How Stablecoins Can Challenge Visa and Mastercard

Editor's Note: Stablecoins have the potential to challenge the market monopoly of Visa and Mastercard, especially in the context of merchants and consumers eager to reduce payment fees. The idea of ​​stablecoin banks may become a mainstream payment method by providing lower payment fees and better user experience. However, the widespread adoption of stablecoin payments still faces multiple challenges, including legal supervision, changes in consumer behavior, and competition with traditional financial institutions. Despite the hope, the current regulatory and legislative environment is uncertain, and the actual implementation of stablecoin banks still faces great difficulties.

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For the $1 trillion Visa and Mastercard duopoly, stablecoins are a problem. Unless Visa and Mastercard learn to adapt, pro-crypto regulation and aggressive new competitors will put them in an unprecedented vulnerable position.

The Credit Card Competition Act (CCCA), if passed, would require big banks to offer merchants at least one additional payment network (besides Visa and Mastercard, the two payment networks merchants are locked into today) to process credit card transactions. This would erode Visa and Mastercard’s pricing power, and more importantly, could provide a golden opportunity for stablecoin networks to compete by lowering fees. It’s worth noting that the bill’s odds of passing (sadly) are only 3% (in the Senate) and 9% (in the House), so while it would be nice to pass, the odds of passing aren’t great at this point.

Currently, Visa and Mastercard charge merchants up to 2-3% in swipe fees — which is typically the second-largest expense for merchants, after payroll costs. Unfortunately, smaller merchants bear the brunt of these swipe fees. Corporate giants like Walmart are able to negotiate lower interchange fees, so they are able to get better rates than smaller stores, which are locked into Visa and Mastercard. This is one reason why Visa and Mastercard both have profit margins above 50%: small businesses have no choice but to accept Visa and Mastercard because they control 80% of the credit card market. In short, merchants simply cannot get away from these two payment networks - this is "classic monopoly [duopoly] behavior" (Senator Josh Hawley).

A stablecoin network can reduce these swipe fees to near zero, and merchants hate swipe fees - completely rightly - if they can choose a network with lower fees that does not limit their total addressable market (TAM), they will switch without hesitation.

Merchants trying to avoid card processing fees is nothing new, but the real question is how to properly incentivize consumers to switch: “Why would the first person use a new payment method, and not the millionth person?” (Peter Thiel). The growing popularity of bank-to-bank payments (A2A) as an option is already a small demonstration that consumers will change their behavior under the right conditions.

Union Square Ventures’ Fred Wilson even predicts that direct bank-to-bank payments will surpass credit card interchange payments in some sectors in the US by 2025.

Better regulation, particularly Consumer Financial Protection Bureau (CFPB) Section 1033, makes it easier for retailers to offer A2A transactions – thereby enabling them to avoid card processing fees.

What’s more, the user experience of A2A is likely to be better for consumers – imagine something like ShopPay. Walmart has already launched an A2A payment product, and retailers large and small are beginning to follow. To convince consumers to choose this payment method, Walmart is adding an instant transfer feature so that consumers can avoid overdraft problems caused by multiple pending transactions.

"New technologies make A2A payments more accessible to small merchants, providing a viable alternative to avoiding card processing fees." - Ansa co-founder Sophia Goldberg.

The demand for cheaper, faster, and more efficient payment methods (i.e. stablecoins) is obviously strong. The question then becomes: how exactly does the transition to stablecoin networks work? From a functional perspective, do consumers need a differently branded credit card? Or can they use a normal Visa/Mastercard card, and merchants have the option to route payments to other networks through mandatory regulation?

This is not clearly stated in the CCCA bill, so we need to see how card compatibility develops for these new networks. Mass adoption requires either: 1) extremely strong incentives for customers to switch cards completely (active adoption); or 2) a back-end transformation where consumers continue to use their existing cards, but actual processing happens through the stablecoin network (passive adoption).

One ​​incentive mechanism that all parties can agree on might be to launch a brand new stablecoin bank: account holders get discounts at participating merchants (like Amazon and Walmart), and merchants are happy to offer rewards for avoiding Visa/Mastercard's 2-3% swipe fees.

Consumers are already increasingly concentrating their spending on a few dominant platforms, so as long as: 1) the rewards customers receive are enough to offset the friction costs of switching; and 2) the rewards merchants offer are lower than the 2% transaction value (TPV) it pays Visa/Mastercard, then a stablecoin bank is a win-win situation. Consumers can still earn a yield on their deposits because the stablecoin will be operating in the background, and the credit issuance itself can be done through the stablecoin. But from a user experience perspective, consumers are still just paying with a plastic card. By then, banks could be bypassed entirely: When customers spend money at retailers, they’re effectively just transferring money from one wallet to another.

Stablecoin banks could make money through processing fees (which would obviously be lower than today’s fees), deposit earnings (revenue sharing), and fees when users exchange stablecoins for fiat. Some argue that stablecoin issuers are effectively shadow banks, but for mainstream adoption, a new stablecoin bank that works with merchants and operates from the top down may be the most effective option. If the incentives are in place, consumers will join.

Take Brazil’s Nubank: It succeeded at a time when banks were both the status quo and notorious for charging exorbitant fees. Nubank lowered fees by offering a full-featured, mobile-first product and stood out at a time when traditional banks in Brazil failed to provide convenient, basic financial services.

In contrast, traditional banks in the U.S.—while far from perfect—offer enough online and mobile features to keep most customers from switching. Nubank is known for its excellent user experience — something that could theoretically be replicated in the U.S. But a unified financial platform is more than just a great interface: it must allow customers to move across deposit accounts, stablecoins, cryptocurrencies, and even BNPL or other credit products — without forcing them to switch between different platforms. This is what Nubank does so well, and it shows a gap in the U.S. market.

Of course, regulatory issues in the U.S. are also a big hurdle: challenger banks trying to replicate a Nubank-style approach in the U.S. (but with stablecoins) face overlapping regulatory requirements from the OCC, the Federal Reserve, and state regulators. The question of whether a stablecoin bank is feasible is whether it would require a banking charter, the required money transmitter licenses (MTLs), and other regulatory issues.

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

The bipartisan stablecoin bill recently introduced by Lummis and Gillibrand would help in this endeavour – the bill’s stated goal is to “create a clear regulatory framework for payment stablecoins that protects consumers, promotes innovation, and advances dollar dominance”. While this bill is certainly a first step in the right direction, it is far less specific than the CCCA, which explicitly requires banks to comply.

One ​​factor that affects the chances of success for stablecoin banks is the banking industry’s enormous influence in Washington; it is one of the most powerful lobbying forces in the country. As such, there will be tremendous pressure to get the necessary legislation through Congress. Combined, the banking industry (including large, medium and small banks) spent about $85 million on lobbying in 2023. It is worth noting that the public lobbying spending figures we see are actually much higher, given the creative operations of lobbyists through different complex entities, etc.

A stablecoin bank would need to have a clear regulatory strategy from the outset, and enough financial backing to withstand lobbying pressure from traditional financial institutions. However, the potential rewards are huge. A successful challenger could bring the integrated financial model that is missing in the United States, built entirely on stablecoins.

If executed properly, this will be the biggest change in the way consumers, merchants, and banks interact - something we have not seen since the advent of the internet. Although this is a (literally) trillion-dollar market and completely technically feasible, stablecoin banks are unfortunately dependent on the CCCA, which has a very small chance of passing. Traditional institutions will fight it with all their might, because the law of nature is that the old always opposes the new. But the new will come - at least in some form.