How similar are credit card networks and Stable Coin networks?

For consumers and merchants, all stablecoins should be as simple as the US dollar. However, in reality, each stablecoin issuer has different ways of handling the US dollar - this stems from different issuance and redemption processes, reserves supporting each stablecoin's supply, different regulatory systems, and the frequency of financial audits, etc. Harmonizing these complexities will be a big business.

We have seen similar situations in the credit card system. Consumers are using assets that are almost equivalent to the US dollar for payment (they are US dollar loans, but these loans are not exactly the same, as everyone's credit score is different). In this system, there are some networks - such as Visa and Mastercard - responsible for coordinating the entire payment process. And the stakeholders in these two systems (or may eventually converge) are also very similar: consumers, consumers' banks, merchants' banks, and merchants.

An example can help explain the similarity in network structure.

1. Suppose you go out for a meal and pay the bill with a credit card. How does your payment enter the restaurant's account?
2. Your bank (credit card issuer) authorizes the transaction and sends funds to the restaurant's bank (known as the acquiring bank). Clearing networks such as Visa or Mastercard facilitate the exchange of these funds and charge a small fee. The acquiring bank then deposits the funds into the restaurant's account, but deducts certain fees.

Now, suppose you want to pay with Stable Coin. Your bank A issuance AUSD Stable Coin, while the restaurant's bank F uses FUSD. Although both Stable Coins represent the US dollar, they are different Stable Coins. The restaurant's bank only accepts FUSD. So, how is the payment in AUSD converted to FUSD?

This process should ultimately be very similar to the process of the credit card network:

1. Consumer's bank (issuanceAUSD) authorized transaction.
2. A coordination service will facilitate the conversion from AUSD to FUSD, and may incur a small fee. This conversion can be carried out in at least several ways:

• Path 1: Exchange Stable Coins on Decentralized Exchanges (DEX), for example, Uniswap provides multiple such trading pools with fees as low as 0.01%.
• Path 2: Exchange AUSD for USD deposit, then deposit the USD into the acquiring bank and issuanceFUSD with it.
• Path 3: Coordinated services offset fund flows within the network; however, this approach may only be realized when reaching a certain scale.

1. When depositing FUSD to the merchant's account, there may be some fees deducted.

Points of Disagreement in Analogy

The above content describes the obvious similarities between the credit card network and the Stable Coin network, and also provides a useful framework for thinking about how Stable Coin can significantly improve and surpass certain aspects of the credit card network.

The first improvement is in cross-border transactions. If we change the above scenario to a situation where a US consumer dines at a restaurant in Italy - the consumer wants to pay in US dollars while the merchant prefers to receive euros - the existing credit card system may charge as high as 3% in fees. However, on a Decentralization exchange (DEX), the exchange fees between Stable Coins could be as low as 0.05% (a difference of 60 times). If we apply this significant drop in fees to widespread cross-border payments, it is evident how much productivity enhancement Stable Coins can bring to the global GDP.

The second improvement is in the flow of funds from enterprises to individuals. Once the payment is authorized, the funds can leave the payer's account immediately. This instant Settlement is both valuable and highly anticipated. In addition, many enterprises have a global workforce. The frequency and amount of cross-border payments may far exceed those of ordinary consumers. With the globalization of labor force, opportunities for cross-border payments will continue to rise, driving the development of this field.

Looking Ahead: Where Are the Opportunities?

If the comparison of the network structure is roughly established, it will help to reveal potential entrepreneurial opportunities. In the credit card ecosystem, the main business areas include payment coordination, issuance innovation, and the realization of formal factors. The situation may be similar for stablecoins.

The previous examples mainly describe the role of coordination, because the flow of funds is big business. The market capitalization of Visa, Mastercard, American Express, and Discover is at least hundreds of billions of dollars, totaling over $1 trillion. The coexistence of multiple credit card networks in the market indicates that competition is healthy and the market is large enough to support large enterprises. Therefore, in a mature market, there may also be similar competition for payment coordination of Stablecoins. In fact, we have only 1-2 years to enter a mature enough Stablecoin infrastructure to achieve large-scale success, and there is still enough time for new startups to seize this opportunity.

Issuance is another area of innovation. Just as the popularity of corporate credit cards, in the future we may see enterprises wanting to issuance their own custom stablecoins. Having their own unit of consumption can give enterprises more control over end-to-end financial management, from expense management to dealing with forex tax issues. The issuance of enterprise custom stablecoins may become a direct business of stablecoin coordination networks, but it could also be an opportunity for brand-new startups (similar to the Lithic model, for example). The derivative effects of enterprise demand may give rise to more new business opportunities.

Meanwhile, the issuance process can also be more professionalized. With the emergence of tiered systems, in many credit cards, customers can pay a certain upfront fee to get better reward structures. For example, the Chase Sapphire Reserve card or AmEx Gold card. Some companies (usually airlines and retailers) even offer their own exclusive credit cards. If Stable Coins also conduct similar experiments in reward tiering, I would not be surprised. This may also become a way for startups to enter the market.

In many ways, these trends are mutually reinforcing. With the diversification of issuance methods, the demand for payment coordination services will also increase. And as the coordination networks mature, they will lower the barriers for new issuers to enter the market. These are all tremendous opportunities, and I look forward to seeing more startups enter this field. In the long run, these will be trillion-dollar markets that can support the growth of multiple large enterprises.

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