By: @bridge__harris
Compiled by: Vernacular Blockchain
Stablecoins are a challenge to the $1 trillion Visa and Mastercard duopoly. Unless the two companies adapt, they will face more pressure as cryptocurrency regulation changes and new competitors rise fiercely. If the Credit Card Competition Act (CCCA) passes, it will require large banks to offer merchants at least one additional network option, in addition to Visa and Mastercard, to process credit card transactions. This will weaken Visa and Mastercard's pricing power, and on top of that, stablecoin networks may take this opportunity to compete with them through lower fees. However, it is important to note that the Credit Card Competition Act has a very low chance of passing - only 3% in the Senate and 9% in the House, so while it would be helpful if it passed, it does not look likely at the moment.
Currently, Visa and Mastercard charge merchants a 2-3% processing fee for swiping a card, which is often the second-largest cost for merchants after payroll. Unfortunately, small merchants are particularly hard hit by these high fees. Large corporate companies like Walmart have enough negotiating power to lower transaction fees, thereby obtaining better rates than small merchants, who are locked into Visa and Mastercard. This is one of the reasons why Visa and Mastercard have profit margins of over 50%: small merchants have no choice but to rely on Visa and Mastercard because they control 80% of the credit card market. In short, merchants cannot afford the additional fees that would come with getting rid of these two companies - this is what is called "a classic duopoly" (Senator Josh Hawley).
A stablecoin network could drive card fees down to near zero. Merchants hate card fees — and for good reason — and if they can choose a low-fee network that doesn’t limit their market size, they won’t hesitate to switch.
The idea that merchants want to avoid card processing fees is not new, the key question is how to incentivize consumers to switch payments: “Why is the first person to use a new currency successful, but what about the millionth user?” (Peter Thiel) The growing popularity of bank-to-bank (A2A) payments as a payment method has proven that consumers are willing to change their payment habits under the right conditions. Fred Wilson of Union Square Ventures even predicts that by 2025, direct bank-to-bank payments in certain areas of the United States will exceed the fees of credit card payments. Better regulation, especially the introduction of Section 1033 of the Consumer Financial Protection Bureau (CFPB), has made it easier for retailers to offer A2A transactions by clarifying government support for open banking, which not only helps them avoid card processing fees, but also provides consumers with more payment options.
In addition, the user experience of payment banks may eventually be more consumer-friendly - similar to the experience of ShopPay. Walmart has already launched a payment bank product, and merchants, both large and small, are beginning to follow suit. To convince consumers to choose this payment method, Walmart has added an instant transfer function, which allows consumers to avoid multiple pending transactions and thus avoid overdrafts.
“New technology makes A2A payments more feasible for smaller merchants, providing a viable alternative to avoiding card processing fees.” - Sophia Goldberg, co-founder of Ansa
The need for cheaper, faster, and more efficient ways to pay (read: stablecoins) is clearly strong. So the question is: how exactly does the transition to a stablecoin network work? From a functional perspective, do consumers need a differently branded card, or can they continue to use their regular Visa/Mastercard cards, while merchants have the option to process them through other networks through mandatory regulation? This is not explicitly stated in the Credit Card Competition Act, and we can only wait and see how compatibility with cards on these new networks ultimately develops. Mass adoption requires one of two things: 1) providing customers with a very strong incentive to switch cards (active adoption); or 2) a background transition, where customers continue to use their existing cards, but the actual processing happens on the stablecoin network (passive adoption).
One way to align incentives is to launch a brand new stablecoin bank: account holders can enjoy discounts at participating merchants such as Amazon and Walmart, and these merchants will be happy to offer rewards because they can avoid Visa/Mastercard’s 2-3% swipe fees.
Today, customer spending is increasingly concentrated on a few major platforms, so as long as the following conditions are met: 1) the rewards customers receive are sufficient to make up for the hassle of switching cards, and 2) the rewards offered by merchants are lower than the 2% transaction amount they pay for Visa/Mastercard, stablecoin banks can achieve a win-win situation.
Customers can still earn interest on their deposits, as stablecoins operate in the background, and credit issuance itself can be done in stablecoins. But from a user experience perspective, customers are still just swiping a card. At that point, banks can be bypassed entirely: when customers spend money at a retailer, they are actually transferring money from one wallet to another.
Stablecoin banks could make money through processing fees (lower than today’s fees, obviously), interest on deposits (revenue sharing), and fees when users convert stablecoins to fiat. Some argue that stablecoin issuers are effectively shadow banks, but to gain mainstream adoption, a new stablecoin bank that works top-down with merchants may be the most effective option. If the incentives are in place, customers will be happy to join.
Consider Brazil’s Nubank, which has stood out in a market still dominated by banks and notorious for charging exorbitant fees. Nubank has managed to attract a large number of consumers by launching a fully functional mobile-focused product and slashing fees, while traditional banks in Brazil often fail to provide basic financial services in a convenient way. In contrast, traditional banks in the United States, while not perfect, have online and mobile features that are good enough for most customers not to switch easily. Nubank has succeeded with its excellent user experience, a model that could theoretically be replicated in the United States. But a successful money platform is more than just a great interface, it must also allow users to easily transfer between deposit accounts, stablecoins, cryptocurrencies, and even enter buy now, pay later (BNPL) or other credit products - without jumping to other platforms. This is the key to Nubank's success and a gap in the US market.
However, regulatory issues in the US cannot be ignored: challenger banks that want to replicate the Nubank model (and use stablecoins) in the US will face overlapping regulatory requirements from multiple regulators, including the OCC, the Federal Reserve Bank, and state governments. The viability of stablecoin banks ultimately depends on whether a banking license is required, which money transmission licenses (MTLs), and other related regulatory issues. The last company to obtain a national banking charter in the US was Sofi (through the acquisition of Golden Pacific Bank), which it almost obtained three years ago in January 2022. Stablecoin banks can consider some innovative paths, such as partnering with existing Federal Deposit Insurance Corporation (FDIC)-insured banks or trust companies, rather than directly pursuing a national charter. However, without the Credit Card Competition Act (CCCA), any new bank stablecoin payment network - even if it is licensed - will be limited to non-merchant payments (i.e. B2B and peer-to-peer payments).
The bipartisan stablecoin bill recently introduced by Lummis and Gillibrand could help move this forward. The bill’s stated goal is to “create a clear regulatory framework for payment stablecoins that protects consumers, supports innovation, and promotes dollar dominance.” While the bill is certainly an important step in the right direction, it is far less specific than the CCCA, which provides a more detailed action plan in terms of forcing banks to comply.
One potential obstacle to the success of stablecoin banks is the banking industry's enormous influence in Washington, which is one of the most powerful lobbying forces in the United States. Therefore, it will be an uphill struggle to push the necessary legislation through Congress. In 2023, lobbying spending by banks large and small totaled approximately $85 million. It should be noted that the public lobbying spending figures may actually be much higher, given the complex entities and methods used by lobbyists.
The establishment of a stablecoin bank first requires a clear regulatory strategy and sufficient financial support to cope with the strong lobbying pressure from existing banks. Nevertheless, the potential rewards are huge. A successful challenger bank can fill the missing integrated financial model in the US market and be built entirely on stablecoins. If executed well, it will be the biggest change in the way consumers, merchants and banks interact since the Internet.
Even if this is a potential trillion-dollar market and is technically feasible, stablecoin banks still rely on the CCCA, which currently seems difficult to pass. The existing banking forces will fight back with all their might, because naturally, the old always opposes the new. But the new will eventually come - at least in some form.
