the payments market with top-tier clients like Uber and Airbnb. Once that was established, he acquired Venmo to instantly gain the consumer side, completing the two-sided marketplace without the immense cost of building it from scratch.
The modern credit card industry originated from a risky experiment where Bank of America mass-mailed 60,000 unsolicited, active cards to an entire city. Despite losses from abuse, this "Fresno Drop" proved the middle class would adopt plastic for general-purpose transactions, directly leading to the creation of Visa.
Rather than engaging in destructive price wars, Visa and Mastercard prioritize maintaining high industry margins. Their primary competitive focus is on converting the world's $11 trillion in cash and check transactions to digital, effectively expanding the entire market for both players instead of fighting over existing share.
Amex's "closed-loop" model intentionally targets affluent consumers, using high merchant fees to fund premium rewards. This creates a virtuous cycle, positioning Amex as a status symbol for high spenders. This contrasts sharply with Visa's "open-loop" system, which scales as a low-cost, high-volume utility for the global mass market.
The chargeback system creates a powerful perception that using credit cards is virtually riskless for consumers. This sense of security, intentionally cultivated by the card industry, was critical for overcoming early internet fears and unlocking billions of dollars in online commerce that would not have otherwise happened.
The system of charging retailers an interchange fee (around 1.8%) that is then passed to consumers as rewards (around 1.57%) creates a strong network effect. Consumers are incentivized to use rewards cards, and retailers cannot easily offer discounts for other payment methods, locking both parties into the ecosystem.
