Author: Crypto Miao

In the Web3 era, USDT bank cards (bank cards paid in stablecoins), as an emerging virtual payment tool, attempt to build a bridge between traditional finance and the decentralized world, bringing users a more convenient and flexible payment experience.

Since laws and regulations have not yet fully adapted to the integration of emerging technologies and traditional systems, U-card companies are often in a dilemma. Compliance is like a sword of Damocles, hanging over the industry, and may be dealt a heavy blow at any time due to policy adjustments or regulatory actions. Companies not only need to cope with the challenges of technological innovation, but also must always be vigilant about potential legal risks. One wrong step may lead to serious consequences such as fines, lawsuits, or even business interruption.

This article will analyze the current situation and challenges of the U-card industry from an industrial perspective and explore its solutions in the payment field.

U card development dilemma

The U card industry is currently facing the dilemma of unclear compliance. This industry not only involves the rapidly evolving digital asset field, but is also closely intertwined with the traditional financial industry, forming a complex regulatory gray area.

At present, most of the compliance researchers in the industry start from the policy and study the compliance actions required in each chain of U card payment. However, the U card industry is currently facing other problems: high operating costs, fierce market competition, and profit difficulties, all of which are testing the survival wisdom of U card issuers.

From an industry perspective, perhaps compliance is not the top priority for entrepreneurs right now?

The U Card Dilemma

1. Difficulties in distribution channels

First of all, the most basic requirement for U-card is to have a bank card , which requires specific issuing institution qualifications, which usually means that the company must comply with a series of strict financial regulatory regulations and financial institution licenses. However, most U-card companies, such as Infini, which has attracted much attention recently, do not have the qualifications to issue bank cards directly. Therefore, these companies often choose to cooperate with qualified banks or payment gateways and use the APIs or infrastructure of these institutions to provide services.

2. Channel cost problem

Since the U business needs to rely on other people's channels to complete the entire business chain, it needs to pay channel costs. In addition to the bank card issuers mentioned above, the payment chain also includes a variety of other channel costs, including API access services, currency exchange, international settlement channels Master/Visa, and payment terminals Apple, PayPal, Alipay, and WeChat.

When a user pays 100 yuan with a credit card, the merchant who uses the international payment channel only receives 97 yuan, which is much higher than the domestic UnionPay channel. Part of the fee needs to be borne by the merchant, resulting in fewer payment scenarios that support international payment channels.

Dilemma of profit model

1. Rate Dilemma

In the U card profit model, renewal is a very important part. When choosing U card payment, the U card issuer will charge relevant fees, which include payment fees, cross-border fees, exchange fees, etc. For users, the most important thing is the exchange rate between stablecoins and payment base currencies, and the difference between the actual exchange rate.

Generally speaking, the comprehensive fee rate is generally around 1.5% or above, depending on the size and bargaining power of the U card issuer. For example, if the USD/RMB exchange rate is 7.20 RMB/USD on that day, and you spend RMB 100, the U card will be deducted from the USD equivalent of 14.10 USD or more in stablecoins, and the exchange rate is 7.092 RMB/USD.

A few U cards will have more favorable comprehensive rates in a short period of time. For example, through some incentive activities, the comprehensive rate can be reduced to 1% or below. However, the activities can only last for a short period of time. They are mainly for the purpose of promoting the activities and increasing customer acquisition, and low rates cannot be maintained for a long time.

Why can’t the fee be reduced? Because the operating costs are here. Long-term low fees will make the project unable to maintain operations. Subsidies can be used to attract users during the initial promotion of the project, but who can guarantee that investment will continue to be raised over time?

Therefore, another important expenditure for U card issuers is advertising promotion, which increases new customers, increases business scale, and strengthens the bargaining power of channels. More importantly, it strengthens market visibility and voice, and obtains new financing for further expansion.

2. The problem of handling fees

So since the operating costs are so high, is it possible to increase the handling fees and raise the overall rate to 2% or higher?

The answer is no.

First of all, the U-card industry is currently highly competitive and user loyalty is low, so if you are not careful you will lose your position in the industry.

Secondly, another competitor of U Card is exchange/OTC withdrawal. If the handling fee is too high, the convenience and fund risk isolation of U Card will be too expensive for users, and they would rather choose exchange/OTC withdrawal. In addition, U Card can only be used for small-amount consumption in China. If large-amount consumption is paid through Alipay or WeChat, an additional 3% handling fee will be charged.

3. Difficulty in interest rate spread of capital pool

Some people may say that the U Card issuer has a fund pool. U Card often publishes the TVL of the fund pool and the proportion of various assets on its official website every day, which is often hundreds of millions of dollars. Isn't it a big profit to buy government bonds and engage in DEFI?

There is a misunderstanding here. First of all, most U-card issuers do not have channels for financial management interest rate spreads. In this regard, exchanges have a natural advantage. For example, Bybit and Bitget issue U-cards. Exchanges already have deposit and loan businesses and can connect with the U-card fund pool.

However, other U cards do not have their own lending channels and need to rely on other people's financial management channels. Are other people's channels safe enough? Can they pay in full and quickly? What about liquidity? Can they withstand sudden large withdrawals?

If you set a withdrawal limit for users when withdrawing large amounts, in the extremely distrustful Web3 community, word will soon spread that there is a problem with the funds, causing a large number of users to withdraw their money, forming a death loop.

4. The problem of the depth of the capital pool

In layman's terms, the fund pool is very shallow. That is, U card users don't tend to put too much money into the U card, but put in a small amount as needed, and then top it up after use. In the short term, they spend as much as they put in.

After all, security incidents frequently occur in the Web3 industry, and no one trusts exchanges. Who can trust a small U card issuer?

Therefore, although the TVL of the U card fund pool is very high, there is less deposited funds in it, and there is less long-term funds that can be used to buy high-yield financial products and arbitrage. The proportion of funds that need to be mobilized at any time is very high, and a large part of the funds can only be used to buy current financial products with limited returns.

The operating model of Tether, the issuer of USDT, can only be envied. USDT issuance is mostly incremental and less redemption, and can be used to buy US bonds, gold, and high-yield financial products.

Older U-card issuers, such as Crypto.com's U-card, encourage users to lock their funds. The more funds they lock, the more uses the card can support, the lower the handling fees, and the more staking rewards. Only with enough deposited funds can U-card issuers have more room for operation.

Compliance Dilemma

1. Compliance and self-protection

As the issuer of U cards, compliance is required regardless of whether it is necessary, such as code audits, project audits, capital audits, financial report audits, custodial audits, etc. This is an inevitable operating cost.

In addition, the fund pool needs to find a third-party custodian, and the strength, background and compliance of the custodian must also be audited and checked, and whether the other party needs to provide corresponding guarantees based on the cooperation situation. If a large institution is found to do the custodial business, the cost is too high, which is unaffordable for entrepreneurial U card companies and medium-sized fund pools. If a small asset management company is found to do the custodial business, there is a fear that the other party's security and compliance are insufficient.

If an accident causes financial loss, the user will first criticize the U card issuer, not the custodian. The U card issuer will have to engage in a long and difficult legal battle with the custodian.

2. Compliance and supervision

In the current U-card industry, compliance supervision may not be a priority for practitioners.

First of all, the industry is still in its early stages, and the relevant regulatory policies and laws are still relatively vague.

Secondly, the regulatory authorities have limited enforcement power over U card issuers. The credit card issuance qualification is borrowed, the U card issuer is based in an offshore area, and the funds are held in a third-party trust. From the perspective of law and enforcement, it is difficult to punish the U card issuer.

Moreover, U Card is issued through regular card issuance channels + regular international payment channels + regular consumption scenarios. If legal disputes arise in the above channels, it is not entirely the responsibility of the U Card issuer. If a user illegally cashes out or uses it illegally, it is a violation of foreign exchange management regulations, false transactions or other illegal matters. The main person responsible is the card holder, and it has nothing to do with the card issuer.

The most severe punishment that regulators may impose on U card issuers is to block the card's BIN (Bank Identification Number) and prevent it from being used, which will lead to user loss. This is likely to cause a U card project to fail, and the only option is to learn from the experience and start anew.

3. Compliance with Anti-Money Laundering

For the U card issuer, the biggest responsibility is anti-money laundering (AML) compliance. But in fact, the anti-money laundering process in the Web3 ecosystem is already relatively mature. For example, major exchanges such as Coinbase, Binance, and OKX strictly control anti-money laundering through on-chain data, cooperation with anti-money laundering institutions, and risk control models.

Although there are relatively mature solutions for anti-money laundering, the cost is not low. It is necessary to establish a supervision mechanism and its own risk control model, cooperate with relevant institutions and recruit corresponding talents, and the cost is indispensable. And no matter which country, anti-money laundering is a top priority.

4. Potential compliance risks

Why is it potential? Because according to the current status of the U-card industry, the asset protection and anti-money laundering compliance mentioned above are the biggest risks, and the importance level of other compliance risks is not very high.

However, if the U card issuer wants to open up the upstream and downstream industrial chain, it needs to bear other operational risks. For example, increase consumption scenarios, support legal currency deposits and withdrawals, expand Web2 users, directly connect to e-commerce payments, and set up "Yu'ebao". These businesses cannot avoid AML/KYC, securities laws, foreign exchange management regulations, investor protection laws, payment channel construction, and marketing channel construction. The closer it is to the real scene, the more compliance is required; the more compliance, the more the development model is like Web2; the more Web2 development, the more it enters the red ocean competition.

Web3 practitioners who want to compete with Web2 companies need to adapt to the Web2 system and redistribute interests, rights, and responsibilities. The bigger, deeper, and broader the business, the heavier the compliance shackles and social responsibilities required.

With great power comes great responsibility.

The future of U Card

What should U-card companies do at this stage?

The first way is to grope forward . Now the U card industry is still in the exploratory stage. The supply model, profit model and resource allocation are still in the exploration stage. It is a high-risk investment for pioneers to break out their own channel model.

The second is to do what you are good at , such as channel construction, community promotion, compliance risk control, fund custody, financial management, fund liquidation, investment research and background check, and be a high-quality supplier in the industrial chain to give full play to your own strengths. Compared with the first type, the income is stable and the risk is relatively small.

As a branch of the Web3 industry, the U-card industry also benefits from the development of the entire Web3 industry. It is still in a stage of rapid development and needs to wait for the entire industry to gradually mature and be accepted by the public.

We have to wait until the US stablecoin bill is passed, until merchants can directly accept stablecoins, until consumers can use Web3 wallets to pay without any conflicts, until Web2 giants flock in, and until a massive market is opened up to Web3.

The companies that are still alive at that time will become the industry leaders with their first-mover advantage.

Do we still need to comply with the regulations? Yes, we must, but we must survive first . "Better to ask for forgiveness than permission", "Better to ask for forgiveness afterward than to ask for permission beforehand."

Compliance is a combination of industry development and enterprise scale. Compliance is necessary, but it is also necessary to balance business development needs with the cost and scale of compliance investment.

The bottom line of the industry is risk control, and risk control is the core of the entire U card industry.

The core business logic of U Card is the transfer of money from beginning to end, and we need to be 100% vigilant about money . Therefore, risk control is the top priority, which is how to manage money, whether there are backdoors in the code, whether the partners are trustworthy, whether the trusteeship is reliable, and whether the employees' wages can be paid next month.

In a word: risk control, risk control, and risk control.

Summarize

The U card industry is at a critical stage of exploration and growth, and the balance between innovation and compliance will be a decisive factor in its future development. Enterprises need to flexibly adapt to market changes and optimize operational strategies to cope with the current difficulties while ensuring the safety of funds and strengthening risk control.

With the continuous maturity of Web3 technology and the popularization of stablecoin payments, U Card is expected to become an important bridge between the digital economy and the real world in the future, leading a new trend in the payment field.

As the industry matures, compliance will become the cornerstone. At present, the primary task of U card companies is to move forward steadily and wait for the dawn of a perfect industry ecosystem and a clear regulatory environment.