The Catalyst Code

Visa, a bank card association that was formed in 1970, and which endured numerous attacks from class action lawyers, rivals, and government prosecutors, passed away on Wednesday, March 19, 2008, after a long illness. Her death was announced by her investment banker, Goldman Sachs. Survivors include its thousands of issuers, and millions of cardholders. Remarkably, perhaps taking guidance from its spiritual advisor, Shirley Maclaine, Visa was reincarnated as a publicly traded for-profit company.

Visa’s grandmother was the California-based Bank of America credit card system which was born in 1958. BankAmericard franchised herself to a number of banks around the country in 1966. This polygamous marriage ended in a messy divorce of sorts around 1970. The bank franchises along with Bank of America then agreed to form an association—almost like a commune instead of a marriage—in which everyone had voting rights. The association changed its name to Visa a few years later. This communal family grew–it had a bunch of Visa offspring—including Visa Europe—around the world. Together they became the Visa family—an association of associations, a commune of communes.

The Visa family, it soon discovered after its divorce from Bank of America, was particularly susceptible to legal ills. That began with a fight with MasterCard and the U.S. Department of Justice over whether banks could belong to both associations. MasterCard said yes, Visa said no, the DOJ said it was not going to take a position. Faced with lawsuits, Visa agreed to let MasterCard banks join it. The two competing communes ending up sleeping with each other as a result.

Shortly thereafter, the first interchange fee lawsuit emerged. Since an association is a collection of competitors, one can argue that they shouldn’t be able to agree on the interchange fee that acquiring banks pay issuing banks. Visa dodged that bullet thanks to the 11th Circuit Court of Appeals in 1986. A few years later, Sears thought it would be neat to not only have its own payment card system, Discover, but to join the Visa commune as well.

Visa dodged another bullet when the 10th Circuit Court of Appeals agreed that it wasn’t such a great idea to expand the commune any more than it already had. But then Visa’s luck turned for the worse. Walmart led a class of merchants who sued Visa along with MasterCard for requiring merchants to take debit cards if they wanted to accept credit cards. Rather than fight, Master Card and Visa (well, not really, it was the very irritated bank members in the case of Visa) wrote their first of several multi-billion checks. Meanwhile, the Justice Department sued Visa, as well as Mastercard, for—get this—letting banks belong to both associations. The associations won that point. But DOJ also claimed that Visa and Mastercard had violated the antitrust laws by refusing to let banks issue American Express cards in addition to Visa and MasterCards. The associations lost that. Visa recently settled a follow-on lawsuit by American Express for a bit more than $2 billion.

Soon thereafter, came the 8000 pound gorilla that broke the camel’s back. The merchants came back the class-action trough with a lawsuit that claimed that interchange fees were a price fix. The case may be dubious but the Australians and European Commission have sided with the merchants in similar cases. The potential damages from this case are astronomical.

These legal troubles mainly come from operating as an association. Integrated businesses like American Express can charge merchants out the wazzo and tell rivals that went access to their system to take a hike without getting anywhere near an antitrust violation. But the antitrust laws make such behavior of more questionable legality for associations of competitors. So the Mastercard and Visa associations decided to commit hari kari. No more association, no more legal troubles, or so the theory goes.

And that brings me back to the reincarnation. Banks now have less control over the reincarnated Visa and that will diminish even further over time. Management now reports to the street and to directors who aren’t mainly drawn from the banks anymore. Banks are becoming customers of Visa rather than partners.

What a reincarnation—it is like dying as a modestly paid government bureaucrat and waking like one of the Internet kings. The company—sans the European association that decided that it didn’t want the Eurocentric Brussels antitrust enforcers to think they had any American connections—had a market cap at the end of the week of $54 billion.