Author: Sam Broner, a16z crypto investment partner; Translator: 0xjs@黄金财经
Today's payments landscape is dominated by gatekeepers who charge high fees, undercut profitability for every business they touch, and justify those fees in the name of ubiquity and convenience — while they stifle competition and limit the creativity of builders.
Stablecoins can do better.
Stablecoins offer lower fees, more competition among payment providers, and wider accessibility. Because stablecoins reduce transaction costs to almost zero, they free businesses from the friction of existing alternatives. Adoption of stablecoins will start with businesses most impacted by current payment methods, a process that will disrupt the payments industry.
Stablecoins are already the cheapest way to transfer dollars. Last month, 28.5 million unique stablecoin users sent more than 600 million transactions. Stablecoin users are found in nearly every country, and they use stablecoins because they offer a safe, cheap, and inflation-resistant way to save and spend. Aside from cash and gold, stablecoins are the only widely adopted payment method that can operate without gatekeepers such as banks, payment networks, or central banks. At the same time, stablecoins are permissionless, programmable, scalable, and integrable—anyone can help build a stablecoin payment platform on stablecoin payment rails. This disruption may take time, but it may happen faster than many expect. Businesses such as restaurants, retailers, enterprises, and payment processors will benefit the most from stablecoin platforms, with significantly higher profit margins. This demand will drive adoption, and as stablecoin adoption continues to increase, the other benefits of stablecoins—permissionless composability and improved programmability—will bring more benefits to on-chain users, businesses, and products. I’ll share more of the whys and hows below, starting with some background on the payments industry.
Payment Tracks
• Payment Channels: The technology, rules, and networks that process transactions
• Payment Processors: Operators on payment tracks that facilitate transactions
• Payment Service Providers: Entities that provide access to payment systems to end users or other systems
• Payment Solutions: Products provided by payment service providers
• Payment Platforms: A set of related payment solutions covering providers, processors, and tracks
Payment Industry Background
The size of the payments industry cannot be underestimated. In 2023, the global payments industry processed 3.4 trillion transactions worth $1.8 trillion and generated $2.4 trillion in revenue. In the United States alone, credit card payments amounted to $5.6 trillion and debit card payments amounted to $4.4 trillion.
Despite the industry’s ubiquity and scale, payment solutions remain expensive and complex, and payment apps often shield consumers from the experience. For example, while peer-to-peer payment app Venmo may look simple on the front end, on the back end, the product hides a labyrinth of bank integrations, debit card vulnerabilities, and countless compliance obligations. Payment solutions are often interdependent, adding to the complexity, and people still use a variety of payment methods: cash, debit cards, credit cards, peer-to-peer payment apps, ACH (Automated Clearing House), checks, and more.
The four main metrics for payment products are timeliness, cost, reliability, and convenience.
Consumers prioritize questions like “How much will I pay?” and merchants ask “Will I get paid?” But in reality, all four metrics are essential for both parties.
Ever since businesses had to look for fraudulent credit cards in physical ledgers, waves of innovation have continuously improved the payment experience. Each wave of innovation has brought faster, more reliable, more convenient and cheaper payment methods, which in turn has led to an increase in transaction volume and consumption.
But many customers still do not enjoy modern services, or are underserved. For merchants, credit cards are expensive, directly eroding their profits. Despite growing adoption of real-time payments (RTP), U.S. bank transfers are still too slow, taking days. And peer-to-peer applications are region- and network-specific, making transfers between ecosystems slow, costly, and complex.
While businesses and consumers have come to expect more sophisticated features from payment platforms, not all users benefit from existing solutions. In fact, most users pay too high fees and don’t use all bundled payment products. But they accept the current situation.
Where Stablecoins Fit In
The key to stablecoins disrupting the industry is that existing payment solutions fail (with high costs, low availability, or high friction), and that bundled products for payment solutions (including identity, lending, compliance, fraud protection, and bank integrations) are least necessary.
Take remittances, for example. It was born out of desperation. Many remittance users are underbanked and use highly fragmented banking services. As a result, these users see little value in native integrations between traditional payment and banking services. Stablecoin payments offer instant finality, low costs, and no middlemen, which are structural advantages for any payments user or builder. After all, with stablecoins, it costs less than $0.01 to send $200 from the U.S. to Colombia, but $12.13 over traditional corridors. (Remittance users need to send money home regardless of transaction costs, but will benefit greatly from lower fees.) International commercial payments, especially for small businesses in emerging markets, also face high fees, slow processing times, and low bank support. For example, a payment between a Mexican apparel manufacturer and a Vietnamese textile manufacturer will involve four or more intermediaries—local bank, foreign exchange, correspondent bank, correspondent bank, foreign exchange, local bank. Each intermediary charges a percentage and there is the risk of the middleman going bankrupt. Fortunately, these transactions occur between partners with a regular relationship. With stablecoins, Mexican payers and Vietnamese payees can experiment and eliminate slow, bureaucratic, and expensive intermediaries. They may have to work hard to find local channels and workflows, but in the end they can enjoy faster, cheaper transactions and more control over the payment process.
Small-value transactions (especially low-fraud face-to-face transactions, such as those conducted at restaurants, coffee shops or corner stores) are also a promising opportunity. With low profit margins, these businesses are cost-sensitive, so the 15-cent transaction fee charged by payment solutions has a big impact on their profitability.
For every $2 a customer spends on a cup of coffee, only $1.70 to $1.80 goes to the coffee shop, and the remaining nearly 15% goes to the credit card company—just for facilitating the transaction. But credit cards are here simply for convenience: neither the consumer nor the store needs additional features to justify the charges. Consumers don’t need fraud protection (they’re just getting a cup of coffee) or loans (the coffee is only $2). And coffee shops have limited compliance and bank integration needs (they typically use comprehensive restaurant management software or none at all). So if there’s a cheap, reliable alternative, these businesses will take advantage of it.
Cheaper Payments Improve Profitability
Current payment system transaction fees directly hurt the bottom line of many businesses. Reducing these fees would bring huge profitability benefits. The first shoe has already dropped: Stripe announced that they will charge 1.5% on stablecoin payments, 30% less than what they charge for credit card payments. To support this effort, Stripe announced the acquisition of Bridge.xyz for approximately $1 billion.
Wider adoption of stablecoins will significantly improve profitability for many businesses—not just small businesses like coffee shops or restaurants. Let’s look at the fiscal 2024 financials of three public companies to get a rough idea of the impact of reducing payment processing rates to 0.1%. (For convenience, this assessment assumes that businesses pay a blended payment processor cost of 1.6% and have minimal deposit and withdrawal costs. More on this below.)
Walmart, with $648 billion in annual revenue, could pay $10 billion in credit card fees and make $15.5 billion in profit. Do the math: factor in the elimination of payment fees and Walmart's profitability, so its valuation (controlling for all other factors) could increase by more than 60% just through a cheaper payment solution
Chipotle is a fast-growing fast-food restaurant with $9.8 billion in annual revenue. It makes $1.2 billion in profit each year, of which it pays $148 million in credit card fees. Chipotle's profitability could increase by 12% just by reducing fees
a staggering number not available elsewhere on its income statement.
National grocer Krogers has the lowest margins, and therefore makes the most money. Surprisingly, Krogers' net income and payment costs are probably nearly equal. Like many grocers, its profit margin is less than 2%, less than the fees it charges businesses to process credit card payments. With stablecoin payments, Krogers could double its profits.
How will Walmart, Chipotle, and Krogers reduce transaction fees with stablecoins? First, consider an idealized scenario: consumers will not accept stablecoins all at once, and there will still be considerable fees before stablecoins gain enough acceptance, especially when starting and stopping use. Second, both retailers and payment processors oppose high-fee payment solutions. Payment processors are also low-margin businesses that give up most of their profits to credit card networks and issuing banks. When payment processors process transactions, most of their fees are passed on to payment networks. So when Stripe processes an online retail checkout process, they take a 2.9% cut of the total transaction and a $0.30 fee, but they pay more than 70% in fees to Visa and the issuing banks. As more payment processors like Block-formerly Square, Fiserv, Stripe, and Toast adopt stablecoins to improve their profit margins, they will make stablecoins more accessible to more businesses.
Stablecoins have low fees and don’t require network gatekeeper fees. This means payment processors earn much higher margins on revenue from stablecoin transactions. Higher margins could lead payment processors to support and encourage more businesses and use cases to use stablecoins. But as payment processors begin to adopt stablecoins, expect stablecoin payment fees to compress over time: Stripe’s 1.5% fee is likely to decline.
Next Steps: Mass Consumer Adoption
Today, stablecoins are a new permissionless way to send and store money. Entrepreneurs are already building solutions to transform stablecoin rails into stablecoin platforms. As with previous innovations, adoption will occur gradually, starting at the edge of consumer demand, then forward-thinking businesses, until the platform matures enough to meet the needs of everyday users and cautious businesses. Three trends will drive more mainstream enterprise adoption of stablecoins.
1. Increased back-office integration through stablecoin aggregation
Stablecoin aggregation (the ability to monitor, direct, and aggregate stablecoins) will soon be integrated into payment processors such as Stripe. These aggregation products enable businesses to process payments at a much lower cost than current mechanisms without major process or engineering changes. Consumers may unknowingly end up with cheaper products because invoices, payrolls, and subscriptions have lower structural costs by default.
Many of these stablecoin aggregation businesses have begun to attract customers who want instant settlement, low cost, and widely available business-to-business or business-to-consumer payments. By integrating stablecoins in the background, businesses will benefit from the advantages of stablecoins — without interrupting or reducing the quality of service that users expect from payment providers, while the adoption rate of stablecoins will also increase.
2. Improve the enterprise entry process and increase shared incentives
The stablecoin business is becoming more and more mature in bringing end users into the chain through shared incentives and improved entry solutions.
Entry is becoming cheaper, faster, and more ubiquitous, making it easier for users to get started with cryptocurrencies. At the same time, more and more consumer applications support cryptocurrencies, allowing users to benefit from the expanding stablecoin ecosystem — without adopting new applications or user behaviors. Popular applications such as Venmo, ApplePay, Paypal, CashApp, Nubank, and Revolut allow their customers to use stablecoins.
Moreover, companies have more incentives to use these channels to integrate stablecoins and deposit funds in stablecoins. Fiat-backed stablecoin issuers such as Circle, Paypal, and Tether are sharing profits with ordinary businesses, just as Visa shares profits with United and Chase for signing up credit card users. Such collaborations and integrations benefit stablecoin issuers because they can create larger pools of assets to capture yields. But they can also benefit businesses that successfully convert users from credit cards to stablecoins. These businesses can now earn part of the revenue generated by the funds their products generate, a business model that is usually only available to banks, fintech companies, and gift card issuers that make money from user floating.
3. Increase regulatory clarity and the availability of compliance solutions
When businesses are confident in the regulatory environment, they are more likely to adopt stablecoins. While we have not yet seen comprehensive global regulation of stablecoins, many jurisdictions have issued rules and guidance on stablecoins, allowing entrepreneurs to start the hard work of building compliant, user-friendly businesses. For example, the European Union's Markets in Crypto-Assets Regulation (MiCA) sets rules for stablecoin issuers, including prudential and behavioral requirements. Since the stablecoin provisions came into effect earlier this year, the regulation has significantly changed the European stablecoin market.
Despite the current lack of a stablecoin framework in the United States, policymakers from both parties are increasingly aware of the need to develop effective stablecoin legislation. Such regulation needs to ensure that issuers fully back their tokens with quality assets, have their reserves audited by a third party, and take comprehensive measures to combat illicit financial activity. At the same time, legislation needs to preserve the ability of creators to create decentralized stablecoins, reduce user risk by eliminating intermediaries, and leverage the benefits of decentralization.
These policy efforts will enable companies across industries to consider switching from traditional payment methods to stablecoin infrastructure. While compliance solutions are not attractive, each person who adopts stablecoins helps prove to incumbents that stablecoins are a reliable, secure, regulated, and improved solution to traditional payment problems.
As stablecoins become more popular, the network effects of the platform will become stronger and stronger. While it may be several years before stablecoins can be used at the point of sale or as a replacement for bank accounts, as the number of stablecoin users grows, stablecoin-centric solutions will become more mainstream and more attractive to consumers, businesses, and entrepreneurs.
Trend: Why Stablecoins Will Continue to Improve
As adoption progresses, the products themselves will continue to improve. The web3 community is celebrating stablecoin adoption, and for good reason: Stablecoins are climbing the value innovation S-curve thanks to years of investment in infrastructure and on-chain applications. As infrastructure improves, on-chain applications become more abundant, and on-chain networks grow, stablecoins will become more attractive to users. This will happen in two ways.
First, the painstaking engineering of crypto infrastructure has made stablecoin payments of less than 1 cent possible. Future investments will continue to make transactions cheaper and faster. At the same time, stablecoin aggregation and an improved onboarding experience are only possible through better wallets, bridges, deposits and withdrawals, developer experience, and AMMs.
This technological foundation provides entrepreneurs with increasing incentives to build stablecoins, which provide better developer experience, rich ecosystems, wide applications, and permissionless composability of on-chain currencies.
Second, stablecoins unlock new user scenarios through the permissionless composability of on-chain currencies. Other payment platforms have gatekeepers that force entrepreneurs to work with extraction networks, such as costly intermediaries in credit card transactions or international payments. But stablecoins are self-custodial and programmable, lowering the threshold for creating new payment experiences and integrating value-added services. Stablecoins are also composable, allowing users to benefit from increasingly powerful on-chain applications and increasing competition. For example, stablecoin users are already benefiting from DeFi, on-chain subscriptions, and social applications.
Conclusion
Stablecoins can lead us into a world of free, scalable, and instant payments. As Stripe CEO Patrick Collison said, stablecoins are the "room temperature superconductors of financial services." They will enable businesses to pursue new opportunities that would otherwise not be able to withstand the burden of existing payment channels or the friction of traditional gatekeepers.
In the short term, stablecoins will create a structural change to financial products as payments become free and open. Existing payment companies will seek new ways to make money, either by charging a percentage of the proceeds or by selling services that are complementary to this newly commoditized platform. As these traditional businesses recognize the changing landscape, entrepreneurs will create new solutions to help these businesses take advantage of stablecoins.
In the long term, as stablecoins become more popular and the technology advances, startups will seize the opportunities presented by a world of free, frictionless, and instant payments. These startups will be founded today, unlocking new and unexpected scenarios and further democratizing the opportunities provided by the global financial system.
Acknowledgements: Special thanks to Tim Sullivan, Aiden Slavin, Eddy Lazzarin, Robert Hackett, Jay Drain, Liz Harkavy, Miles Jennings, and Scott Kominers for their thoughtful feedback and suggestions that made this article possible.
Alex
