Stablecoin Takes on Visa and Mastercard: How to Gain the Upper Hand?

Original Article Title: Exploring a Stablecoin Bank
Original Article Author: bridge harris, Crypto Kol
Original Article Translation: zhouzhou, BlockBeats

Editor's Note: Stablecoins could potentially challenge the market monopoly of Visa and Mastercard, especially in a context where both merchants and consumers are eager to reduce payment fees. The concept of a stablecoin bank, by providing lower payment costs and a better user experience, could become a mainstream payment method. However, the widespread adoption of stablecoin payments still faces several challenges, including regulatory issues, changes in consumer behavior, and competition with traditional financial institutions. Despite promising prospects, the current regulatory and legislative environment's uncertainty poses significant difficulties for the actual implementation of stablecoin banks.

The following is the original content (slightly reorganized for better readability):

For a $1 trillion duopoly like Visa and Mastercard, stablecoins are a problem. Unless Visa and Mastercard learn to adapt, supportive cryptocurrency regulations and proactive emerging competitors will put them in an unprecedentedly fragile position.

The Credit Card Competition Act (CCCA), if passed, would require major banks to provide merchants with at least one additional payment network (apart from Visa and Mastercard, the two payment networks today's merchants are locked into) for processing credit card transactions. This would weaken the pricing power of Visa and Mastercard, and more importantly, it could provide a golden opportunity for stablecoin networks to compete by lowering fees. It is worth mentioning that, unfortunately, the chances of this bill passing are only 3% (in the Senate) and 9% (in the House), so while passing would be great, the current likelihood of passage is not high.

Currently, Visa and Mastercard charge merchants up to 2-3% in swipe fees — which is often the second-largest expense for merchants, just behind labor costs. Unfortunately, small businesses bear the brunt of these swipe fees. Corporate giants like Walmart can negotiate lower interchange fees, so they can get better rates than small shops, which are locked into the Visa and Mastercard system. This is also one of the reasons why Visa and Mastercard have profit margins of over 50%: small businesses have no choice but to accept Visa and Mastercard since they control 80% of the credit card market. In short, merchants simply cannot break free from these two payment networks — a form of "typical monopoly behavior" (Senator Josh Hawley).

A stablecoin network can reduce these swipe fees to near zero. Merchants hate swipe fees — rightly so — and if they could choose a lower fee network that doesn't limit their total addressable market (TAM), they would switch in a heartbeat.

Merchant attempts to avoid card processing fees are nothing new, but the real issue is how to properly incentivize consumers to switch payment methods: "Why would the first person use a new payment system as opposed to the millionth" (Peter Thiel). The increasingly popular bank-to-bank payments (A2A) as an option is already a small proof showing that under the right conditions, consumers will change their behavior.

Union Square Ventures' Fred Wilson even predicts that by 2025, direct bank-to-bank payments will surpass credit card interchange payments in certain sectors in the US. Better regulation, especially the Consumer Financial Protection Bureau's (CFPB) Section 1033, makes it easier for retailers to offer A2A transactions — enabling them to avoid card processing fees.

More importantly, the A2A user experience might be better for consumers — imagine a function similar to ShopPay. Walmart has already launched an A2A payment product, and smaller retailers are also starting to follow suit. To persuade consumers to choose this payment method, Walmart is adding instant transfer features so consumers can avoid multiple pending transactions leading to overdraft issues.

"New technology is making A2A payments more accessible to small businesses, providing a viable alternative to avoid card processing fees." — Ansa Co-founder Sophia Goldberg.

The demand for a cheaper, faster, more efficient payment method (i.e., stablecoin) is clearly strong. So the question becomes: How does the transition of a stablecoin network actually work? Functionally, do consumers need a different branded credit card? Or can they use a regular Visa/Mastercard, with merchants having the option to route payments through other networks by regulatory fiat?

This is not explicitly spelled out in the CCCA bill, so we need to see how the card compatibility of these new networks develops. Mass adoption will require: 1) Strong incentives for customers to fully switch cards (active adoption); or 2) Backend transformation, allowing consumers to continue using existing cards, but processing actually goes through the stablecoin network (passive adoption).

One incentive mechanism that could align all parties may be the introduction of a brand-new stablecoin bank: Account holders can receive discounts at participating merchants (like Amazon and Walmart), who would be willing to provide rewards because they can avoid Visa/Mastercard's 2-3% swipe fees.

Consumers have been increasingly concentrating their spending on a few dominant platforms, so as long as: 1) the rewards customers receive are sufficient to offset the friction cost of switching; and 2) the rewards provided by merchants are lower than the 2% of transaction volume (TPV) they pay Visa/Mastercard, the stablecoin bank would be a win-win situation. Consumers can still earn interest on their deposits as the stablecoin would operate in the background, and credit issuance itself could also be done using stablecoins. However, from a user experience perspective, consumers would still simply be paying with a plastic card. At that point, the bank could be completely bypassed: when a customer spends at a retailer, they are effectively transferring from one wallet to another.

The stablecoin bank can make money through processing fees (presumably lower than current fees), deposit interest (revenue sharing), and charging fees when users convert stablecoins to fiat currency. Some argue that stablecoin issuers are essentially shadow banks, but for mainstream adoption, a new stablecoin bank that operates top-down in partnership with merchants may be the most effective option. With the right incentives in place, consumers will join in.

Take Nubank in Brazil as an example: it has succeeded in a banking landscape that is both the status quo and infamous for high fees. Nubank has excelled by providing a full-featured, mobile-first product that lowers costs and stands out when traditional Brazilian banks fail to offer convenient basic financial services.

In contrast, traditional U.S. banks—though far from perfect—provide enough online and mobile functionality to keep most customers from switching. Nubank is known for its outstanding user experience—a feat that could theoretically be replicated in the U.S. But a unified financial platform is not just about a great interface: it must allow customers to flow across deposit accounts, stablecoins, cryptocurrencies, and even BNPL or other credit products without forcing them to switch between different platforms. This is where Nubank excels and highlights a gap in the U.S. market.

Of course, regulatory challenges in the U.S. are also a major hurdle: challenger banks attempting to replicate Nubank's style in the U.S. (but with stablecoins) face overlapping regulatory requirements from the OCC, Federal Reserve, and state regulators. The viability of a stablecoin bank lies in whether it requires a banking charter, the necessary Money Transmission Licenses (MTLs), and other regulatory issues.

The last bank in the U.S. to receive a national charter was Sofi (through the acquisition of Golden Pacific Bank), which only obtained its charter in January 2022, almost three years ago. Stablecoin banks could consider creative approaches: for instance, partnering with existing FDIC-insured banks or trust companies instead of directly seeking a national charter. However, without the CCCA, any new bank stablecoin payment network—even with a charter—would be limited to non-merchant payments (i.e., B2B and P2P payments).

The bipartisan stablecoin bill recently introduced by Lummis and Gillibrand will help advance this goal — the bill's explicit aim is to "establish a clear regulatory framework for payment stablecoins, protect consumers, foster innovation, and promote the dollar's dominance." While this bill is undoubtedly a step in the right direction, its specificity falls far short of the CCCA, which explicitly mandates bank compliance.

One factor affecting the likelihood of stablecoin bank success is the significant influence of the banking industry in Washington; it is one of the most powerful lobbying forces in the U.S. As such, significant pressure will be faced to get necessary legislation through Congress. Overall, in 2023, the banking industry (including large, mid-size, and small banks) spent around $85 million on lobbying. It is worth noting that due to creative maneuvers by lobbyists through various complex entities, the actual public lobbying expenditure figures we see are much higher.

A stablecoin bank needs to have a clear regulatory strategy from the outset, as well as sufficient financial backing to withstand lobbying pressure from traditional financial institutions. However, the potential payoff is enormous. A successful challenger could bring the integrated financial model missing in the U.S., entirely built on stablecoins.

If executed correctly, this would be the most significant transformation in how consumers, businesses, and banks interact — something we haven't seen since the advent of the internet. While this is a (quite literally) trillion-dollar market and entirely feasible from a technological perspective, the stablecoin bank unfortunately hinges on the CCCA, which has a very slim chance of passing. Traditional institutions will push back hard as the natural order is for the old to resist the new. But the new will eventually come — at least in some form.

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