This article will analyze the current status and challenges of the U Card industry from an industrial perspective, exploring its breakthrough path in the payment field.
Written by: Mankun
In the Web3 era, USDT bank cards (bank cards for stablecoin payments) are emerging virtual payment tools that attempt to bridge the gap between traditional finance and the decentralized world, providing users with a more convenient and flexible payment experience.
Due to the legal and regulatory framework not fully adapting to the integration of this emerging technology with traditional systems, U Card companies often find themselves in a dilemma. Compliance hangs over the industry like a sword of Damocles, poised to strike at any moment due to policy adjustments or regulatory actions. Companies must not only tackle the challenges of technological innovation but also remain vigilant against potential legal risks, as a single misstep could lead to severe consequences such as fines, lawsuits, or even business interruptions.
This article will analyze the current status and challenges of the U Card industry from an industrial perspective, exploring its breakthrough path in the payment field.
U Card Development Dilemma
The U Card industry currently faces the dilemma of unclear compliance. This industry involves both the rapidly evolving digital asset sector and a close intertwining with traditional finance, creating a complex regulatory gray area.
Currently, most compliance researchers in the industry start from policy perspectives, studying the compliance actions required in various chains of U Card payments. However, the U Card industry also faces other issues: high operational costs, fierce market competition, and profitability challenges, all of which test the survival wisdom of U Card issuers.
From an industrial perspective, perhaps compliance is not the top priority for entrepreneurs at this moment?
U Card Challenges
1. Challenges in Issuance Channels
First and foremost, to issue a U Card, a bank card is fundamentally required, which necessitates specific qualifications from issuing institutions, typically meaning that companies must adhere to a series of strict financial regulatory requirements and financial institution licenses. However, most U Card companies, such as the recently spotlighted Infini, do not possess the qualifications to directly issue bank cards. Therefore, these companies often choose to collaborate with banks or payment gateways that have obtained the necessary qualifications, utilizing these institutions' APIs or infrastructure to provide services.
2. Challenges in Channel Costs
Since U Card businesses need to rely on others' channels to complete the entire business chain, they must pay channel costs. In addition to the need for the aforementioned bank card issuers to profit, the payment chain includes various other channel fees, such as API access services needing to generate revenue, currency exchange fees, and international settlement channels like MasterCard/Visa also needing to profit. Payment platforms like Apple, PayPal, Alipay, and WeChat also need to make money.
When a user swipes a credit card for 100, the merchant using international payment channels only receives 97, which is significantly higher than domestic UnionPay channels. Some fees must be borne by the merchant, leading to fewer payment scenarios that support international payment channels.
Profitability Model Challenges
1. Fee Rate Challenges
A significant part of the U Card profitability model is renewal fees. When choosing U Card payments, the U Card issuer charges relevant fees, which include payment processing fees, cross-border fees, and exchange costs. For users, the most concerning aspect is the exchange rate between stablecoins and the payment base currency, as well as the rate difference compared to actual foreign exchange rates.
Generally, the comprehensive fee rate is around 1.5% or higher, depending on the scale and bargaining power of the U Card issuer. For example, if the USD to RMB exchange rate is 7.20 RMB/USD on a given day, and you spend 100 RMB, the U Card will deduct the equivalent of 14.10 USD or more in stablecoins, with an exchange rate of 7.092 RMB/USD.
A few U Cards may offer more favorable comprehensive rates for a short period, such as through promotional activities that reduce the comprehensive rate to 1% or below, but these promotions can only last for a limited time, primarily aimed at customer acquisition and cannot maintain low rates for long.
Why can't the rates be lowered? Because operational costs are involved; prolonged low fees can lead to unsustainable projects. During the initial promotion phase, subsidies can attract users, but over time, who can guarantee continuous investment?
Thus, another significant expense for U Card issuers is advertising and promotion, which increases new customers while expanding business scale and enhancing bargaining power with channels. More importantly, it strengthens market visibility and influence, securing new financing for further expansion.
2. Fee Challenges
Given the high operational costs, can fees be increased to raise the comprehensive rate to 2% or higher?
The answer is no.
First, the U Card industry is highly competitive, and user loyalty is low; a slight misstep can lead to a loss of industry position.
Secondly, U Card's competitors include exchanges and OTC cash-out options. If fees are too high, the convenience and fund risk isolation advantages of U Cards become too expensive for users, who may prefer the cash-out methods offered by exchanges or OTC. Additionally, U Cards are generally only used for small transactions domestically, while large transactions through Alipay or WeChat incur an additional 3% fee.
3. Funding Pool Interest Rate Challenges
Some may argue that U Card issuers have funding pools, often publicly announcing the TVL (Total Value Locked) and asset ratios of their funding pools on their websites, sometimes amounting to hundreds of thousands or millions of dollars. Isn't buying government bonds or engaging in DeFi a significant source of income?
This perspective contains a misunderstanding. Firstly, most U Card issuers lack channels for interest rate arbitrage. This is similar to exchanges that have inherent advantages; for example, Bybit and Bitget issue U Cards and already have lending operations, allowing them to connect their U Card funding pools.
However, other U Cards lack their own lending channels and must rely on others' wealth management channels. Are those channels sufficiently secure? Can they provide full and rapid redemption? What is the liquidity like? Can they withstand sudden large withdrawals?
If there are large withdrawals, and you set withdrawal limits for users, in a highly distrustful Web3 community, it won't be long before rumors of funding issues spread, leading to a death spiral of mass withdrawals.
4. Funding Pool Depth Challenges
Simply put, the funding pool is shallow. U Card users typically do not deposit large amounts of money into their U Cards; instead, they tend to use small amounts as needed, reloading only after spending.
After all, the Web3 industry frequently experiences security incidents, and users are still wary of exchanges; who can trust a small U Card issuer?
Thus, despite the high TVL of U Cards, the actual funds deposited are low, limiting the amount available for high-yield investments or arbitrage. A significant portion of the funds can only be used for low-yield liquid investments.
The operational model of Tether, the issuer of USDT, is enviable; USDT issuance typically sees more inflows and fewer redemptions, allowing for investments in U.S. Treasuries, gold, or high-yield financial products.
Established U Card issuers, such as Crypto.com's U Card, encourage users to lock up their assets. The more assets locked, the more uses and lower fees the card can support, along with more staking rewards. Only with sufficient deposited funds can U Card issuers have more operational flexibility.
Compliance Challenges
1. Compliance and Self-Protection
As U Card issuers, compliance is necessary regardless of need, including code audits, project audits, fund audits, financial report audits, and custody audits, all of which are unavoidable operational costs.
Additionally, funding pools require third-party custody, and the strength and compliance of the custodian must also be audited and background-checked, determining whether guarantees are needed based on the cooperation situation. If large institutions are chosen for custody, the costs may be too high for startup U Card companies and average-sized funding pools to bear. If smaller asset management firms are chosen, there are concerns about their security and compliance.
If unexpected events lead to financial losses, the first target of user complaints will be the U Card issuer, not the custodian. The U Card issuer will then have to engage in lengthy and arduous legal battles with the custodian.
2. Compliance and Regulation
In the current U Card industry, compliance regulation may not be a priority for practitioners.
Firstly, the industry is still in its early stages, and relevant regulatory policies and laws remain quite vague.
Secondly, regulatory enforcement power over U Card issuers is limited. The card issuance qualifications for credit cards are borrowed, and the U Card issuer's entity is located offshore, with funds held in third-party custody, making it difficult to impose penalties on U Card issuers from a legal and enforcement perspective.
Moreover, U Card issuance follows formal issuance channels + formal international payment channels + formal consumption scenarios. If legal disputes arise from these channels, it is not entirely the responsibility of the U Card issuer. If users engage in illegal cash-outs or misuse, it violates foreign exchange management regulations, false trading, or other illegal matters, primarily implicating the cardholder, not the issuer.
The most severe penalty for U Card issuers from regulators may be the suspension of the card BIN (Bank Identification Number), leading to user attrition. This could potentially cause a U Card project to collapse, forcing it to learn from the experience and start anew.
3. Compliance and Anti-Money Laundering
For U Card issuers, the greatest responsibility lies in anti-money laundering (AML) compliance. However, the AML processes in the Web3 ecosystem are already quite mature, as seen in major exchanges like Coinbase, Binance, and OKX, which utilize on-chain data, collaborate with AML institutions, and employ risk control models for stringent AML enforcement.
While there are relatively mature solutions for AML work, the costs are not low; a supervisory mechanism and proprietary risk control model must be established, requiring collaboration with relevant institutions and hiring appropriate talent, all of which incur unavoidable costs. Moreover, anti-money laundering is a top priority in any country.
4. Potential Compliance Risks
The term "potential" is used because, according to the current state of the U Card industry, the asset protection and anti-money laundering compliance mentioned above pose the greatest risks, while the importance of other compliance risks is not particularly high.
However, if U Card issuers wish to connect the upstream and downstream industry chains, they must bear additional operational risks. For instance, increasing consumption scenarios, supporting fiat currency inflows and outflows, expanding Web2 users, directly connecting e-commerce payments, and establishing "Yu'ebao" (a money market fund). These operations cannot avoid AML/KYC, securities laws, foreign exchange management regulations, investor protection laws, payment channel construction, and marketing channel construction. The closer the integration with real-world scenarios, the more compliance is needed; the more compliant, the more the development model resembles Web2; the more it resembles Web2, the more it enters a red ocean of competition.
Web3 practitioners looking to compete with Web2 companies must readjust to the Web2 system, redistributing interests, rights, and responsibilities. The larger and deeper the business grows, the heavier the compliance shackles become, and the greater the social responsibility.
With great power comes great responsibility.
The Future of U Cards
What should U Card companies do at this stage?
The first approach is to explore and move forward. The U Card industry is still in the exploratory phase regarding operational models, profitability models, and resource allocation. Pioneers are carving out their channel models, which is a high-risk investment.
The second approach is to focus on what you are good at, such as channel construction, community promotion, compliance risk control, fund custody, financial management pairing, fund clearing, and investment research background checks. Become a quality supplier in the industrial chain and leverage your strengths. Compared to the first approach, this one offers stable income with lower risks.
As a branch of the Web3 industry, the U Card industry also benefits from the overall development of the Web3 sector, which is still in a phase of rapid growth. It needs to wait for the entire industry to gradually mature and be accepted by the public.
Endure until the stablecoin legislation in the U.S. is passed, endure until merchants can directly accept stablecoins, endure until consumers can seamlessly use Web3 wallets for payments, endure until Web2 giants rush in, and endure until vast markets open up to Web3.
By that time, the companies that are still alive will have a first-mover advantage and become industry leaders.
So, is compliance still necessary? Yes, it is essential, but survival comes first. "Better to ask for forgiveness than permission."
Compliance should align with industry development and the scale of the enterprise. It is necessary to comply, but it is also important to balance business development needs with the costs and scale of compliance investment.
The bottom line of the industry is risk control; risk control is the core of the entire U Card industry.
The core logic of U Card's business from start to finish is the transfer of money, and there needs to be 100% vigilance regarding money. Therefore, risk control is of utmost importance: how to manage money well, whether the code has backdoors, whether partners can be trusted, whether the custody is reliable, and whether employees will receive their salaries next month.
In short: risk control, risk control, and more risk control.
Summary
The U Card industry is at a critical stage of exploration and growth, and the balance between innovation and compliance will become a decisive factor in its future development. Companies need to flexibly adapt to market changes and optimize operational strategies while ensuring fund security and strengthening risk control to address current challenges.
With the continuous maturation of Web3 technology and the popularization of stablecoin payments, U Cards are expected to become an important bridge between the digital economy and the real world in the future, leading new trends in the payment field.
As the industry matures, compliance will become a cornerstone. Currently, the primary task for U Card companies is to move forward steadily, awaiting the dawn of a more complete industry ecosystem and clearer regulatory environment.
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