Michael: The first mass credit card launch was a catastrophe. Within a year, delinquency rates hit 22% and losses topped the modern equivalent of $200 million. That spectacular failure became the accidental blueprint for the global payment system we all use every single day. Kevin: Whoa, hold on. Twenty-two percent? That’s one in five people just not paying their bills. That sounds less like a business launch and more like a national disaster. How does a failure that big become the foundation for… well, everything? Michael: It’s an incredible story of how order emerges from total chaos. It’s all laid out in a fascinating, though not widely known, book called Electronic Value Exchange: Origins of the VISA Electronic Payment System by David L. Stearns. Kevin: That's a mouthful. What makes this author the guy to tell the story? Is he some tech guru? Michael: That's the interesting part. Stearns isn't just an academic; he's a historian of technology who also spent over 35 years as a banking executive, even a CEO. He understands both the messy human systems and the tech. He saw this wasn't just a business story; it was a sociotechnical revolution, a story about people, power, and ideas as much as it was about computers. Kevin: Okay, so he’s seen the beast from both inside and outside the cage. I like that. Where does this story of catastrophic failure begin? Michael: It begins in an unsuspecting town in California, with an event that has a legendary name: the "Fresno Drop."

Kevin: The Fresno Drop? That sounds like a wrestling move or a secret military operation. Michael: It might as well have been. In 1958, Bank of America had a big idea for a "universal" charge card. But they faced a classic chicken-and-egg problem. Merchants won't accept a card that nobody has, and nobody wants a card that no merchants accept. Kevin: Right, the network effect problem. You need users to get vendors, and vendors to get users. How do you solve it? Michael: Bank of America’s solution was brute force. They chose Fresno, California—a relatively isolated city where a lot of people banked with them—and in the weeks leading up to September 18, 1958, they mailed 65,000 live, unsolicited BankAmericards to households. Kevin: Wait, they just sent them out? No applications, no credit checks, just active credit cards in the mail? That sounds like a recipe for absolute mayhem. Michael: It was. That’s where the 22% delinquency rate came from. People who shouldn't have had credit got it. Fraud was rampant. One guy reportedly used his unsolicited card to start a long-distance taxi service, charging gas and oil until he was arrested for something else entirely. The bank lost a fortune, about $20 million in today's money, and kept the losses quiet to avoid scaring off competitors. Kevin: That's incredible. So the first big step in consumer finance was basically an accidental, high-stakes social experiment that went completely off the rails. Michael: Exactly. But it highlights how broken the system was before it. People forget that even paying by check was a nightmare. Before the Federal Reserve standardized things, a check could take weeks to clear. The book tells these wild stories of checks traveling thousands of miles on roundabout routes just for a bank to avoid a small fee. A check from a bank 100 miles away might travel 1,500 miles over 11 days to get settled. Kevin: That’s insane. It’s like sending a letter from New York to New Jersey via Alaska. Michael: Precisely. And this delay created something called "float"—the time between when you write a check and when the money actually leaves your account. People and banks loved float. It was like a tiny, interest-free loan. So, any attempt to make the system more efficient was met with huge resistance. Everyone was benefiting from the inefficiency. Kevin: So you have this slow, clunky check system that everyone secretly likes, and then this chaotic, fraud-plagued credit card experiment. It sounds like the entire world of payments was built on a foundation of molasses and wishful thinking. Michael: That's a perfect way to put it. And it was out of this complete mess that the need for a totally new kind of organization became obvious. The problem wasn't just the technology; it was the structure. All the banks were fierce competitors. How could you possibly get them to cooperate on a single, unified system? Kevin: Okay, so the system was a complete mess. How on earth did anyone fix it? You'd need a miracle, or someone who could get cats to organize a parade. Michael: Not a miracle, but a man with a very strange philosophy. This brings us to the central figure of the book: Dee Hock.

Kevin: Dee Hock. I’ve heard the name, but I always pictured some slick, Wall Street-type CEO. Michael: He was the absolute opposite. Hock was an outsider, a community bank manager from Washington. He described himself as a "crank." He had a deep distrust of traditional, top-down, command-and-control organizations. He believed they stifled creativity and inevitably decayed into bureaucracy, where, in his words, "purpose slowly erodes into process." Kevin: I think everyone who's ever worked in a big company knows that feeling. The "doing of the doing," as he called it. So what was his alternative? Michael: He had this radical idea for an organization he called "chaordic"—a blend of chaos and order. Think of the internet, or a biological ecosystem. There's no central CEO of the internet, right? It's a decentralized network that functions based on a few simple, shared principles and protocols. It allows for immense creativity and growth at the edges without a central authority dictating everything. Kevin: That sounds like corporate poetry. How do you get competing banks, who hate each other, to actually agree to this? What's in it for them? Michael: That’s the genius of it. In October 1968, the BankAmericard licensees had a meeting in Columbus, Ohio. The system was falling apart. Banks couldn't settle their accounts, fraud was out of control, and the meeting devolved into what was described as "acrimonious argument." It was, in the words of one manager, "literally chaos." Kevin: So they were at rock bottom. Michael: Exactly. And in that chaos, Hock, who was just a mid-level manager at the time, was put on a committee to fix things. But instead of just tweaking the rules, he proposed blowing up the entire structure. He argued that Bank of America shouldn't own the system. No single bank should. Kevin: But why would Bank of America ever agree to give up its golden goose? Michael: Hock convinced them that their goose was about to die. He showed them that the system was unsustainable and that the only way for it to survive and grow into a global network was for everyone to own it together. He proposed a new entity, which would become National BankAmericard Inc., or NBI. It was structured as a non-stock membership cooperative. The members—the banks—were the owners. Power was distributed. Bank of America would become just another member, with no special control. Kevin: That’s a wild pitch. It's like telling the king it's in his best interest to become just another citizen in a new democracy he doesn't control. Michael: And somehow, he pulled it off. He was an incredibly persuasive leader. He laid out these core principles for the new organization: it had to be self-organizing, power had to be distributed, and it had to be infinitely malleable. It was a constitution for a business. He essentially convinced a room full of bitter rivals that the only way to win was to cooperate under a new set of rules that no single one of them could dominate.

Michael: And once they agreed on the philosophy, they had to build the machine. The first big task was to solve the authorization problem. Remember, in the old days, a merchant had to call an operator, who would then call another operator at the issuing bank, who would flip through giant printed books of bad account numbers. It was a joke. Kevin: I can't even imagine. It's amazing any transaction ever went through. Michael: So NBI, under Hock, decided to build their own system. They called it BASE, for BankAmericard Authorization System Experimental. It went live in 1973 and was a game-changer. It was a real-time electronic switch that connected all the banks. Authorization time dropped from an average of five minutes to just fifty-six seconds. Kevin: Wow. So that's the moment the modern electronic age of payments really begins. The system gets a brain. Michael: It gets a central nervous system. And this is where the story gets really interesting, because once you have this powerful tool, new possibilities—and new conflicts—emerge. The biggest one was the debit card. Kevin: But wait, I use my debit card for everything. It seems like a no-brainer. Why would they resist something so useful? Michael: Because it threatened the entire power structure. Hock saw the future. He realized they weren't in the "credit card business," they were in the "business of the exchange of monetary value." A card could be linked to anything—a line of credit, a savings account, stocks. He envisioned an "asset card." But the banks freaked out. Kevin: Why? What was the threat? Michael: Two things. First, the credit card divisions were finally becoming hugely profitable from interest payments. A debit card, which just moves money you already have, would cannibalize that profit. Second, there was a huge cultural divide inside the banks. The "credit card people" were seen as these weird, slightly disreputable upstarts. The "real bankers," on the deposit side, looked down on them. These "real bankers" had their own, much more conservative plans for electronic payments, mostly centered on ATMs. Kevin: So it was an internal turf war. Michael: A massive one. The debit card, which Hock called the "Entrée" card, was a collision of these two worlds. It looked like a credit card but acted like a check. The banks resisted it for years. They saw Hock expanding Visa's power, telling them how to manage their core deposit business. As one executive put it, the moment you talk about debit, "You’re hitting bankers where they live. They weren’t going to let anybody, especially Dee Hock, tell them how to manage their deposit stream." Kevin: So his success became his biggest liability. Michael: It’s the paradox of the visionary. He built this incredible, decentralized system, but his relentless push forward made his own members see him as a new centralizing force. The controversies piled up. There was a deal with JC Penney that allowed the retailer to bypass the banks and connect directly to Visa's system, which the banks saw as a declaration of war. One Citicorp executive famously called Visa a "Frankenstein" that was turning on the banks that created it. Kevin: Wow. So what happened to Hock? Michael: In 1984, after years of these battles, he was essentially forced out of the organization he created. He had built a system so powerful and so successful that its members—the banks—decided they couldn't let him be in charge of it anymore.

Michael: When you step back, the story of Visa, as told in Electronic Value Exchange, isn't really about a piece of plastic. It’s about solving a deep organizational paradox: how do you create unity, trust, and cooperation among self-interested, competing entities without a central ruler? Kevin: It seems like the technology was almost the easy part. The hard part was getting the people and the institutions to agree on a set of rules. Michael: Exactly. The technology—the global electronic network—was a consequence of the social and philosophical solution Hock pioneered. He created a framework where competitors could cooperate. He built a system that was robust because it was decentralized, and innovative because it allowed for competition at the edges. Kevin: And that chaordic idea feels more relevant than ever today, with things like crypto, DAOs, and the platform economy. Everyone is trying to figure out how to build decentralized trust. Michael: They are. And Hock was thinking about it fifty years ago. He saw that money was just becoming "guaranteed alphanumeric data," and the future belonged to whoever could build the most trusted system for exchanging it. The irony is that he built a system so trusted that its own members eventually decided they couldn't trust him with it. Kevin: It makes you wonder what other 'invisible systems' we rely on every day were born from that same kind of organized chaos and human drama. Michael: It’s a powerful question. The world runs on these systems, and their origin stories are rarely as simple as a single invention. They're messy, human, and full of conflict. We'd love to hear what our listeners think. What's an invisible system in your life you've never thought about the origin of? Let us know on our socials. Kevin: It’s a great reminder that behind every seamless tap of a card is a history of spectacular failures and brilliant, cranky visionaries. Michael: This is Aibrary, signing off.