Visa Effect

Written by: Nishil Jain

Translated by: Block unicorn

Preface

In the 1960s, the credit card industry was in chaos. Banks across the United States were trying to establish their own payment networks, but each network operated independently. If you held a credit card from a U.S. bank, you could only use it at merchants partnered with that bank. When banks tried to expand their business to other banks, all credit card payments faced the challenge of interbank settlement.

If the merchant accepted a card issued by another bank, the transaction had to be settled through its original check clearing system. The more banks involved, the more complex the settlement issues became.

Then Visa emerged out of nowhere. While its technology undoubtedly played a significant role in the revolution of card payments, its greater success lay in its global universality and its ability to bring banks worldwide into its network. Today, nearly all banks worldwide are part of the Visa network.

Although this seems perfectly normal today, imagine trying to convince the first thousand banks within and outside the United States that joining a cooperative agreement was wiser than building their own networks—you would realize how massive this undertaking was.

By 1980, Visa had become the dominant payment network, handling about 60% of credit card transactions in the U.S. Today, Visa operates in over 200 countries.

The key was not just advanced technology or more capital, but the structure: a model capable of coordinating incentives, decentralizing ownership, and creating network effects.

Today, stablecoins face a similar fragmentation problem. The solution might be very much like Visa’s approach fifty years ago.

Visa’s Predecessor Experiments

Other companies that appeared before Visa failed to develop.

American Express (AMEX) tried to expand its credit card business as an independent bank, but its growth was limited to new merchants joining its banking network. On the other hand, BankAmericard (later Visa) was different. U.S. banks owned their credit card network, and other banks simply leveraged its network effects and brand value.

American Express had to individually approach each merchant and user to open bank accounts; Visa, by contrast, scaled through its acceptance by banks. Every bank that joined the Visa network automatically gained thousands of new customers and hundreds of new merchants.

Meanwhile, the infrastructure of BankAmericard had issues. They didn’t know how to efficiently settle credit card transactions from one consumer’s bank account to a merchant’s bank account. They lacked an efficient settlement system.

The more banks that joined, the worse this problem became. That’s why Visa was born.

The Four Pillars of Visa’s Network Effect

From Visa’s story, we learn about 2-3 key factors that drove its network effects:

Visa benefits from its status as an independent third-party entity. To ensure no bank felt threatened by competition, Visa was designed as a cooperative, independent organization. Visa does not compete for distribution; the competing entities are the individual banks.

This incentivized participating banks to seek larger profit shares. Each bank is entitled to a portion of the total profits, proportional to its total transaction volume.

Banks have a say in the network’s functions. Visa’s rules and changes must be approved by a vote involving all relevant banks, requiring at least 80% approval.

Visa has exclusivity agreements with each bank (at least initially); anyone joining the cooperative can only use Visa cards and networks, not other networks—so to interact with Visa banks, you also need to be part of its network.

When Visa’s founder, Dee Hock, lobbied banks across the U.S. to join the Visa network, he had to explain: joining Visa was more advantageous than building their own credit card network.

He explained that joining Visa meant more users and merchants would connect to the same network, promoting more digital transactions globally and generating greater benefits for all participants. He also pointed out that building their own credit card network would limit their user base significantly.

Implications for Stablecoins

In a sense, Anchorage Digital and other companies offering stablecoin-as-a-service are reenacting the BankAmericard story in the stablecoin space. They provide the underlying infrastructure for new issuers to build stablecoins, but liquidity is increasingly dispersed across new tokens.

Currently, over 300 stablecoins are listed on the Defillama platform. Moreover, each newly created stablecoin is confined to its own ecosystem. As a result, no single stablecoin can generate the network effects needed to reach mainstream adoption.

Given that these tokens are all supported by the same underlying assets, why do we need more tokens with new code?

In our Visa story, these are like BankAmericards. Ethena, Anchorage Digital, M0, or Bridge—all allow protocols to issue their own stablecoins, but this only exacerbates industry fragmentation.

Ethena is another similar protocol that enables yield transfer and white-label customization of its stablecoins. Like MegaETH issuing USDm—they support USDtb to issue USDm.

However, this model has failed. It only fragments the ecosystem further.

In the credit card case, brand differences among banks are not significant because they do not cause friction in user-to-merchant payments. The underlying issuance and payment layers are always Visa.

But for stablecoins, it’s different. Different token codes mean an infinite number of liquidity pools.

Merchants (or in this case, applications or protocols) will not add all stablecoins issued by M0 or Bridge to their accepted list. They will decide whether to accept based on the liquidity of these stablecoins in the open market; the most held and most liquid tokens should be accepted, while others will not.

The Future Path: The Visa Model for Stablecoins

We need independent third-party institutions to manage different asset classes of stablecoins. Issuers and applications supporting these assets should be able to join cooperatives and earn reserve income. They should also have governance rights, voting on the development direction of the stablecoins they choose.

From a network effect perspective, this would be an excellent model. As more issuers and protocols join the same token, it will foster a widely adopted token that can retain its yield internally rather than flowing into others’ pockets.