Can stablecoins break the monopoly of Visa and Mastercard?

Author: @bridge__harris

Compilation: Vernacular Blockchain

For the $1 trillion Visa and Mastercard "double-poly" valued at $1 trillion, stablecoins are a challenge. Unless these two companies can adapt in time, they will face greater pressure as regulatory changes in cryptocurrencies and the fierce rise of emerging competitors. If the Credit Card Competition Act (CCCA) is passed, it will require large banks to provide merchants with at least one additional network option, except for the Visa and Mastercard that merchants can only choose to handle credit card transactions. This will weaken Visa and Mastercard's pricing power, and most importantly, the stablecoin network may take this opportunity to compete with them with lower fees. However, it should be noted that the possibility of the Credit Card Competition Act is very small - the probability of passing in the Senate is only 3% and 9% in the House of Representatives. Therefore, although it will be of great benefit once it is passed, it does not seem too good at the moment. possible.

Currently, Visa and Mastercard charge merchants a card swiping fee of up to 2-3%, which is usually the second largest cost for merchants after wage expenses. Unfortunately, small merchants are particularly affected by these high fees. Large companies like Walmart have enough negotiating capabilities to reduce transaction fees and obtain more favorable rates than small merchants, but the latter is locked in by Visa and Mastercard. This is also one of the reasons why Visa and Mastercard have a profit margin of more than 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 to get rid of the extra costs of getting rid of these two companies—this is called “typical duopoly” (Senator Josh Hawley).

A stablecoin network can reduce card swipe fees to nearly zero. Merchants hate card swipe fees—which is perfectly reasonable—if they can choose a low-cost network and do not limit their market size, they will switch without hesitation.

It is not a new concept for merchants to avoid card processing fees. The key question is how to incentivize consumers to change their payment methods: "Why can the first person to use a new currency succeed, and so what about the millionth user?" (Peter Thiel) The gradual popularity of payment banks (A2A) as a payment method has proved that consumers are willing to change their payment habits under appropriate conditions. Union Square Ventures' Fred Wilson even predicts that by 2025, direct interbank payments in certain areas of the United States will exceed the fees paid by credit cards. Better regulation, especially the introduction of CFPB Section 1033, makes it easier for retailers to provide A2A transactions by clarifying government support for open banking, which not only helps them avoid card processing fees , also provides consumers with more payment options.

Additionally, the user experience of payment banks may end up being more consumer-friendly—an experience similar to that of ShopPay. Walmart has launched payment banking products, and both large merchants and small merchants have begun to follow up. To convince consumers to choose this payment method, Walmart has added instant transfer function, which allows consumers to avoid multiple pending transactions, thereby avoiding overdrafts.

"New technology makes A2A payments more viable for small merchants, providing a viable alternative to avoid card processing fees." - Sophia Goldberg, co-founder of Ansa.

The demand for cheaper, faster and more efficient payment methods (i.e. stablecoins) is obviously strong. So the question is: How exactly does the transition to stablecoin network work? From a functional perspective, do consumers need a card with a different brand, or can they continue to use a regular Visa/Mastercard card, and merchants have the option to process it through other networks through mandatory supervision? This is not explicitly stated in the Credit Card Competition Act, we can only look at how these new networks will eventually develop with card compatibility. Large-scale adoption requires one of the following two conditions: 1) Provide customers with extremely strong incentives to switch cards (actively adopt); or 2) transition in the background, and customers continue to use existing cards, but the actual processing process occurs in stablecoins. On the Internet (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, who will be happy to offer rewards because they can avoid Visa/Mastercard 2-3 % card swipe fee.

Today, customer consumption is increasingly concentrated on a few major platforms, so as long as the following conditions are met: 1) The rewards received by customers are enough to make up for the hassle of switching cards, 2) The rewards provided by merchants are lower than those paid for Visa/Mastercard The transaction volume of 2% can achieve a win-win situation for stablecoin banks.

Customers can still earn money on deposits because stablecoins operate in the background, and credit issuance itself can also be done with stablecoins. But from the perspective of user experience, customers are still just swiping their cards. By then, banks can be completely bypassed: when customers spend at retailers, they are actually transferring money from one wallet to another.

Stablecoin banks can make money by processing fees (apparently lower than the current fees), deposit interest (revenue sharing), and fees charged by users when converting stablecoins into fiat currency. Some believe that stablecoin issuers are actually shadow banks, but in order to gain mainstream adoption, a new stablecoin bank that works top-down with merchants may be the most effective option. If incentives are in place, customers will be happy to join.

Refer to Brazil's Nubank, which stands out in a market where banks still dominate and are notorious for charging too high fees. Nubank has successfully attracted a large number of consumers by launching a full-featured product that is mainly mobile and has significantly reduced fees, while traditional Brazilian banks often fail to provide basic financial services in a convenient way. In contrast, while traditional banks in the United States are imperfect, their online and mobile capabilities are enough to prevent most customers from easily converting. Nubank has succeeded with its excellent user experience, and this model is theoretically replicable in the United States. But a successful currency platform is not just an excellent interface, it must also allow users to easily transfer money between deposit accounts, stablecoins, cryptocurrencies, and even enter "Buy First Pay Later" (BNPL) or other credit products- And there is no need to jump to other platforms. This is the key to Nubank's success and a gap in the US market.

However, the regulatory issues in the United States cannot be ignored: Challenger banks that want to replicate the Nubank model (and use stablecoins) in the United States will face overlapping regulatory requirements from multiple regulators such as the OCC, the Federal Reserve and state governments. The feasibility of stablecoin banks ultimately depends on whether a bank license is required, which currency transfer licenses (MTLs) and other related regulatory issues. The last company in the United States to obtain a national banking license was Sofi (through the acquisition of Golden Pacific Bank), which it obtained almost three years ago in January 2022. Stablecoin banks can consider some innovative paths, such as working with existing Federal Deposit Insurance Corporation (FDIC)-insured banks or trust companies instead of directly pursuing a national license. 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).

Lummis and Gillibrand’s recent bipartisan stablecoin bill has helped to drive the process. The clear goal of the bill is to “create a clear regulatory framework for payment of stablecoins that both protect consumers, support innovation and promote 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 action plan in compulsory bank compliance.

One potential obstacle to the success of stablecoin banks is the huge influence of the banking industry in Washington, one of the most powerful lobbying forces in the United States. Therefore, pushing the necessary legislation through Congress will be an uphill struggle. In 2023, lobbying expenditures from banks of all sizes totaled approximately $85 million. It should be noted that, given the complex entities and means of lobbyists, the open lobbying spending figures may actually be far higher.

The establishment of stablecoin banks first requires a clear regulatory strategy and sufficient financial support to cope with the strong lobbying pressure of existing banks. Still, the potential rewards are huge. A successful challenger bank can fill the missing integrated financial model in the U.S. market and is built entirely on stablecoins. If executed properly, this will be the biggest change in the way consumers, merchants and banks interact since the Internet.

Even if this is a trillion-potential market and technically completely feasible, stablecoin banks still rely on CCCA, and the bill seems difficult to pass at the moment. The existing bank forces will fight back with all their might, because naturally, the old always oppose the new. But new things will come eventually—at least in some form.