Stablecoin has become a challenge for the $1 trillion Visa and Mastercard duopoly. Unless the two companies can adapt in time, they will be under even more pressure as cryptocurrency regulation changes and emerging competitors rise to the forefront. If the Credit Card Competition Act (CCCA) passes, it will require large banks to provide merchants with at least one additional network option to process credit card transactions beyond Visa and Mastercard, which are now the only options for merchants. This would weaken Visa and Mastercard’s pricing power, and most importantly, stablecoin networks may take this opportunity to compete with them through lower fees. It’s important to note, however, that the Credit Card Competition Act is very unlikely to pass – the probability of passage is only 3% in the Senate and 9% in the House, so while it would be hugely beneficial if passed, it doesn’t look likely at the moment.
Currently, Visa and Mastercard charge merchants as much as 2-3% for swipe fees, which is typically the second largest cost to merchants after payroll expenses. Unfortunately, smaller merchants are disproportionately affected by these high fees. Corporate powerhouses like Walmart have enough negotiating power to be able to reduce transaction fees and thus get better rates than small merchants, who are locked in by Visa and Mastercard. This is one of the reasons why Visa and Mastercard’s profit margins are 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 can’t afford the extra cost of getting rid of these two companies – it’s called a “classic duopoly” (Senator Josh Hawley’s words).
A stablecoin network could reduce card fees to near zero. Merchants hate swipe fees – it’s perfectly reasonable – and if they have a choice of a low-fee network that doesn’t limit their market size, they won’t hesitate to switch.
Merchants wanting to avoid card processing fees is not a new concept; the key question is how to incentivize consumers to shift their payment methods: “Why does the first person to use a new type of currency succeed, but what about the millionth user?” (Peter Thiel) The growing popularity of payment banks (A2A) as a payment method has proven that under the right conditions, consumers are willing to change their payment habits.Fred Wilson of Union Square Ventures has even predicted that by 2025, direct bank-to-bank payments in some areas of the U.S. will outpace the cost of credit card payments. Better regulation, particularly the introduction of Consumer Financial Protection Bureau (CFPB) Section 1033, has made it easier for retailers to offer A2A transactions by clarifying the government’s support for open banking, which not only helps them avoid card processing fees, but also provides consumers with more payment options.
Additionally, the user experience of payment banks could end up being more consumer-friendly – similar to the ShopPay experience. Walmart has already launched a payment banking product, and both large and small merchants are starting to follow suit. To convince consumers to choose this payment option, Walmart has added an instant transfer feature, which allows consumers to avoid multiple pending transactions, thus avoiding overdrafts.
“The new technology makes A2A payments more viable for smaller merchants, providing a viable alternative to avoiding card processing fees.” –Sophia Goldberg, co-founder of Ansa.
The demand for cheaper, faster, and more efficient payment methods (ie: stablecoins) is clearly strong. So here’s the question: how does the transition to a stablecoin network actually work? From a functional standpoint, will 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 will just have to see how the compatibility of these new networks with cards will eventually evolve. Mass adoption will need to meet one of two conditions: 1) provide customers with an extremely strong incentive to switch cards (active adoption); or 2) a back-end transition where customers continue to use their existing cards, but the actual processing occurs on the stablecoin network (passive adoption).
One way to align incentives is to launch a new stablecoin bank: account holders can receive discounts at participating merchants such as Amazon and Walmart, who will be happy to offer incentives for avoiding Visa/Mastercard’s 2-3% swipe fee.
Today, customer spending has become more and more concentrated on a handful of major platforms, so as long as the following conditions are met: 1) the customer receives enough rewards to make up for the hassle of switching cards, and 2) the merchants offer rewards that are less than the 2% of the transaction that they would have paid for a Visa/Mastercard, Stablecoin Banks will have a win-win situation.
Customers can still earn on their deposits, as Stablecoin operates in the background, and credit issuance itself can be done in Stablecoin. But from a user experience perspective, the customer is still just swiping their card. At that point, banks could be bypassed altogether: when a customer spends money at a retailer, they are effectively transferring money from one wallet to another.
Stablecoin banks could make money through processing fees (which are, obviously, lower than today’s fees), interest on deposits (revenue sharing), and fees charged when users convert stablecoins to fiat. Some argue that stablecoin issuers are effectively shadow banks, but a new stablecoin bank that works top-down with merchants may be the most effective option in order to gain mainstream adoption. If the incentives are in place, customers will be happy to join.
Consider Brazil’s Nubank, which stood out in a market still dominated by banks and notorious for charging excessive fees.Nubank managed to attract a large number of consumers by launching a full-featured, mobile-oriented product with dramatically lowered fees, whereas traditional banks in Brazil often fail to provide basic financial services in a convenient manner. By contrast, traditional banks in the U.S., while not perfect, have enough online and mobile capabilities to discourage most customers from making the switch easily.Nubank has succeeded with its great user experience, a model that could theoretically be replicated in the U.S. The U.S. is a great place to start, but it is a great place to start. But a successful cryptocurrency platform is more than just a great interface; it must also allow users to easily transfer money between deposit accounts, stablecoins, cryptocurrencies, and even into buy now pay later (BNPL) or other credit products-without having to hop on another platform. other platforms. This is the key to Nubank’s success, and a gap in the U.S. market.
However, regulatory issues in the US cannot be ignored: challenger banks that want to replicate the Nubank model (and use stablecoin) in the US will face overlapping regulatory requirements from a number of regulators, including the OCC, the Federal Reserve Bank and state governments. The viability of a stablecoin bank ultimately depends on whether a bank license is required, which money transfer licenses (MTLs) are available, and other related regulatory issues. The last company in the U.S. to receive a national banking license was Sofi (through its acquisition of Golden Pacific Bank), which it received almost three years ago in January 2022. Rather than pursuing a national license outright, stable-currency banks could consider a number of innovative paths, such as partnering with an existing Federal Deposit Insurance Corporation (FDIC)-insured bank or trust company. However, without the Credit Card Competition Act (CCCA), any new bank stablecoin payment network – even if licensed – would be limited to non-merchant payments (i.e., B2B and peer-to-peer payments).
The bipartisan Stablecoin Act recently introduced by Lummis and Gillibrand helps to facilitate this process. 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 undoubtedly an important step in the right direction, it is far less specific than the CCCA, which provides a more detailed plan of action for enforcing bank compliance.
One potential obstacle to the success of a stablecoin bank is the banking industry’s enormous influence in Washington, which is one of the most powerful lobbying forces in the United States. As a result, pushing the necessary legislation through Congress will be an uphill battle. in 2023, lobbying expenditures by banks, large and small, totaled about $85 million. It is important to note that the publicly available figures for lobbying expenditures could actually be much higher, considering the complex entities and methods through which lobbyists maneuver, among other things.
The creation of a stablecoin bank would first require a clear regulatory strategy, as well as sufficient financial backing to deal with strong lobbying pressure from existing banks. Nonetheless, the potential rewards are enormous. A successful challenger bank could fill the missing integrated financial model in the U.S. market and be built entirely on stablecoin. If executed properly, it would be the biggest change in the way consumers, merchants and banks interact since the Internet.
Even though this is a market with trillions of dollars in potential and is technically completely feasible, stablecoin banks are still dependent on the CCCA, a bill that seems very difficult to pass at this point. 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.
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