Author: @bridge__harris

Translation: Baihua Blockchain

For the $1 trillion "duopoly" of Visa and Mastercard, stablecoins pose a challenge. Unless these two companies can adapt in a timely manner, they will face increasing pressure due to regulatory changes in cryptocurrency and the fierce rise of emerging competitors. If the Credit Card Competition Act (CCCA) passes, it will require large banks to provide at least one additional network option for merchants, beyond the current choices of Visa and Mastercard, to process credit card transactions. This would weaken the pricing power of Visa and Mastercard, and importantly, stablecoin networks might seize the opportunity to compete with them through lower fees. However, it is worth noting that the likelihood of the CCCA passing is very low—only a 3% chance in the Senate and 9% in the House—so while it would be beneficial if passed, it currently seems unlikely.

Currently, Visa and Mastercard charge merchants swipe fees of up to 2-3%, which is typically the second-largest cost for merchants after payroll. Unfortunately, small merchants are particularly hard hit by these high fees. Large corporations like Walmart have enough negotiating power to lower transaction costs, securing better rates than small merchants, who are tightly locked into Visa and Mastercard. This is also one reason why Visa and Mastercard have profit margins exceeding 50%: small merchants have no choice but to rely on Visa and Mastercard, as they control 80% of the credit card market. In short, merchants cannot afford the additional costs of breaking free from these two companies—this is what is referred to as a "typical duopoly" (as Senator Josh Hawley puts it).

A stablecoin network could reduce swipe fees to nearly zero. Merchants hate swipe fees—this is entirely reasonable—if they could choose a low-fee network that does not limit their market size, they would switch without hesitation.

The desire for merchants to avoid card processing fees is not a new concept; the key issue is how to incentivize consumers to change their payment methods: "How does the first person to use a new currency succeed, and what about the millionth user?" (Peter Thiel) The gradual popularity of Account-to-Account (A2A) payments 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 sectors of the U.S. will exceed the costs of credit card payments. Better regulation, particularly the introduction of the Consumer Financial Protection Bureau (CFPB) Section 1033, which clearly supports government backing of open banking, makes it easier for retailers to offer A2A transactions, helping them avoid card processing fees while providing consumers with more payment options.

Moreover, the user experience of payment banks may ultimately be more consumer-friendly—similar to the ShopPay experience. Walmart has already launched payment bank products, and both large and small merchants are beginning to follow suit. To persuade consumers to choose this payment method, Walmart has added instant transfer features, allowing 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 avoid card processing fees." — Sophia Goldberg, co-founder of Ansa.

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 actually work? From a functional perspective, do consumers need a differently branded card, or can they continue using their regular Visa/Mastercard cards while merchants have the option to process through other networks due to mandatory regulations? The CCCA does not clarify this, and we can only observe how the compatibility of these new networks with cards will ultimately develop. Mass adoption requires meeting one of the following two conditions: 1) providing customers with a strong incentive to switch cards (active adoption); or 2) a backend transition where customers continue using existing cards, but the actual processing occurs on the stablecoin network (passive adoption).

One way to align incentives is to launch entirely new stablecoin banks: account holders can enjoy discounts at participating merchants like Amazon and Walmart, who would be happy to offer rewards as they can avoid the 2-3% swipe fees of Visa/Mastercard.

Today, customer spending is increasingly concentrated on a few major platforms, so as long as the following conditions are met: 1) the rewards customers receive are sufficient to offset the hassle of switching cards, and 2) the rewards offered by merchants are lower than the 2% transaction fees they pay to Visa/Mastercard, stablecoin banks can achieve a win-win situation.

Customers can still earn returns on deposits, as stablecoins operate in the background, and credit issuance can also be done using stablecoins. But from a user experience perspective, customers are still just swiping their cards. By then, banks can be completely bypassed: when customers spend at retailers, they are essentially transferring from one wallet to another.

Stablecoin banks can make money through processing fees (which are clearly lower than current fees), deposit interest (revenue sharing), and fees charged when users convert stablecoins to fiat currency. Some believe that stablecoin issuers are essentially shadow banks, but for mainstream adoption, a new stablecoin bank that collaborates top-down with merchants may be the most effective option. If the incentives are in place, customers will be eager to join.

Brazil's Nubank serves as a reference, having emerged in a market where banks still dominate and are notorious for charging excessive fees. Nubank successfully attracted a large number of consumers by launching a mobile-first, fully functional product and significantly reducing fees, while traditional banks in Brazil often fail to provide basic financial services in a convenient manner. In contrast, while traditional banks in the U.S. are not perfect, their online and mobile functionalities are sufficient to make most customers reluctant to switch easily. Nubank's success stems from its excellent user experience, and this model is theoretically replicable in the U.S. However, a successful currency platform is not just about having a great interface; it must also allow users to easily transfer between deposit accounts, stablecoins, and cryptocurrencies, and even access "buy now, pay later" (BNPL) or other credit products—without needing to switch to other platforms. This is the key to Nubank's success and a gap in the U.S. market.

However, regulatory issues in the U.S. cannot be ignored: challenger banks looking to replicate the Nubank model (and use stablecoins) will face overlapping regulatory requirements from multiple agencies, including the OCC, the Federal Reserve, and state governments. The feasibility of stablecoin banks ultimately depends on whether a banking license is required, what money transfer licenses (MTL) are needed, and other related regulatory issues. The last company to obtain a national banking license in the U.S. was Sofi (through the acquisition of Golden Pacific Bank), which received the license nearly three years ago in January 2022. Stablecoin banks might consider some innovative paths, such as partnering with existing banks or trust companies insured by the Federal Deposit Insurance Corporation (FDIC), rather than directly pursuing a national license. However, without the CCCA, any new bank stablecoin payment network—even if licensed—will be limited to non-merchant payments (i.e., B2B and peer-to-peer payments).

The bipartisan stablecoin bill recently proposed by Lummis and Gillibrand helps to advance this process. The bill's explicit goal is "to create a clear regulatory framework for payment stablecoins that protects consumers, supports innovation, and promotes the dominance of the dollar." While the bill is undoubtedly an important step in the right direction, its specificity is far less than that of the CCCA, which provides a more detailed action plan for enforcing compliance among banks.

One potential obstacle to the success of stablecoin banks is the immense influence of the banking industry in Washington, which is one of the most powerful lobbying forces in the U.S. Therefore, pushing the necessary legislation through Congress will be a tough battle. In 2023, lobbying expenditures for banks, large and small, totaled about $85 million. It is important to note that considering the means lobbyists use, such as complex entities and methods, the actual figures for lobbying expenditures may be much higher.

The establishment of stablecoin banks first requires a clear regulatory strategy and sufficient funding support to counter the strong lobbying pressure from existing banks. Nevertheless, the potential rewards are enormous. A successful challenger bank could fill the missing comprehensive financial model in the U.S. market, entirely built on stablecoins. If executed properly, this would be the most significant transformation in how consumers, merchants, and banks interact since the internet.

Even though this is a trillion-dollar potential market and technically entirely feasible, stablecoin banks still rely on the CCCA, which currently seems difficult to pass. Existing banking powers will fight back with all their might, as naturally, the old always opposes the new. But the new will eventually come—at least in some form.

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