Dee Hock interview continued

Jon Raymond: I wonder if to begin with you could draw us a little thumbnail history of credit cards in general, their beginnnings with MasterCharge and BankAmericard and some of the issues the industry was wrestling with before VISA entered the picture.

Dee Hock: The original concept of credit cards arose nearly a century ago in the retail merchant segment of the economy with what they called charge-a-plates. Large merchants issued a little metal plate that allowed you to charge at their establishments only. However, you could only buy goods from them and only at the prices they commanded. They were pretty much proprietary products for many, many years. The first multi-merchant credit card was Diner’s Club. Carte-Blanche followed and then American Express, all nearly a half century ago. The concept was to allow the very affluent businessperson to charge entertainment, meals and hotels. It was really a travel and entertainment card, acceptable at multiple merchants.

Then back in the early 50s banks got the idea that they could maybe do this a little better, that they could combine the multiple merchant concept with the revolving credit characteristic of the retail cards. They packaged the two together and jumped into the business. Most of them had a disasterous experience and quit.

One of the few that stuck with it was Bank of America, even though they took a tremendous bloodbath in losses at first. But eventually they made a financial success of it and that frightened some of the major California banks into banding together to launch a competing card,
Mastercharge, soon renamed Mastercard.

This caused BofA to think they might have some-thing valuable, and to start franchising their card to banks across the country. This all happened in the late fities and early sixties, and, of course, the other banks that were issuing cards banded together, and a network soon emerged to compete with BofA’s little network of licensees. It was sort of lemmings into the sea. Every bank got worried that they would be left out and many leaped in to the business. There were ten thousand banks in the U.S. and several hundred were quickly into the business. They had little experience or electronic capability and no idea of how to clear the volume of paper or deal with the fraud that rapidly mushroomed–no idea of how to govern such a system. So by the late 60s the industry was hemorraging hundreds of millions of dollars. Literally in a state of collapse.

And where were you in this?

At the time, I was the assistant vice president of a modest bank in Seattle, Washington; one of the first six banks licensed by BofA in 1966. By 1968, I was extremely concerned that the industry may go under and our bank’s investment with it. I was attending a meeting of all of the licensees of BofA which soon became a shambles of argument and accusation. The BofA were desperate to know what to do. They proposed that seven people from licensee banks, of which I was one, form a committee to look into a couple of the more pressing operating problems and propose solutions. I thought that was an exercise in futility because the problems were building much faster than such an effort could examine, let alone contain. I suggested that the committee should look into some sensible way of organizing the whole of the licensee structure to examine all the problems and propose methods to get a grip on them. It’s not an uncommon story. A naive young nobody, 38 years old, stands up in a confused meeting and makes a suggestion. In desperation, the licensees, knowing it won’t cost or commit them to anything, say ‘fine, let’s do it, but it’s your idea so you’re the chairman of the committee.’ I just walked into a set of circumstances that was a marketing success and an operating disaster with no intent but to do a bit of civic duty.

So what was the solution? What did VISA do to solve it?

Well, a little history first. I had spent about 16 years in various management positions in the consumer finance industry, but my first love was literature and philosphy, not business. I was struck by how dysfunctional most business organizations really were, how they crushed the human spirit and how often people were in severe conflict with the organizations of which they were part. I started studying history to see where the idea of corporation came from, what it was based on, why our institutions were as they were. I became convinced over the years that all of our present societal intitutions were essentially dysfunctional. We had schools that couldn’t teach, unhealthy health care systems, welfare systems in which no one fared well, farming systems that destroyed the topsoil and polluted the water, and a gross maldistribution of wealth and power. This was by no means unique to an -ism. Whether communism, socialism, capitalism or totalitarianism, it seemed to me these problems were endemic worldwide. I had become convinced over the years that we were going to face an epidemic of institutional failure, of which BankAmericard and MasterCharge were just examples.

So you wanted to rebuild from the ground up.

Right. I was raised in the mountains of Utah, so I have a great love of Nature. I became enthralled with studying biology and ecology to discover some of the essential organizing principles of Nature. How is the brain organized? Is it a command and control structure with a chief executive neuron and a bunch of board of directors neurons? How about the immune system? How about a rain forest, a marine system, a weather system? None of these things, nothing in Nature, seemed to me to be organized like these hierarchical, top down pyramids of power, these command and control, dominator organizations. That is essentially how our government is run, how our religions are run, how our business is run. I saw this huge chasm between how evolution and Nature organized complex entities and how we organize societal entities, and there was no resemblance. Societal entities had grown out of a 400 year old Newtonian/Cartesian philosophy that postulated that everything in the universe was nothing but a machine. A machine that could be taken apart and, once we understood all the parts, put back together and made to behave the way we thought it should. The bulk of society was based an a false metaphor of institution as machine.

If you really think about it, an institution, or organization of any kind, has no reality except in your mind. It has a lot of manifestations, like a name and a logo, buildings and financial statements, but they are not the reality, they are only physical manifestations. The organization itself cannot be perceived by any of your senses. You can’t taste VISA. You can’t touch it or feel it. You can’t smell it. You can’t see it, nor can you touch, smell, or feel the thing we call the United States of America. So, if you really think deeply about such things, you come to realize that every organization is nothing but a mental construct, an idea around which people and resources are assembled theoretically in pursuit of common purpose and in accordance with a belief system of some sort. So I became convinced that it is really the ultimate design problem. If an organization is really nothing but a mental construct, then anything you can conceivably imagine in putting together the relevant materials, which include people and their relationships, is possible. And this construct will either bring out the best in people or the worst in them. In the long run, the command and control model rewards and brings out the worst in people instead of their best.

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