a16z: How will stablecoins devour the payment industry

Author: Sam Broner, a16z crypto investment partner; translation: 0xjs@Golden Finance

The current payment field is dominated by gatekeepers, who charge high fees, weaken the profit potential of every business they touch, and justify these fees in the name of universality and convenience - while they stifle competition and restrict the creativity of builders.

Stablecoins can be done better.

Stablecoins have lower fees, more intense competition among payment providers, and greater accessibility. Because stablecoins reduce transaction costs to almost zero, they can help businesses overcome the frictions caused by existing alternatives. The adoption of stablecoins will start with businesses that are most affected by current payment methods, disrupting the payment industry.

Stablecoins have become the cheapest way to transfer US dollars. Last month, 28.5 million independent stablecoin users sent over 6 billion transactions. Stablecoin users are present in almost every country, and they use stablecoins because they provide a secure, inexpensive, and inflation-resistant way to save and spend. In addition to 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 stablecoin payment platforms on the stablecoin payment track.

The disruption may take time, but the pace at which it occurs may be faster than many expect. Restaurants, retailers, businesses, and payment processors will benefit most from stablecoin platforms, with profit margins greatly increased. This demand will drive adoption, and as stablecoin usage continues to rise, the other benefits of stablecoins - permissionless composability and improved programmability - will bring even more advantages to on-chain users, businesses, and products. I will share more reasons and methods in the following text, starting with some background on the payment industry.

Payment Track

• Payment channels: the technology, rules and network that process transactions.

• Payment processor: Operator on the payment track, facilitating transactions

Payment service provider: Entity that provides access to the payment system to end users or other systems

• Payment solution: products provided by payment service providers

• Payment Platform: A suite of related payment solutions covering providers, processors, and rails.

Payment Industry Background

The scale of the payment industry is not to be underestimated. In 2023, the global payment industry processed 34 trillion transactions, worth up to $18 trillion, generating $2.4 trillion in revenue. In the United States alone, credit card payments amounted to $5.6 trillion, while debit card payments amounted to $4.4 trillion.

Despite being ubiquitous and massive in scale, payment solutions are still expensive and complex, and payment applications often shield consumers from the experience. For example, while the frontend of the peer-to-peer payment app Venmo appears simple, behind the scenes, the product hides intricate bank integrations, debit card vulnerabilities, and numerous compliance obligations. Payment solutions are often interdependent, which adds to the complexity, and people still use various payment methods: cash, debit cards, credit cards, peer-to-peer payment apps, ACH (Automated Clearing House), checks, etc.

The four main metrics for payment products are timeliness, cost, reliability, and convenience.

Consumer priorities include 'How much do I have to pay?' and businesses asking 'Will I get a reward?' In fact, these four indicators are essential for both parties.

Since companies had to search for fraudulent credit cards in physical ledgers, the wave of innovation has 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 amount.

However, many customers still do not have access to modern services or do not receive sufficient services. For merchants, credit card fees are expensive and directly erode their profits. Despite the increasing adoption of real-time payments (RTP), bank transfers in the United States are still too slow, taking several days. In addition, peer-to-peer applications are specific to regions and networks, which makes transfer speeds slow, costly, and complex between ecosystems.

While businesses and consumers are starting to expect payment platforms to offer more complex features, not all users can benefit from existing solutions. In fact, most users pay too much for fees and do not use all bundled payment products. But they have accepted the current situation.

Stablecoin enters here

The key to stablecoin disrupting the industry lies in the failure of existing payment solutions (high cost, low availability, or high friction), as well as the unnecessary bundling of payment solution with products such as identity, lending, compliance, fraud protection, and banking integration.

Taking remittances as an example, it was born out of desperation. Many remittance users lack access to banking services and rely on highly fragmented banking services. Therefore, these users see no value in the native integration between traditional payments and banking services. Stablecoin payments offer instant finality, low costs, and no need for intermediaries, which is a structural advantage for any payment user or builder. After all, with stablecoins, the cost of remitting $200 from the United States to Colombia is less than $0.01, but it would be $12.13 through traditional channels. (Regardless of the transaction cost, remittance users need to send money back home, and lower fees will greatly benefit them.)

International business payments, especially for small businesses in emerging markets, are facing high costs, slow processing times, and low bank support. For example, payments between Mexican clothing manufacturers and Vietnamese textile manufacturers will involve four or more intermediaries - local banks, foreign exchange, agent banks, agent banks, foreign exchange, and local banks. Each intermediary charges a certain percentage of fees and there is a risk of intermediary bankruptcy.

Fortunately, these transactions occur between partners with regular relationships. With stablecoins, Mexican payers and Vietnamese recipients can experiment and eliminate slow, bureaucratic, and expensive intermediaries. They may need 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 in restaurants, cafes, or street corner stores, are also a promising opportunity. These businesses are cost-sensitive due to low profit margins, so the 15 cent transaction fee charged by payment solutions has a significant impact on their profitability.

For every $2 spent by the customer to buy coffee, only $1.70 to $1.80 flows to the coffee shop, with the remaining nearly 15% flowing to the credit card company—solely for the sake of facilitating the transaction. But the credit card here is just for convenience: neither the consumer nor the store needs additional functionality to prove the reasonableness of the charge. Consumers do not need fraud protection (they just get a cup of coffee) or a loan (coffee only costs $2). And the coffee shop's compliance and banking integration needs are limited (coffee shops typically use integrated restaurant management software or none at all). Therefore, if there is a cheap, reliable alternative, these businesses will take advantage of it.

Cheaper payments can increase profitability

The current payment system transaction fees directly harm the profits of many businesses. Reducing these fees will bring enormous profitability. The first shoe has dropped: Stripe has announced that they will charge a fee of 1.5% for stablecoin payments, which is 30% lower than the fees they charge for credit card payments. To support this effort, Stripe has announced the acquisition of Bridge.xyz for approximately $1 billion.

The more widespread use of stablecoins will significantly improve the profitability of many enterprises—not just small businesses like cafes or restaurants. Let's take a look at the financial situation of three listed companies in the 2024 fiscal year to roughly understand the impact of reducing the payment processing fee rate to 0.1%. (For convenience, this assessment assumes that the enterprise pays a 1.6% blended payment processor cost, and the cost of deposit and withdrawal is extremely low. For more information on this, please see below.)

• Walmart's annual revenue is $648 billion, and it may pay $10 billion in credit card fees, with a profit of $15.5 billion. Let's do the math: considering the elimination of payment fees and Walmart's profitability, its valuation (controlling for all other factors) could increase by more than 60% with a cheaper payment solution alone.
• Chipotle is a rapidly growing fast food restaurant with an annual revenue of $9.8 billion. Its annual profit is $1.2 billion, of which credit card fees amount to $148 million. By reducing costs alone, Chipotle's profitability could increase by 12%—an astonishing figure that cannot be achieved elsewhere in its income statement.
• The national grocery store Krogers has the lowest profit margin, so it makes the most profit. Surprisingly, Krogers' net income and payment costs may be almost equal. Like many grocery stores, its profit margin is less than 2%, lower than the cost of processing credit card payments for businesses. With stablecoin payments, Krogers' profits could double.

How will Walmart, Chipotle, and Krogers reduce transaction costs through stablecoins? First, consider an idealized scenario: consumers will not immediately accept stablecoins, and there will still be relatively high costs before stablecoins gain sufficient acceptance, especially when starting and stopping usage. Secondly, retailers and payment processors are both against high-cost payment solutions. Payment processors are also low-margin businesses, giving most of the profits to credit card networks and issuing banks. When payment processors handle transactions, most of their costs are passed on to payment networks. Therefore, when Stripe processes online retail checkouts, they extract 2.9% of the total transaction and $0.30, but they have to pay over 70% to Visa and issuing banks. As more payment processors (such as Block - formerly Square, Fiserv, Stripe, and Toast) adopt stablecoins to increase profit margins, they will make it easier for more businesses to obtain stablecoins.

Stablecoin fees are low and do not require payment to network gatekeepers. This means that payment processors can earn much higher income and profit margins in stablecoin transactions. Higher profit margins may encourage payment processors to support and encourage more businesses and use cases to use stablecoins. However, as payment processors begin to adopt stablecoins, stablecoin payment fees are expected to be compressed over time: Stripe's 1.5% fee may decrease.

Next step: wide consumers adopt

Today, stablecoins are a permissionless new way of sending and storing money. Entrepreneurs are already building solutions to transform the stablecoin track into a stablecoin platform. As with previous innovations, adoption will gradually occur, starting from the fringes of consumer demand, then forward-thinking enterprises, until the platform is mature enough to meet the needs of everyday users and cautious businesses. Three trends will drive more mainstream enterprises to adopt stablecoins.

1. Increase backend integration through stablecoin aggregation

Stablecoin aggregation (the ability to monitor, guide, and integrate stablecoins) will soon be integrated into payment processors like Stripe. These aggregation products allow businesses to process payments at much lower costs than current mechanisms, without significant process or engineering changes. Consumers may ultimately benefit from cheaper products without even realizing it, as invoices, payrolls, and subscriptions have inherently lower structural costs.

Many such stablecoin aggregation businesses have begun to attract customers, who are looking for instant settlement, low-cost, and widely available business-to-business or business-to-consumer payments. By integrating stablecoins in the backend, businesses will benefit from the advantages of stablecoins - without interrupting or reducing the service quality expected by users from payment providers, while also increasing the adoption of stablecoins.

2. Improve the process of enterprise entry and increase shared incentive measures

Stablecoin business is becoming increasingly mature in terms of introducing end users to the chain through incentive measures and improved access solutions.

Entering becomes cheaper, faster, and more common, allowing users to start using cryptocurrencies more easily. At the same time, more and more consumer applications support cryptocurrencies, allowing users to benefit from an expanded stablecoin ecosystem without the need for new applications or user behavior. Popular applications such as Venmo, ApplePay, Paypal, CashApp, Nubank, and Revolut all allow their customers to use stablecoins.

Moreover, companies are more motivated to use these channels to integrate stablecoins and deposit funds into stablecoins. Fiat-backed stablecoin issuers such as Circle, Paypal, and Tether are sharing profits with ordinary businesses, much like Visa shares profits with United and Chase by signing credit card users. Such partnerships and integrations benefit stablecoin issuers, as they can create larger asset pools to generate revenue. However, they can also benefit businesses that successfully convert users from credit cards to stablecoins. These businesses can now earn a portion of the funds generated from their products, a business model that typically only applies to banks, fintech companies, and gift card issuers that make money through user float.

3. Improve regulatory transparency and the availability of compliance solutions

When companies are confident in the regulatory environment, they are more likely to adopt stablecoins. Although we have not yet seen comprehensive global regulation of stablecoins, many jurisdictions have issued rules and guidance on stablecoins, allowing entrepreneurs to start the arduous task of building compliant, user-friendly businesses.

For example, the EU's Markets in Crypto-Assets Regulation (MiCA) sets rules for stablecoin issuers, including prudential and conduct requirements. Since the stablecoin provisions came into effect earlier this year, the regulation has greatly transformed the stablecoin market in Europe.

Although the United States currently lacks a stablecoin framework, policymakers of both parties are increasingly recognizing the need to enact effective stablecoin legislation. Such regulations need to ensure that issuers fully back their tokens with high-quality assets, have their reserves audited by third parties, and take comprehensive measures to combat illegal financial activities. At the same time, legislation needs to preserve the ability of creators to create decentralized stablecoins, reducing user risks by eliminating intermediaries and leveraging the advantages of decentralization.

These policy efforts will encourage companies in various industries to consider transitioning from traditional payment methods to stablecoin infrastructure. While compliance solutions may not be attractive, everyone who adopts stablecoins contributes to proving to existing enterprises that stablecoins are a reliable, secure, regulated, and improved solution to traditional payment problems.

With the popularity of stablecoins, the network effect of this platform will become stronger. Although it may take a few more years for stablecoins to be used at point of sale or as a substitute for bank accounts, as the number of stablecoin users grows, solutions centered around stablecoins will become more mainstream and more attractive to consumers, businesses, and entrepreneurs.

Trend: Why Stablecoins Continue to Improve

During the adoption process, the product itself will be continuously improved. The web3 community is celebrating the adoption of stablecoins for good reason: due to years of investment in infrastructure and on-chain applications, stablecoins are climbing the value innovation S-curve. With the improvement of infrastructure, the abundance of on-chain applications, and the growth of on-chain networks, stablecoins will become more attractive to users. This will be achieved in two ways.

First of all, the arduous work on the infrastructure of encryption makes it possible to make stablecoin payments lower than 1 cent. Future investments will continue to make transactions cheaper and faster. At the same time, it is only possible to achieve the aggregation and improvement of stablecoin entry experience through better wallets, bridges, deposits and withdrawals, developer experience, and AMM.

This technological foundation provides entrepreneurs with more and more incentives to build stablecoins, thereby providing a better developer experience, a rich ecosystem, wide-ranging applications, and the permissionless composability of on-chain currencies.

Furthermore, stablecoins unlock new user scenarios through the permissionless composability of on-chain currency. Other payment platforms have gatekeepers, forcing entrepreneurs to collaborate with costly intermediaries in transactions such as credit card transactions or international payments. However, stablecoins, with their self-custody and programmability, lower the barriers to creating new payment experiences and integrating value-added services. Stablecoins are also composable, allowing users to benefit from increasingly powerful on-chain applications and intense competition. For example, stablecoin users have already benefited from DeFi, on-chain subscriptions, and social applications.

Conclusion

Stablecoins can lead us into a world of free, scalable, 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 were previously unaffordable due to the burden of existing payment channels or the friction of traditional gatekeepers.

In the short term, as payments become free and open, stablecoins will bring about structural changes to financial products. Existing payment companies will seek new ways to make profits, either by charging a certain percentage of revenue or by selling services complementary to this new commoditized platform. As these traditional enterprises recognize the ever-changing situation, entrepreneurs will create new solutions to help these enterprises utilize stablecoins.

In the long run, with the popularization of stablecoins and technological advancements, startups will seize the opportunities brought by the world of free, frictionless, and instant payments. These startups will be established 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, which have contributed to the completion of this article.