Visa's Automated Clearinghouse

As Visa's network grew, the settlement process became exponentially complex, resembling an n-squared computer science problem.

Visa addressed this challenge by developing its own automated clearinghouse (ACH) system, named Base Two, for electronic settlement.

Simultaneously, the Federal Reserve's San Francisco branch was creating its ACH system for checks during the same period in the 1970s.

Despite the parallel efforts, there's no documented evidence of collaboration or knowledge sharing between Visa and the Federal Reserve.

This situation highlights Visa's proactive approach to solving settlement challenges, mirroring efforts by the Federal Reserve.

Transcript:

Ben Gilbert

Maybe more time, but like a lot of paper. Because you're effectively mailing checks.

David Rosenthal

And even more perniciously, as the network grew, and at this point in time, soon to be Visa is growing explosively, the complexity of this settlement piece also grows sort of exponentially. Every new bank node that you add into the system now has to interact with all the other bank nodes. And so like this is a hard computer science problem. It's an n-squared problem. Well, it's a problem that is easily solved by computers. But when you're doing all this manually with paper, this is a big, big problem. N-squared is much worse when you're doing it with paper than with computers. Yes. What you really need to do this efficiently, to bring it all the way back to the beginning of the episode, is a clearinghouse. You need an automated clearinghouse. And this is unbelievable. A few people had referenced this to us as we were doing the research, but I kind of forgot about it till the end when I got to this point. And I was like, holy crap, Visa builds an automated clearinghouse for themselves to do settlement electronically over the network. They end up calling this project base two after base one, which was the first thing doing authorizations. This happens at the exact same time and place as when the Federal Reserve is building their own ACH system for checks, automated clearinghouse, ACH, everything in the banking system. That was built by the San Francisco branch of the Federal Reserve in the exact same years in the 70s when Visa was building their own essentially automated clearinghouse system.

Ben Gilbert

That is wild.

David Rosenthal

Now, I've never read anything. I couldn't find anything. I've never heard anybody say that they like talk to each other, that they knew anything about what was going on, that they were sharing practices. I assume they probably didn't, but it's wild. The same place, the same time.

Ben Gilbert

Solving the same problem. Solving the same problem. Which, again, the problem is this gigantic list of a whole bunch of transactions just happened. People just agreed to make them happen. And now we need to settle up at the end of the day. And if you paid me $100 500 times and I paid you $100 400

Acquired • Visa