GuShiio.com This article analyzes how stablecoins challenge the market monopoly of Visa and Mastercard through low fees, and discusses the challenges and potential of their development under pressure from regulation and the banking industry.
Author: @bridge__harris
Compilation: Vernacular blockchain
For the US$1 trillion “duopoly” of Visa and Mastercard, stablecoins have become a challenge. Unless the two companies 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, in addition to Visa and Mastercard, which merchants now have only options for processing credit card transactions. This would weaken the pricing power of Visa and Mastercard, and most importantly, the stablecoin network could take this opportunity to compete with them through lower fees. However, it should be noted that the probability of passing the Credit Card Competition Act is very slim-the probability of passing the Credit Card Competition Act is only 3% in the Senate and 9% in the House, so although it will be beneficial once passed, it does not seem likely at present.
Currently, Visa and Mastercard charge merchants as high as 2-3%, which is usually the second largest cost for merchants after wages. Unfortunately, small businesses are particularly affected by these high fees. Big companies like Wal-Mart have enough negotiating power to reduce transaction fees and obtain better rates than small merchants, who are locked in by Visa and Mastercard. This is one reason why Visa and Mastercard profit margins exceed 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 the additional costs of getting rid of the two companies-what is called a “classic duopoly”(in Senator Josh Hawley’s words).
A stablecoin network can reduce card fees to near zero. Merchants hate credit card fees-which is perfectly reasonable-and if they could choose a low-cost network and wouldn’t limit the size of their market, they wouldn’t hesitate to switch.
The concept that merchants want to avoid card processing fees is not a new one. The key question is how to encourage consumers to change payment methods: “Why is the first person to use the new currency successful, but what about the millionth user?” (Peter Thiel) The growing popularity of payment banks (A2A) as a payment method has proven that consumers are willing to change their payment habits under the right conditions. Fred Wilson of Union Square Ventures even predicts that by 2025, direct interbank payments in certain areas of the United States will exceed credit card payments. Better regulation, especially the introduction of Section 1033 of the Consumer Financial Protection Bureau (CFPB), has made it easier for retailers to offer A2A transactions by clarifying government support for open banking, which not only helps them avoid card processing fees, but also provides consumers with more payment options.
In addition, the user experience of payment banks may ultimately be more consumer-friendly-similar to ShopPay’s experience. Wal-Mart has launched payment banking products, and both large and small merchants have begun to follow suit. In order to persuade consumers to choose this payment method, Wal-Mart has added an instant transfer function, which allows consumers to avoid multiple pending transactions and thus avoid overdrafts.
“New technology makes A2A payments more feasible for small merchants, providing a viable alternative to avoiding card processing costs.”– Ansa co-founder Sophia Goldberg.
The demand for cheaper, faster, and more efficient payment methods (i.e. stablecoins) is clearly strong. So the question arises: How does the transition to a stablecoin network work? From a functional perspective, do consumers need a card with a different brand, or can they continue to use ordinary Visa/Mastercard cards while merchants choose to process it through other networks through mandatory regulation? This is not clearly stated in the Credit Card Competition Act, so we can only see how card compatibility between these new networks and these new networks will eventually develop. Large-scale adoption requires meeting one of the following two conditions: 1) providing customers with strong incentives to switch cards (proactive adoption); or 2) background transition, where customers continue to use existing cards, but the actual processing takes place on the stablecoin network (passive adoption).
One way to align incentives is to launch a new stablecoin bank: Account holders can enjoy discounts at participating merchants such as Amazon and Wal-Mart, who will be happy to offer rewards because they can avoid Visa/Mastercard 2-3% card fees.
Nowadays, customers ‘consumption is increasingly concentrated on a few major platforms, so stablecoin banks can achieve a win-win situation as long as the following conditions are met: 1) the rewards customers receive are enough to make up for the trouble of switching cards, and 2) the rewards offered by merchants are less than the 2% transaction value they pay for Visa/Mastercard.
Customers can still earn income on deposits because stablecoins operate in the background and credit issuance itself can also be carried out in stablecoins. But from a user experience perspective, customers are still just swiping their cards. By then, banks can be completely bypassed: when customers spend money at retailers, they are effectively transferring money from one wallet to another.
stablecoin banks can make money through processing fees (obviously lower than current fees), interest on deposits (revenue sharing), and fees charged by users when they convert stablecoins to fiat currencies. Some people believe that the issuer of stablecoins is actually a shadow bank, 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.
Consider Brazil’s Nubank, which stands out in a market where banks still dominate and are notorious for charging excessive fees. Nubank has successfully attracted a large number of consumers by launching a full-featured mobile product and significantly reducing fees. Traditional banks in Brazil often fail to provide basic financial services in a convenient way. In contrast, traditional banks in the United States, although imperfect, have enough online and mobile capabilities to make most customers reluctant to switch easily. Nubank has achieved success with its excellent user experience, a model that can theoretically be replicated in the United States. But a successful currency platform is not just a great interface; it must also allow users to easily transfer money between deposit accounts, stablecoins, cryptocurrencies, and even access “buy first pay later”(BNPL) or other credit products-without having to jump to another platform. This is the key to Nubank’s success and a gap in the U.S. market.
However, 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, including the OCC, the Federal Reserve Bank, and state governments. The feasibility of a stablecoin bank ultimately depends on whether a bank license is needed, which money 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 obtained it almost three years ago in January 2022. stablecoin banks could consider innovative paths, such as working with existing banks or trust companies underwritten by the Federal Deposit Insurance Corporation (FDIC), rather than directly pursuing a national license. However, without the Credit Card Competition Act (CCCA), any new bank stablecoin payment networks-even if licensed-would be limited to non-merchant payments (i.e., B2B and peer-to-peer payments).
The bipartisan stablecoin bill recently proposed by Lummis and Gillibrand will help advance this process. The bill’s explicit goal is to “create a clear regulatory framework for payments in stablecoins that both protect consumers, support innovation, and promote U.S. 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 enforcing bank compliance.
A potential obstacle to the success of stablecoin banks is the huge influence of the banking industry 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 spending by banks, large and small, will total approximately US$85 million. It should be noted that public lobbying spending figures may actually be much higher, considering the complex entities and methods used by lobbyists.
The establishment of a stablecoin bank first requires a clear regulatory strategy and sufficient financial support to cope with the strong lobbying pressure from existing banks. Still, the potential rewards are huge. A successful challenger bank could fill the missing comprehensive financial model in the U.S. market and be built entirely on stablecoins. If implemented properly, this will be the biggest change in the way consumers, merchants and banks interact since the Internet.
Even if this is a trillion-dollar market and is technically fully feasible, stablecoin banks still rely on the CCCA, and the bill currently looks difficult to pass. Existing banking forces will fight back with all their might, because naturally, the old always opposes the new. But something new will come-at least in some form.
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