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“Think of It As Money”: a History of the VISA Payment System, 1970–1984

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“Think of It As Money”: a History of the VISA Payment System, 1970–1984 “Think of it as Money”: A History of the VISA Payment System, 1970–1984 David L Stearns Submitted for the Degree of PhD by Research University of Edinburgh August 2007 Abstract This dissertation is a historical case study of the payment system designed, built, and operated by Visa International Services Association (VISA, hereafter “Visa”). The system is analyzed as a sociotechnical one, consisting of both social and technical elements that mutually constitute and shape one another. The historical narrative concentrates on the period of 1970 to 1984, which roughly corresponds to the tenure of the system’s founder and first CEO, Dee Ward Hock. It also focuses primarily upon the events that took place within the United States. After establishing a theoretical and historical context, I describe why and how the organiza- tion now known as Visa was formed. I then explain how the founder and his staff transformed the disintegrated, paper-based credit card systems of the 1960s into the unified, electronic value exchange system we know today. Special attention is paid throughout this narrative to the ways in which the technologies were shaped by political, legal, economic, and cultural forces, as well as the ways in which the system began to alter those social relations in return. In the final chap- ter, I offer three small extensions to the literature on payment systems, cooperative networks, and technology and culture. Keywords: VISA, BankAmericard, National BankAmericard Incorporated, Dee Hock, credit cards, payment systems, sociotechnical systems. i Declarations I, David L Stearns, hereby certify that (a) this thesis has been composed by myself; (b) the work is my own; and (c) the work has not been submitted for any other degree or professional qualification. Date: Signature: ii Contents Abstract . i Some Notes on Style . viii Acknowledgments . ix I Introduction and Context 1 1 Introduction 2 1.1 What is Visa? . 3 1.2 Scope of the Project . 3 1.3 Structure of the Dissertation . 4 2 Theoretical Context: Literature Review and Methodology 7 2.1 Literature Review . 7 2.1.1 Visa and the Payment Card Industry . 7 2.1.2 Science and Technology Studies Perspectives . 10 2.2 Methodology . 14 2.2.1 News and Trade Publications . 15 2.2.2 Autobiographies and Oral Histories . 16 2.2.3 Primary Documents . 21 2.2.4 Techniques for Building the Narrative . 21 2.3 Conclusion . 22 3 Historical Context: The American Payments Industry Before Visa 23 3.1 Basic Terms and Concepts . 23 3.2 Innovations in the American Payments Industry, 1913–1969 . 26 3.2.1 The Federal Reserve System and Cheque Clearing . 27 3.2.2 Merchant and Industry-Specific Charge Card Systems . 31 3.2.3 Travel and Entertainment Card Systems . 35 3.2.4 Bank Credit Cards . 41 3.2.5 National Bankcard Associations . 49 3.3 Conclusion . 51 II History of the VISA Payment System, 1970–1984 53 4 Creating a System: Dee Hock and the Foundation of the Organization 54 4.1 Problems in the Licensing Program . 54 iii 4.1.1 A Typical Transaction in 1968 . 54 4.1.2 Operational Problems . 57 4.1.3 Organizational Problems . 62 4.1.4 Tensions Come to a Head . 63 4.2 Dee Hock . 64 4.2.1 Early Life . 64 4.2.2 Views on Organizations . 65 4.2.3 Views on the Nature of Money . 67 4.3 Creation of National BankAmericard Inc. 68 4.4 First Steps Towards Building a Cohesive Payment System . 74 4.4.1 Creating the Operating Regulations . 74 4.4.2 Building a Staff . 74 4.4.3 Fixing the Interchange Reimbursement Fee . 75 4.4.4 National Advertising . 78 4.5 Conclusion . 80 5 Automating Authorizations: BASE 81 5.1 Authorization as a “Reverse Salient” . 81 5.2 Automating Local Authorizations . 83 5.3 Automating Interchange Authorizations . 86 5.4 The Joint National Authorization System . 89 5.5 NBI’s BASE . 90 5.5.1 Acquiring the Talent . 91 5.5.2 Design of the System . 92 5.5.3 The Development Process . 96 5.5.4 Effects of the New System . 98 5.6 Conclusion . 100 6 Automating Clearing and Settlement: BASE II and III 101 6.1 Truncating the Paper: BASE II . 101 6.1.1 Country-Club, Descriptive, and Facsimile Billing . 102 6.1.2 Design of BASE II . 105 6.1.3 Final Development and Rollout . 111 6.1.4 Effects of the System . 111 6.2 Losing Focus: BASE III . 112 6.2.1 Problems Begin to Emerge . 114 6.2.2 Problems Come to a Head . 115 6.2.3 Success in Failure . 116 6.2.4 Returning to Purpose and Principles . 116 6.3 Conclusion . 117 7 Expanding the System: Organizational and Technical Changes 119 7.1 Expanding the Organization . 119 7.1.1 IBANCO . 120 7.1.2 Antitrust and Dual Membership . 123 7.1.3 Adopting the Name VISA . 127 7.2 Expanding the Computer Systems . 132 iv 7.2.1 Expanding BASE I’s Capacity . 132 7.2.2 Multiple Data Centers . 137 7.2.3 Expanding Internationally . 140 7.3 Conclusion . 142 8 Automating the Point of Sale: Encoding Standards and Merchant Dial Terminals 143 8.1 Dreaming the Future: BASE IV . 144 8.1.1 Electronic Value Exchange . 144 8.1.2 Gems in the Rubble . 145 8.2 Encoding the Card: Magnetic Stripes and Magic Middles . 146 8.2.1 Encoding Options and Standards . 147 8.2.2 Magstripe Tracks . 149 8.2.3 Magstripe Security . 151 8.2.4 The Magic Middle . 153 8.2.5 Visa and the Magstripe . 155 8.3 Dialing for Dollars: The Merchant Dial Terminal Project . 157 8.3.1 Dial Terminals . 157 8.3.2 The Pilot Test . 158 8.3.3 Adoption Incentives . 160 8.3.4 Resolutions . 161 8.3.5 Adoption and Consequences . 161 8.4 Conclusion . 163 9 Negotiating Roles: Debit Cards and Other Controversies 164 9.1 Entree´ and Early Debit Cards . 165 9.1.1 The Asset Card Concept . 166 9.1.2 NBI’s Asset Card . 168 9.1.3 “Credit Paranoia” . 169 9.1.4 Member Reactions . 171 9.1.5 Enter Entree´ ............................... 175 9.1.6 Coordinator or Competitor? . 176 9.2 The JC Penney Deal . 177 9.2.1 The Deal . 178 9.2.2 The Reactions . 179 9.3 Hock’s Departure . 181 9.3.1 Signs of Empire Building . 182 9.3.2 101 California: Headquarters for an Empire . 184 9.3.3 The King is Dead. Long Live the King . 185 9.4 Conclusion . 186 10 Conclusions: Three Lessons 187 10.1 Value Flows According to a Mark . 188 10.1.1 Marks . 188 10.1.2 Marks and Value Exchange Rules . 190 10.1.3 Rules and Guarantees . ..
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