Stablecoin is leading the payment revolution! a16z: How does the low-cost, high-speed advantage subvert finance?

Today's payment industry is dominated by gatekeepers who charge high fees, weakening the profitability of every business they touch, and justify these fees in the name of universality and convenience—while stifling competition and limiting builders' creativity.

Stablecoin can be done better.

Stablecoin fees are lower, payment providers are more competitive, and access is wider. Because stablecoins reduce transaction costs to almost zero, they can free businesses from the friction of existing alternatives. The adoption of stablecoins will start with enterprises 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 600 million transactions. Stablecoin users are almost everywhere, and they use stablecoins because they provide a secure, cheap, 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 intermediaries such as banks, payment networks, or central banks. At the same time, stablecoins are programmable, scalable, and integrable without permission - anyone can help build stablecoin payment platforms on the stablecoin payment track.

This kind of subversion may take time, but the speed of its occurrence may be faster than many people expect. Businesses such as restaurants, retailers, enterprises, and payment processors will benefit the most from stablecoin platforms, and profit margins will increase significantly. This demand will drive adoption, and as the adoption rate of stablecoins continues to rise, other benefits of stablecoins - permissionless composability and improved programmability - will bring more benefits to online users, businesses, and products. I will share more reasons and methods in the following text, first introducing some background of the payment industry.

Payment Raceway

Payment channels: the technology, rules, and network for processing transactions

Payment processor: an operator on the payment track that facilitates transactions

Payment service provider: an entity that provides access to payment systems to end users or other systems

Payment solution: products provided by payment service providers

Payment Platform: A set of related payment solutions covering providers, processors, and tracks

Payment industry background

The scale of the payment industry should not be underestimated. In 2023, the global payment industry processed 3.4 trillion transactions, with a value of up to $1.8 trillion, generating $2.4 trillion in revenue. In the United States alone, credit card payments amounted to $5.6 trillion, while debit card payments reached $4.4 trillion.

Despite being ubiquitous and massive in scale, payment solutions are still expensive and complex, with payment applications often obscuring the consumer experience. For example, while the front-end of the peer-to-peer payment application Venmo appears simple, behind the scenes, the product hides intricate bank integrations, debit card loopholes, and numerous compliance obligations. Payment solutions often rely on each other, adding 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 evaluation indicators of payment products are timeliness, cost, reliability, and convenience.

Image source: Golden Finance

Consumer priority issues include 'How much do I have to pay?' Merchants will ask 'Will I get a reward?' But in fact, these four indicators are essential for both parties.

Since enterprises have 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 enjoy modern services, or do not enjoy sufficient services. For businesses, the high cost of credit cards directly erodes their profits. Although the adoption rate of real-time payments (RTP) continues to increase, the transfer speed of US banks is still too slow, taking several days. Moreover, peer-to-peer applications are specific to regions and networks, which makes transfer speeds slow, costly, and complex between ecosystems.

Although businesses and consumers are already expecting 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.

Enter stablecoin here

The key to stablecoin disrupting the industry lies in the failures of existing payment solutions (high cost, low usability or high friction), and the unnecessary bundling of products with payment solutions (including identity, lending, compliance, fraud protection, and bank integration).

Taking remittances as an example, it was born out of despair. 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 US dollars from the United States to Colombia is less than 0.01 US dollars, but it would require 12.13 US dollars through traditional channels. (Remittance users need to remit money home regardless of transaction costs, but lower costs will greatly benefit them.)

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

Fortunately, these transactions take place between partners with ongoing 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 ultimately they can enjoy faster, cheaper transactions and more control over the payment process.

Image source: a16zcrypto

Small transactions (especially low-fraud face-to-face transactions, such as transactions in restaurants, cafes, or street corner stores) are also a promising opportunity. Due to the low profit margin, these businesses are cost-sensitive, so the 15-cent transaction fee charged by the payment solution has a significant impact on their profitability.

For every $2 a customer spends on coffee, only $1.70 to $1.80 flows to the coffee shop, with the remaining nearly 15% going to the credit card company - just to facilitate the transaction. But the credit card is only for convenience here: neither the consumer nor the store needs extra functionality to prove the reasonableness of the charge. Consumers don't need fraud protection (they just got 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). So if there's a cheaper, reliable alternative, these businesses will take it.

Image Source: a16zcrypto

Cheaper payments can increase profitability

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

Widely adopting stablecoins will significantly improve the profitability of many businesses—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 get a rough idea of the impact of reducing the payment processing fee to 0.1%. (For convenience, this assessment assumes that the company pays a 1.6% mixed payment processor cost and has extremely low deposit and withdrawal costs. For more information on this, please refer to the following text.)

Walmart's annual revenue is $648 billion, which could cover $10 billion in credit card fees and generate a profit of $15.5 billion. Consider eliminating payment costs and Walmart's profitability, its valuation (controlling for all other factors) could potentially increase by over 60% with a cheaper payment solution.

Chipotle is a rapidly growing fast food restaurant with annual revenue of $9.8 billion. Its annual profit is $1.2 billion, of which credit card fees paid are $148 million. By simply reducing expenses, Chipotle's profitability can increase by 12% - a staggering figure that cannot be achieved elsewhere on its income statement.

The national grocery store Krogers has the lowest profit margin, therefore making 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.

Image source: a16zcrypto

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 significant costs before stablecoins gain enough acceptance, especially when starting and stopping their usage. Secondly, both retailers and payment processors are opposed to high-cost payment solutions. Payment processors are also low-profit businesses, with the majority of their profits going to credit card networks and issuing banks. When payment processors handle transactions, most of their costs are passed on to the payment networks. Therefore, when Stripe processes online retail checkout processes, they extract a fee of 2.9% and $0.30 from the total transaction, but they have to pay over 70% of the fee to Visa and issuing banks. As more payment processors (such as Block - formerly Square, Fiserv, Stripe, and Toast) adopt stablecoins to improve profit margins, they will make it easier for more businesses to obtain stablecoins.

The cost of stablecoin is very low, and there is no need to pay network gatekeeper fees. This means that payment processors can have much higher profit margins in stablecoin transactions. Higher profit margins may encourage payment processors to support and encourage more businesses and applications to use stablecoins. However, as payment processors begin to adopt stablecoins, it is expected that stablecoin payment costs will compress over time: Stripe's 1.5% fee may decrease.

Next step: adopted by the general consumers

Today, stablecoins are a permissionless new form of currency transmission and storage. Entrepreneurs have been building solutions to transform stablecoin tracks into stablecoin platforms. As with previous innovations, adoption will gradually occur, starting from the edge of consumer demand, then forward-looking enterprises, until the platform is mature enough to meet the needs of everyday users and cautious enterprises. Three trends will drive more mainstream enterprises to adopt stablecoins.

  1. Increase backend integration through stablecoin aggregation.

The stablecoin aggregation (the ability to monitor, guide, and integrate stablecoins) will soon be integrated into payment processors such as 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 get cheaper products without even realizing it, as invoices, payrolls, and subscriptions have lower structural costs by default.

Many such stablecoin aggregation businesses have begun to attract customers who want instant settlement, low-cost, and widely available B2B or B2C payments. By integrating stablecoins in the backend, businesses will benefit from the advantages of stablecoins—no interruption or reduction in the expected service quality for payment providers, while the adoption rate of stablecoins will also increase.

  1. Improve the enterprise entry process and increase incentive measures for sharing.

Stablecoin business is becoming increasingly mature in terms of passing through incentive measures for sharing and improving access solutions to introduce end users to the chain.

Entering cryptocurrency becomes cheaper, faster, and more common, allowing users to start using cryptocurrency more easily. At the same time, more and more consumer apps support cryptocurrency, allowing users to benefit from the stablecoin ecosystem without adopting new apps or user behavior. Popular apps like Venmo, ApplePay, Paypal, CashApp, Nubank, and Revolut all allow their customers to use stablecoins.

Moreover, the company is 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, just like Visa shares profits with United and Chase by using signed credit card users. Such cooperation and integration benefit stablecoin issuers as they can create larger asset pools to generate revenue. But they can also benefit enterprises that successfully convert users from credit cards to stablecoins. These enterprises can now earn a portion of the revenue generated from their products, a business model that is usually only applicable to banks, fintech companies, and gift card issuers that make money through user float.

3、Improve the availability of regulatory transparency and compliance solutions

When companies have confidence in the regulatory environment, they are more likely to adopt stablecoins. Although we have not yet seen comprehensive global regulations for stablecoins, many jurisdictions have already issued rules and guidance for stablecoins, allowing entrepreneurs to start the challenging work of building compliant and user-friendly businesses.

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

Despite the lack of a stablecoin framework in the United States, both parties' legislative bodies are increasingly recognizing the need to enact effective stablecoin legislation. Such regulation needs to ensure that the issuer fully supports its tokens with high-quality assets, third-party audits its reserves, and takes comprehensive measures to combat illegal financial activities. At the same time, legislation needs to preserve the ability of creators to create decentralized stablecoins, reduce user risks by eliminating intermediary institutions, and leverage the advantages of decentralization.

These policies are efforts to encourage companies in various industries to consider transitioning from traditional payment methods to stablecoin infrastructure. While compliance solutions may not be appealing, each adoption of stablecoins helps demonstrate to existing businesses that stablecoins are a reliable, secure, regulated, and improved solution to traditional payment problems.

With the popularity of stablecoins, the network effect of the platform will become stronger. Although it may take a few more years for stablecoins to be used at points of sale or as substitutes 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 continue to improve. The Web3 community is celebrating the adoption of stablecoins, and for good reason: due to years of investment in infrastructure and on-chain applications, stablecoins are rising in value and innovating the S-curve. With infrastructure improvements, rich 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, the arduous task of building the cryptographic infrastructure has made it possible to make stable coin payments of less 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 stable coins through better wallets, bridges, deposits and withdrawals, developer experience, and AMM.

Image source: a16zcrypto

This technology foundation provides entrepreneurs with increasingly more incentives to build stablecoins, thus providing a better developer experience, a rich ecosystem, extensive applications, and the permissionless composability of on-chain currency.

Secondly, 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, such as credit card transactions or expensive intermediaries in international payments. However, stablecoins have self-custody and programmability, reducing 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 benefited from DeFi, on-chain subscriptions, and social applications.

Conclusion

Stablecoins can lead us into a world of free, scalable, and instant payments. As Stripe CEO Patrick Collison put it, stablecoins are the "room-temperature superconductors" of financial services. They will enable businesses to pursue new opportunities that were previously inaccessible due to the burden of existing payment channels or friction from 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 of profit, either by charging a certain percentage of revenue or by selling services complementary to this new commoditized platform. As these traditional enterprises recognize the constantly changing situation, entrepreneurs will create new solutions to help these enterprises utilize stablecoins.

In the long run, with the widespread adoption of stablecoins and technological advancements, startups will seize the opportunities brought by a world of free, frictionless, and instant payments. These startups will be established today, unlocking new and unexpected scenarios, and further democratizing the opportunities offered 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 that have contributed to the completion of this article.

【Disclaimer】There are risks in the market, and investment needs to be cautious. This article does not constitute investment advice, and users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Invest at your own risk.

This article is authorized for reproduction from: 'Rhythm Blockbeats'

Original author: Sam Broner, a16z crypto investment partner

"Stablecoin is Leading the Payment Revolution! a16z: How do Low Cost and High Speed Advantages Disrupt Finance?" This article was first published on "Crypto City".

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