How will stablecoins devour the traditional payment industry?

In today’s payments space, the market is dominated by intermediaries that control high fees that directly erode profitability. These intermediaries often use “universality” and “convenience” as justification, but in reality, they are stifling competition and limiting the potential of innovators.

Stablecoins can obviously provide a better choice.

The advantages of stablecoins are low fees, fierce market competition, and wider popularity. Since stablecoins can reduce transaction costs to almost zero, companies can get rid of the friction and restrictions brought by current payment methods. As stablecoins become more popular, the industry will usher in a disruption, and the first to be affected will be those companies that are currently the least friendly to payment methods.

In fact, stablecoins are already the most economical way to transfer dollars. In the past month, 28.5 million stablecoin users around the world have completed more than 600 million transactions, 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 anti-inflation characteristics. 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.

Although 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 be significantly improved. This market demand will drive the widespread adoption of stablecoins. 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.

In this context, we can explore in depth the structure of the payment industry and how stablecoins can drive innovation and change in this industry.

A brief description of payment ecosystem participants :

• Payment channels: The technology, rules and networks responsible for processing transactions .

• Payment Processor: An entity that operates on top of payment rails and facilitates transactions .

• Payment service provider: An organization that provides access to payment systems for end users or other systems.

• Payment Solutions: Specific payment products provided by payment service providers.

• Payment platform: A complete payment solution covering payment providers, processors and payment rails.

1. Payment industry background: current status of complexity and high cost

The payments industry is large and influential. In 2023, the global payments industry processed 34 trillion transactions with a total transaction value of $18 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 industry’s size and popularity, payment solutions remain expensive and complex. While some payment apps have simplified the consumer payment experience on the surface, the underlying systems remain complex. For example, peer-to-peer payment apps like Venmo are simple to operate on the front end, but the back end involves complex integration with banking systems, debit card restrictions, and a large number of compliance requirements. To complicate matters, 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.

The 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? Merchants are concerned about: can I receive the money smoothly? But in fact, these four criteria are crucial for both consumers and merchants.

From the days when merchants had to check for credit card fraud through physical ledgers to today, there have been multiple waves of innovation in the payment experience, each making payments faster, more reliable, more convenient, and lower cost, which in turn has driven increases in transaction volumes and spending levels.

Despite this, many consumers remain underserved by modern payment products. For merchants, credit card payments are expensive, squeezing their profit margins. Despite the increasing use of real-time payments (RTP), bank transfers in the United States remain slow, often taking days to complete. And peer-to-peer payment applications are limited by geography and networks, making cross-network transfers expensive, slow, and complex.

While businesses and consumers have become accustomed to payment platforms offering more and more features, not all users are able to truly benefit from existing payment solutions. In fact, most users still have to pay excessive 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.

2. Industry pain points that stablecoins are solving

The value of stablecoins lies in the fact that they can disrupt the payment industry by addressing the failures of existing payment solutions. 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.

1. Remittance scenario

Take cross-border remittances as an example. This area is essentially because users have no choice. Many people who send remittances lack complete banking services, and the decentralized banking system makes the deep integration of traditional payments 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 traditional payment methods cost as much as $12.13. For remitters, regardless of the fee, they have to send the money home, but the low cost will undoubtedly greatly reduce their burden.

2. International Commercial Payment

International payments, especially for small businesses in emerging markets, are plagued by high fees, inefficiencies, and insufficient banking support. For example, when a Mexican clothing manufacturer pays a Vietnamese textile supplier, it often needs to go through four or more intermediaries: a local bank, a foreign exchange intermediary, an agent bank, and then back to the foreign exchange intermediary and the recipient's bank. Each link increases the fee and the risk of transaction failure. Fortunately, these transactions usually occur between business partners with long-term cooperative relationships. With stablecoins, payers in Mexico and payees in Vietnam can bypass these complex, expensive, and inefficient intermediaries and achieve direct payments.

3. Small transaction scenarios

Small transactions in person (such as at restaurants, cafes, or convenience stores) are also well suited for stablecoins. These scenarios typically have a low risk of fraud, but merchants have limited profit margins and are very cost-sensitive. For example, a 15-cent processing fee charged by a payment system can directly affect the profitability of these businesses. For example, of a $2 cup of coffee, only $1.70 to $1.80 ends up in the coffee shop, 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 the high processing fee, 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.

3. Case Study: 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 unlock huge profit potential. This trend has already begun to emerge: Stripe Announced that it would charge a 1.5% fee for stablecoin payments, 30% lower than the fee it charges for credit card payments. To further promote the technology, Stripe It also announced the acquisition of Bridge.xyz for approximately $1 billion.

The wider use 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. (Assuming that these companies currently pay a comprehensive payment processing fee of 1.6%, and other upstream and downstream costs are less affected.)

1. Enterprise 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, has $9.8 billion in annual revenue and $148 million in credit card fees . This cost is 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.

• Kroger Kroger, 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 credit card transactions. If stablecoins are used for payment, Kroger's profits may double directly.

2. How do stablecoins help businesses reduce transaction costs?

Although the above analysis is an idealized scenario, there are still a few limitations to note:

• Transition period for consumer adoption It will take time for consumers to fully adopt stablecoin payments. During this process, businesses will still be subject to some cost constraints, especially the impact of upstream and downstream costs.

• Existing structure of the payment industry Currently, retailers and payment processors are very dissatisfied with high-fee payment solutions, and payment processors themselves are also a low-profit industry. Most of their revenue is divided by card organizations and 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 issuing banks.

• The advantages of stablecoins and the transformation of payment processors The significant advantages of stablecoin payments are low fees and no intermediary network control, 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, Block (formerly Square), Fiserv, Stripe Payment companies such as Bitcoin and Toast have begun exploring stablecoins to optimize their profitability.

As more payment processors join, the cost of stablecoin payments is expected to decrease further. Stripe A 1.5% fee is charged on stablecoin payments, but as competition increases, this rate may fall further, bringing more benefits to businesses and consumers.

3. The next step to promote widespread adoption of stablecoins: mainstream consumer acceptance

As a new way to pay and store funds, stablecoins have shown their permissionless, efficient and convenient features. Entrepreneurs are working hard to transform stablecoins from a simple payment tool to a more powerful payment platform . As with previous innovations, the popularization of stablecoins will be gradually promoted: starting with 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 companies to embrace stablecoins:

1. Stablecoin orchestration through backend integration

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 is 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). This back-end integration allows companies to enjoy the benefits of stablecoins without compromising the quality of payment services or user experience.

2. Improve user experience and increase enterprise sharing incentives

Stablecoin companies are optimizing the entry process and shared incentive mechanisms to attract end users to easily enter the on-chain ecosystem.

Ramps : They are becoming more efficient and more popular, making it easier for users to convert fiat currency into cryptocurrencies. At the same time, many consumer applications have begun to support cryptocurrency payments, which means that consumers can enjoy the convenience of 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 following the traditional credit card model and sharing profits 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 larger asset pools through cooperation. In particular, those companies that successfully transfer user payments from credit cards to stablecoins can also earn part of the profits generated by capital flow. This model used to be limited to banks, fintech companies, or gift card issuers, but now ordinary businesses also have the opportunity to participate.

3. Improve regulatory clarity and strengthen compliance solutions

For enterprises, a clear regulatory environment is an important prerequisite for the adoption of stablecoins. Although there is no comprehensive and unified regulatory framework for stablecoins 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 here to learn more ) 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 dynamics in the United States ( click here for more ) Although the United States has not yet formed a complete stablecoin regulatory system, bipartisan policymakers have gradually reached a consensus on the need for legislation. They hope to ensure that stablecoin issuers fully support 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 and 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.

4. Going with the trend: Why stablecoins will continue to improve

During the promotion of 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.

1. Continuous advancement of technological infrastructure

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 automated market makers (AMMs). 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 are composable without permission, which allows developers to build new products more flexibly and integrate different on-chain services into their own applications, further stimulating innovation.

2. Unlocking new user scenarios

Another major advantage of stablecoins is that they expand many new use cases 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 , and companies can quickly build personalized payment systems without relying on these "gatekeepers".

In addition, for users, the composability of stablecoins allows 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 enterprises.