What Does A Manager Obsessed With Chaos Theory Have To Do With 18% Interest On Credit Card Bills?

Dee HockWe are at that very point in time when a 400-year-old age is dying and another is struggling to be born — a shifting of culture, science, society, and institutions enormously greater than the world has ever experienced. Ahead, the possibility of the regeneration of individuality, liberty, community, and ethics such as the world has never known, and a harmony with nature, with one another, and with the divine intelligence such as the world has never dreamed. – Dee Hock

Meet Dee Hock. You’ve probably never heard of the man unless you’re a business school graduate or in the banking industry, but his story is one of the most amazing things I’ve ever heard, tying together chaos theory, hidden organizations, and the reason why credit card companies get away with charging 18% or higher interest rates. Sound crazy? Look at the Visa logo on your credit card and ask yourself this question: how can I invest in Visa? What company is behind that logo? It’s a ubiquitous logo, but the organization behind it is a lot less clear to the casual observer.

Let’s rewind back to 1966 for a moment. The modern credit card was in its infancy, but the names Visa and MasterCard were still yet to be born. Instead, banks were restricted from having branches in other states, so individual, small, competing banks were issuing hundreds of different credit cards and hemhorraging money in the process, because businesses had little interest in accepting dozens of different credit cards. Bank of America of San Francisco came up with the innovation of franchising their card to other banks nationwide, so banks in many states were issuing a BankAmericard; however, these banks were still directly competing with each other from the ground up and many other credit cards were attempting to franchise.

Enter Dee Hock, a vice president at a bank in Seattle that was one of the franchisees of the BankAmericard. During a BankAmericard franchisee meeting in 1968, he stepped forward and said that this entire problem had a solution, one that would not only turn this whole mess around, but would make everyone involved a whole lot of money.

Dee Hock basically created the modern concept of how a credit card works. Instead of it working like the fast food industry, with a bunch of franchises all operating under the umbrella of one overall company (like McDonalds, for example), he founded BankAmericard as a separate company (and eventually renamed it Visa). It’s a privately held company that sells only one thing: cooperation. Anyone that wants to have that Visa logo on their own credit card, and thus be accepted wherever Visa is accepted, just has to follow a few basic guidelines put out by the company: that Visa logo has to appear on the lower right corner of the card, for example. This meant that any number of banks (or any business, for that matter) could make a Visa card, make up whatever rates and fees they wanted to, and have that card be used at any business that accepted Visa cards. Several banks signed up very quickly in the early 1970s and began to issue a lot of cards with the Visa logo on them.

Then, the company turned around and started going to every major retailer in the country, showing that they had a ton of people with these cards ready to spend money, and showed how easy it was, so that these business, for just a little fee per transaction, could offer the service of having a Visa card. Before you know it, almost every business in America suddenly had a Visa logo on their door.

Obviously, lots of consumers wanted the ease of use that came with a credit card, and since this ease was a brand new thing, a new set of rules could be laid down. It didn’t take long for the companies that sold the cards to quickly latch on to very high credit card rates – and because of the complete convenience of it, the consumer didn’t really care at all. The concept of the modern credit card was so brilliant that credit card sellers got away with charging incredible rates – and they still do.

So where did this idea come from? Basically, banks compete with various credit card rates, but also cooperate on the basic pieces of the credit card network: all transactions with a Visa card, regardless of who makes it, are basically identical in terms of the retailer. It’s a balance between the order of cooperation and the chaos of the competing credit card market, a concept which Dee Hock invented wholesale from his readings on philosophy and chaos theory.

What’s the moral of the story? Never stop learning about everything you can, because even ideas that seem completely unrelated can suddenly click together so easily that you can literally make trillions of dollars. No one drew a connection between bank lending, business organization, and chaos theory before this, but many banks now make billions off of this simple idea – and most Americans buy in because the end result (the credit card) is so elegant and effective.

Plus, now you have an interesting little anecdote to share with your friends.

The problem is never how to get new, innovative thoughts into your mind, but how to get old ones out. Every mind is a building filled with archaic furniture. Clean out a corner of your mind and creativity will instantly fill it. – Dee Hock

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  1. Jim Lippard says:

    If you haven’t read the book _A Piece of the Action: How the Middle Class Joined the Money Class_ by Joseph Nocera, I highly recommend it.

    It describes not only the history of the credit card, but of the creation of the money market account, ATM networks, and discount brokerage firms, and shows how financial innovation greatly outpaced government regulation (as does technological innovation). It also discusses Peter Lynch and mutual funds, and how South Dakota became the credit card capital of the U.S.

    Dee Hock is one of the major figures in the book.

  2. Bobby says:

    Wow. Always enjoy your posts and learn something new all the time.

  3. Dave Prouhet says:

    Trent,

    Awesome piece of history! Reminds me of a book I read that talks about how banks and the federal reserve (which isn’t owed by the federal government) was founded.

    Yes, Mr. Hock was very innovative!

    Dave
    http://businessadvicedaily.com

  4. Recardo says:

    Very fascinating article! Thanks!

    Still I wish to add interview with Dee Hock
    http://www.wie.org/j22/hock.asp
    I advise also to read through…

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