Author: a16z Translator: Aiying艾盈
In today's payment field, intermediaries who control high fees almost dominate the market, and these fees directly erode the profitability of enterprises. These intermediaries often use "popularity" and "convenience" as justifications, but in fact, they are suppressing competition and limiting the potential of innovators.
And stablecoins can obviously bring better choices.
The advantages of stablecoins are low fees, fierce market competition and wider popularity. Because stablecoins can reduce transaction costs to almost zero, businesses can get rid of the friction and restrictions of current payment methods. As stablecoins become more popular, the industry will usher in a disruption, and the first to be affected will be those businesses that are currently the least friendly to payment methods.
In fact, stablecoins are already the most economical way to transfer US dollars. In the past month, 28.5 million stablecoin users have completed more than 600 million transactions worldwide, with users in almost all countries. The reason why stablecoins are so widely used is that they are not only a safe and low-cost payment tool, but also have inflation-resistant properties. Like cash and gold, stablecoins are the only payment method that can be widely used without relying on intermediaries such as banks, payment networks or central banks. More importantly, stablecoins have permissionless programmability, scalability and easy integration, which means that anyone can build a payment platform on the stablecoin payment track, which greatly promotes innovation.
While this change may take time, it may come faster than many people expect. Companies in industries such as catering, retail, enterprises, and payment processors will be the first to benefit from stablecoin platforms, and their profit margins will increase significantly. This market demand will drive the widespread adoption of stablecoins, and as their applications increase, the more advantages of stablecoins - including permissionless composability and greater programmability - will attract more users, companies, and new products to enter the market.
Against this backdrop, we can take a deep dive into the structure of the payment industry and how stablecoins can drive innovation and change in this industry.
Brief description of payment ecosystem participants:
Payment channel:the technology, rules and network responsible for processing transactions.
Payment processor:the entity that operates on the payment track and promotes transactions.
Payment Service Provider: An organization that provides access to payment systems for end users or other systems.
Payment Solution: The specific payment products provided by a payment service provider.
Payment Platform: A complete set of payment solutions covering payment providers, processors and payment rails.
1. Payment Industry Background: Complexity and High Cost
The payment industry is large and influential. In 2023, the global payment industry processed 34 trillion transactions with a total transaction value of $180 trillion and generated $2.4 trillion in revenue. In the United States alone, credit card payments reached $5.6 trillion and debit card payments reached $4.4 trillion.
Despite the large size and popularity of the industry, payment solutions are still expensive and complex. Although some payment applications have simplified the payment experience for consumers on the surface, the systems behind them are still complex. For example, peer-to-peer payment applications like Venmo are simple to operate on the front end, but the back end involves complex integration with the banking system, restrictions on debit cards, and a large number of compliance requirements. To complicate matters further, existing payment solutions are not unified, and users still use a variety of payment methods: cash, debit cards, credit cards, peer-to-peer payments, ACH (Automated Clearing House), checks, etc.
Four major criteria for payment products: timeliness, cost, reliability and convenience
For consumers, the most important question is: how much do I need to pay? While merchants are concerned about: can I receive the money smoothly? But the fact is that all four criteria are critical for both consumers and merchants.
From the days when merchants had to check for credit card fraud on physical ledgers to today, there have been multiple waves of innovation in the payment experience, each of which has made payments faster, more reliable, more convenient, and less expensive, which in turn has driven increases in transaction volume and spending levels.
Despite this, many consumers remain underserved by modern payment products. For merchants, credit card payments are expensive, directly squeezing their profit margins. Despite the gradual increase in the use of real-time payments (RTP), bank transfers in the United States are still slow, often taking days to complete. And peer-to-peer payment applications are limited by geography and network, making cross-network transfers expensive, slow, and complex.
Although businesses and consumers have become accustomed to payment platforms providing more and more features, not all users can really benefit from existing payment solutions. In fact, most users still need to pay too high fees for payments and do not take full advantage of all the additional features in payment products. However, they have accepted this situation by default.
Second, the industry pain points that stablecoins are solving
The value of stablecoins is to cut in where existing payment solutions fail and completely subvert the payment industry. Traditional payment systems often fail to meet demand due to high costs, low efficiency or high friction. In addition, they often bundle unnecessary additional services such as identity authentication, lending, compliance, fraud protection, and bank integration. The advantage of stablecoins is to solve these pain points.
Take cross-border remittances as an example. This field is essentially because users have no choice.Many remitters lack perfect banking services, and the decentralized banking system makes the deep integration of traditional payment and banking services meaningless. In contrast, stablecoin payments have the structural advantages of instant completion, low cost, and no middlemen.For example, using stablecoins to remit $200 from the United States to Colombia costs less than $0.01, while the cost of traditional payment methods is as high as $12.13.For remitters, no matter how high or low the handling fee is, they have to send the money home, but the low cost will undoubtedly greatly reduce their burden. 2. International Commercial Payments International payments, especially for small businesses in emerging markets, face high costs, low efficiency and insufficient bank support. For example, when a Mexican clothing manufacturer pays a Vietnamese textile supplier, it often needs to go through four or more intermediaries: local banks, foreign exchange intermediaries, agent banks, and then back to foreign exchange intermediaries and recipient banks. Each link increases the risk of handling fees and transaction failure. Fortunately, these transactions usually occur between business partners with long-term cooperative relationships. Through stablecoins, payers in Mexico and payees in Vietnam can bypass these complex, expensive and inefficient intermediaries and achieve direct payments.
Face-to-face small transactions (such as consumption in restaurants, cafes or convenience stores) are also very suitable for the use of stablecoins. These scenarios usually have a lower risk of fraud, but merchants have limited profit margins and are very sensitive to costs. For example, a 15-cent handling fee charged by the payment system may directly affect the profitability of these businesses. Take a $2 cup of coffee as an example, only $1.70 to $1.80 goes to the coffee shop in the end, and nearly 15% of the revenue is taken by the card organization just to complete the transaction. But in this scenario, the main reason consumers use credit cards is convenience, and they don’t need the additional services covered by high fees, such as fraud protection (coffee is delivered instantly) or loan services (only a $2 transaction amount). Merchants also have low requirements for compliance and bank integration. Therefore, if there is a cheap and reliable alternative payment method, these merchants are very likely to be willing to adopt it.
III. Case Analysis: How Cheaper Payments Can Improve Corporate Profitability
In the current payment system, high transaction fees directly undermine the profit margins of many companies. By reducing these fees, companies can unleash huge profit potential. This trend has already begun to emerge:
The wider application of stablecoins will significantly increase the profitability of businesses, not just small businesses such as cafes or restaurants, but also large businesses. The following analyzes the potential impact of reducing payment fees to just 0.1% through the financial data of three listed companies in fiscal year 2024. (Assume that these companies currently pay a 1.6% comprehensive payment processing fee, and that other upstream and downstream costs are less affected.) 1. Corporate Case Analysis Walmart Walmart's annual revenue is as high as $648 billion, of which about $10 billion is paid in credit card fees, and its net profit is $15.5 billion. If this part of the fee is eliminated through stablecoin payments, this alone can increase Walmart's profits by about 60%, thereby significantly increasing the company's valuation.
Chipotle, a fast-growing fast-food chain with $9.8 billion in annual revenue, spends $148 million on credit card fees. This cost accounts for a significant portion of its $1.2 billion in annual profits. By adopting stablecoin payments, Chipotle's profitability will increase by 12%. This improvement is almost impossible to achieve in other parts of its financial statements.
KrogerKroger, as a national grocery retailer, may be the biggest beneficiary because of its extremely low profit margins. Surprisingly, Kroger’s net income is almost equal to the credit card fees it pays. Like many grocers, its profit margin is less than 2%, which is lower than the cost of paying for credit card transactions. If stablecoins are used for payment, Kroger’s profits may double directly. 2. How do stablecoins help companies reduce transaction fees?
Although the above analysis is an ideal scenario, there are still several limitations to note:
Transition period for consumer adoptionIt will take time for consumers to fully adopt stablecoin payments. During this process, companies will still be subject to some cost constraints, especially the impact of upstream and downstream costs.
Existing structure of the payment industryCurrently,retailers and payment processors are very dissatisfied with high-fee payment solutions, and payment processors themselves are also a low-profit margin industry. Most of their revenue is divided between the card associations and the issuing banks. For example, when Stripe processes online payments, they charge 2.9% of the total transaction amount plus $0.30 per transaction, but more than 70% of the fees are actually taken by Visa and the issuing banks. The advantages of stablecoins and the transformation of payment processors The significant advantages of stablecoin payments are low fees and no control by the middle network, which allows payment processors to obtain higher profit margins in stablecoin transactions. This increase in profit margins will encourage more payment processors to support and promote stablecoin payments. For example, payment companies such as Block (formerly Square), Fiserv,
As more payment processors join, the cost of stablecoin payments is expected to decrease further.
3. The next step to promote the widespread adoption of stablecoins: acceptance by mainstream consumers
Currently, stablecoins, as a new way to pay and store funds, have demonstrated the characteristics of permissionless, efficient and convenient. Entrepreneurs are working hard to transformstablecoins from a simple payment tool to a more powerful payment platform. Like previous innovations,the popularization of stablecoins will be promoted gradually: starting from pilot applications that meet the marginal needs of consumers and forward-looking enterprises, until the platform matures to the stage where it can serve ordinary users and conservative enterprises.
The following three trends will drive more mainstream enterprises to embrace stablecoins:
Stablecoin orchestration, which refers to the ability to monitor, manage and integrate stablecoins, is gradually being integrated into the systems of payment service providers (such as Stripe). This back-end integration allows companies to process payment transactions at a lower cost without changing existing processes or making complex technical changes.For consumers, although it may not be noticeable, the actual result is: the cost of goods and services will be reduced. For example, structural costs such as invoice settlement, salary payment, and subscription payment will be greatly reduced by default.
Today, many stablecoin orchestration companies are attracting corporate users who need fast settlement and low-cost payments, whether business-to-business (B2B) or business-to-consumer (B2C) payments. This back-end integration allows companies to enjoy the advantages of stablecoins without affecting the quality of payment services or user experience.
Stablecoin companies are optimizing the entry process and shared incentive mechanisms to attract end users to easily enter the on-chain ecosystem.
Ramps: are becoming more efficient and ubiquitous, making it easier for users to convert fiat currency into cryptocurrencies. At the same time, many consumer applications are also beginning to support cryptocurrency payments, which means that consumers can enjoy the convenience brought by the stablecoin ecosystem without changing their application habits or behaviors.Now,popular applications such as Venmo, ApplePay, Paypal, CashApp, Nubank and Revolut already allow users to complete payments with stablecoins.
For businesses, there are also more and more commercial incentives for stablecoins. Stablecoin issuers (such as Circle, Paypal and Tether) are emulating the traditional credit card model and sharing revenue with ordinary businesses. Similar to Visa sharing profits from credit card user registrations with United Airlines and Chase Bank, stablecoin issuers can also benefit from building a larger asset pool through cooperation. In particular, those companies that successfully transfer user payments from credit cards to stablecoins can also earn some of the income generated by capital flow. This model used to be limited to banks, fintech companies or gift card issuers, but now ordinary companies also have the opportunity to participate.
For companies, a clear regulatory environment is an important prerequisite for adopting stablecoins. Although there is no comprehensive and unified stablecoin regulatory framework in the world, many countries and regions are already formulating rules for stablecoins to help entrepreneurs build compliant and user-friendly payment businesses.
The EU's Mica Act (Click to read more)The EU has introduced regulations that clarify the rules for the issuance of stablecoins, including prudential management and behavioral norms. Earlier this year, the stablecoin provisions of the regulation came into effect, significantly improving the transparency and trust of the European stablecoin market.
Regulatory developments in the United States (Click to read more)Although the United States has not yet formed a complete stablecoin regulatory system, policymakers from both parties have gradually reached a consensus on the need for legislation. They want to ensure that stablecoin issuers fully back their tokens with high-quality assets, accept third-party audits, and strictly crack down on illegal financial activities. At the same time, policies also need to protect developers' ability to design decentralized stablecoins, eliminate intermediaries to reduce user risks and leverage the advantages of decentralization.
As these regulatory policies advance, more companies will consider migrating from traditional payment systems to stablecoin payment infrastructure. Although the compliance solution is not conspicuous, it provides companies with confidence that stablecoins are a reliable, secure, and regulated payment alternative.
Fourth, follow the trend: Why stablecoins will continue to improve
In the process of promoting stablecoins, the products themselves will continue to be optimized and upgraded. The Web3 community is looking forward to the widespread adoption of stablecoins, and there are good reasons for this: after years of heavy investment in infrastructure and on-chain applications, stablecoins are at a critical turning point in value innovation, climbing the "S curve" of technological development. With the improvement of infrastructure, the enrichment of on-chain applications, and the continuous development of on-chain networks, stablecoins will continue to attract more and more users. This process is mainly achieved through the following two aspects.
After years of hard work, improvements in crypto infrastructure have reduced the cost of stablecoin payments to less than 1 cent per transaction. Future investments will further promote the increase in payment speed and the reduction of transaction costs. At the same time, this improvement is inseparable from the support of technical tools such as wallets, cross-chain bridges, entry channels, developer experience, and automatic market makers (AMM). These technologies form a solid foundation for stablecoin payments.
For entrepreneurs, this improved infrastructure provides tremendous impetus for development. It not only optimizes the developer experience, but also promotes the prosperity of the stablecoin ecosystem, attracting a wider range of users and investors. In addition, the on-chain funds of stablecoins have permissionless composability, which allows developers to build new products more flexibly and integrate different on-chain services into their own applications, further stimulating innovation.
Another major advantage of stablecoins is that they expand many new usage scenarios through the permissionless composability of on-chain funds. Compared with traditional payment methods, stablecoins have greatly reduced the threshold for creating and integrating new payment experiences. Traditional payment platforms usually require companies to cooperate with high-cost intermediaries (such as credit card networks or international payment providers), which increases the burden on companies. However, stablecoins are self-custodial and programmable, so companies can quickly build personalized payment systems without relying on these "gatekeepers." In addition, for users, the composability of stablecoins enables them to benefit from the increasingly rich on-chain applications and fierce market competition. For example, stablecoin users have been able to obtain practical services in areas such as decentralized finance (DeFi), on-chain subscription services, and on-chain social applications. This openness and flexibility not only allows users to obtain more cost-effective services, but also brings more innovation opportunities to companies.
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