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The death of interchange Initially, merchants paid as much as 6 percent interchange
and waited a week to get paid. Many things had to happen
in those early days, including the creation of an army of
feet-on-the-street salespeople to sell the idea of taking
credit cards to merchants. This was an enormous task.

The first credit cards as we know them (not store cards)
were issued in 1958 by the Visa predecessor organization,
BankAmericard. It wasn't until 1973 that Visa had fully
electronic authorization, clearing and settlement. It's
probably accurate to say that not much changed during
the ensuing 40 years.

Many people reading the The Green Sheet will recognize
the name Dee Hock, the visionary behind Visa and one
By Brandes Elitch of the true heroes of the payments industry. A 1996 article
CrossCheck Inc. published by Fast Company recalled Hock holding up a Visa
card to the audience and asking how many knew what it
eneath the beauty and mysticism of terroir, was (of course, everyone did) and asking, "How many of
grape growing and varietal blending in Sonoma you can tell me who owns it, where it's headquartered,
County's Wine Country, where CrossCheck is how it's governed or where to buy shares?" There was
B located, lies a stark business reality: the ground only "confused silence" in the room. Then Hock added, "In
is shifting beneath our feet. This is due to several factors. Visa, we tried to create an invisible organization and keep
it that way."
First is the direct-to-consumer movement, which has
entirely eliminated the broker, distributor and retailer When Hock drafted the original Visa bylaws, he
for boutique wineries too small to get distributors to sell encouraged member banks to innovate and even compete
for them (large distributors carry 10,000 wine labels in with Visa. He said he wanted members to freely "create,
their portfolios). Second is the rise in buying wine online, price, market, and service their own products under the
which has shifted the wine buying experience away from Visa name." His vision was that Visa would be "largely
frequenting local wine specialists to consult skilled wine self-organizing."
experts about which wines to buy.
But it was not to be, probably due to the very structure
Third is the so-called retail apocalypse, which means of the organization. Originally, Visa was owned by the
brick-and-mortar stores in general have some cost member banks. Thus, Visa was controlled by less than
burdens, such as unsustainably high "percentage of sale" two dozen, very large, commercial banks, which were the
rents and employee salaries and benefits. Fourth is the largest card issuers.
specter of Amazon buying Whole Foods. It's too soon to
know what the implications for wine retailers will be, but Acquiring, the stepchild
the selection of wines available in retail stores will likely Acquiring took a backseat to issuing. Acquiring was messy,
shrink to just a few popular brands. The retail mix in a complex and complicated. But it necessarily accompanied
supermarket is part of a larger portfolio focused on high- issuing tens of millions of cards, which is what it took to
volume throughput, not satisfying wine enthusiasts. get a critical mass. Back then, the largest issuing banks
were not prepared to enter the acquiring business or sell
In short, the three-tier distribution network put in place merchant services themselves.
after Prohibition is rapidly being deconstructed. A new
distribution model is being created that will disrupt the The original idea of interchange was that the issuing bank
traditional commission and payment structure in a big and the acquiring bank were two different entities, and
way. that it would take a few days to settle transactions (the
As with grapes, so with cards merchant used a knuckle-buster to fill out a multipart
paper business form, which had to be split and sent to all
The same is happening in the payments industry. For parties in the transaction). The merchant would receive
many years, retailers have complained the cost of payment payment in a few days. Meanwhile, the issuing bank billed
processing is too high. But back when the credit card the cardholder and was paid after the statement date. On
industry was being formed, card acceptance was seen as average, the issuing bank might have to wait 15 to 20 days
a revolution. It was a "chicken or egg" problem for issuing for reimbursement from the consumer. Interchange was a
banks. Merchants didn't want to take cards because way to compensate them for this.
nobody had them, and consumers didn't need cards
because merchants didn't take them.

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