Original author: Sam Broner
Original translation: TechFlow
The current payments market is dominated by a few “gatekeepers” who charge high fees that cut into every business’s profits, justifying those fees with the pretext of ubiquity and convenience while stifling competition and limiting the creativity of innovators.
Stablecoins may provide a better solution.
Stablecoins offer lower fees, more competition among payment providers, and wider accessibility. Because stablecoins reduce transaction costs to almost zero, they can help businesses get rid of the friction of existing payment methods. The adoption of stablecoins will start with those businesses that are most affected by current payment methods, and this process will disrupt the entire payment industry.
Stablecoins have become the cheapest way to send dollars. Last month, 28.5 million stablecoin users around the world completed more than 600 million transactions. Stablecoin users are almost everywhere in the world, and they use stablecoins because they provide a safe, cheap and inflation-resistant way to store and spend. In addition to cash and gold, stablecoins are the only widely adopted payment method that does not require intermediaries such as banks, payment networks or central banks. At the same time, stablecoins are permissionless programmable, scalable and integrable - anyone can build a payment platform on the stablecoin payment infrastructure.
This transformation may take time, but it will likely happen faster than many expect. Businesses such as restaurants, retailers, enterprises, and payment processors will benefit most from stablecoin platforms, seeing significant improvements in profit margins. This demand will drive stablecoin adoption, and as their use grows, the other advantages of stablecoins—permissionless composability and enhanced programmability—will attract more users, businesses, and products to the chain. I will explain the reasons and methods in detail below, but first provide some background on the payments industry.
Payment Participants
Payment Rails: The technologies, rules, and networks that process transactions
Payment processor: The operator on the payment rails responsible for facilitating transactions
Payment Service Provider: An entity that provides access to payment systems to end users or other systems
Payment solutions: products provided by payment service providers
Payment Platform: A set of related payment solutions covering providers, processors and payment rails
Payment Industry Background
The size of the payments industry is hard to fathom. In 2023, the global payments industry processed 3.4 trillion transactions, representing $1.8 quadrillion in transaction volume, and generated $2.4 trillion in revenue. In the U.S. alone, credit card payments accounted for $5.6 trillion and debit card payments for $4.4 trillion.
Despite the size and ubiquity of the payments industry, payment solutions remain expensive and complex, even though payment apps often mask the complexity of the consumer experience. For example, Venmo, a peer-to-peer payment app, appears simple on the surface, but hides complex bank integrations, debit card vulnerabilities, and countless compliance obligations in the background. Adding to the complexity, payment solutions often layer on top of each other, and people still use a variety of payment methods: cash, debit cards, credit cards, peer-to-peer payment apps, ACH (Automated Clearing House), checks, and more.
The four main criteria for payment products are timeliness, cost, reliability and convenience.
Consumers are usually concerned about how much will I pay, while merchants are concerned about whether I will be paid. But in fact, these four criteria are critical to both parties.
Since the days when businesses needed to look for fraudulent credit cards in physical ledgers, waves of innovation have improved the payment experience. Each wave of innovation has brought faster, more reliable, more convenient and cheaper payment methods, which in turn has driven growth in transaction volume and spending.
However, many customers are still not benefiting from modern payment products or are underserved. For merchants, credit card fees are expensive, directly eating into their profits. Despite the increase in the adoption of real-time payments (RTP), bank transfers in the United States are still too slow, often taking days. And peer-to-peer applications are limited by regions and networks, making transfers between ecosystems slow, expensive, and complex.
While businesses and consumers have come to expect more sophisticated functionality from payment platforms, existing solutions do not meet the needs of all users well. In fact, most users pay too much.
Stablecoins are emerging in the payment industry
Stablecoins find a niche where existing payment solutions fail (e.g. high cost, low availability, or high friction), especially where demand for additional products in payment solutions (e.g. identity, lending, compliance, fraud protection, and bank integrations) is low.
Take remittances, for example. This demand often stems from a desperate need. Many remittance users are underbanked and use very fragmented banking services. As a result, they do not see much value in the native integration of traditional payments with banking services. Stablecoin payments offer the advantages of instant settlement, low costs, and no intermediaries, which are beneficial to any payment user or developer. After all, it costs less than $0.01 to send $200 from the United States to Colombia in stablecoins, while it costs $12.13 through traditional channels. (Remittance users need to send money home regardless of transaction fees, but lower fees can bring substantial benefits to them.)
International commercial payments, especially for small businesses in emerging markets, also face high fees, long processing times and insufficient bank support. For example, a payment between a clothing manufacturer in Mexico and a textile manufacturer in Vietnam needs to go through four or more intermediaries - local bank, foreign exchange, correspondent bank, foreign exchange, local bank. Each intermediary takes a piece of the pie and increases the risk of transaction failure.
Fortunately, these transactions usually occur between two parties with a long-standing relationship. By using stablecoins, payers in Mexico and payees in Vietnam can try to cut out those 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 have more control over the payment process.
Low-value transactions—especially face-to-face transactions with low fraud risk, such as those at restaurants, coffee shops, or corner stores—are also a potential opportunity. Because these businesses have low profit margins, they are very cost-sensitive, so the 15-cent transaction fee charged by payment solutions has a significant impact on their profitability.
Every time a customer spends $2 on a cup of coffee, only $1.70 to $1.80 goes to the coffee shop, while the remaining nearly 15% goes to the credit card company—simply for facilitating the transaction. But here, the credit card is just a convenience: neither the consumer nor the store needs the bells and whistles that justify the fees. The consumer doesn’t need fraud protection (they’re just buying a cup of coffee) or loans (the coffee is only $2). And the coffee shop has limited need for compliance and bank integration (coffee shops typically use comprehensive restaurant management software or none at all). So if there’s a cheap, reliable alternative, we can expect these businesses to take advantage of it.
Cheaper payment methods boost profitability
The transaction fees of the current payment system directly impact the profitability of many businesses. Reducing these fees will unlock huge profit margins. The first signal has already appeared: Stripe announced that it will charge a 1.5% fee on stablecoin payments, which is 30% lower than the fees they charge for card payments. To support this effort, Stripe announced the acquisition of Bridge.xyz for approximately $1 billion.
Wider stablecoin adoption would significantly improve profitability for many businesses — not just small businesses like coffee shops or restaurants. Let’s look at the fiscal 2024 financials of three public companies to estimate the effect of reducing payment processing fees to 0.1%. (For simplicity, this assessment assumes that businesses pay a blended payment processing cost of 1.6% and that up- and down-channel costs are minimal. More on that below.)
Walmart, with $648 billion in annual revenue, could pay $10 billion in credit card fees for a profit of $15.5 billion. Do the math: If payment fees were eliminated, Walmarts profitability and valuation could increase by more than 60% with a cheaper payment solution, all else being equal.
Burrito, a fast-growing fast-food restaurant with $9.8 billion in annual revenue, paid $148 million in credit card fees on $1.2 billion in annual profits. Simply by reducing fees, Burrito could increase profitability by 12%—a significant boost that it can’t capture on its income statement.
Kroger, the national grocer, will benefit the most due to the lowest profit margins. Surprisingly, Kroger’s net income and payment costs may be almost equal. Like many grocery stores, its profit margin is less than 2%, which is less than the fees that businesses pay to process credit cards. Kroger may be able to double its profits through stablecoin payments.
How can Walmart, Burrito, and Kroger reduce transaction fees by using stablecoins? First, this is an idealistic scenario: widespread consumer adoption will not be immediate. Until stablecoins are widely used, there will still be significant fees, especially on the inflow and outflow channels. Second, retailers and payment processors generally oppose high-fee payment solutions. Payment processors are a low-margin industry, with most of the profits captured by card networks and issuing banks. When payment processors process transactions, most of their fees are split with the payment networks. For example, Stripe charges 2.9% of the total transaction amount plus a $0.30 fee when processing online retail checkouts, but more than 70% of this fee goes to Visa and the issuing bank. As more payment processors, such as Block (formerly Square), Fiserv, Stripe, and Toast, begin to adopt stablecoins to improve their profit margins, it will make it easier for more businesses to use stablecoins.
Since stablecoins have lower fees and no intermediary fees, this means that payment processors can earn higher profit margins on stablecoin transactions. Higher profit margins may incentivize payment processors to support and drive more businesses and application scenarios to use stablecoins. However, as payment processors adopt them, stablecoin payment fees are expected to gradually decrease: for example, Stripes 1.5% fee may decline due to market competition.
Next Step: Driving Broad Consumer Adoption of Stablecoins
Currently, stablecoins are gradually being adopted as a new, permissionless way to transmit and store funds. Entrepreneurs are developing solutions to transform stablecoin infrastructure into stablecoin platforms. Like previous innovations, stablecoin adoption will occur gradually, starting with marginal consumers and forward-thinking enterprises, until the platform is mature enough to meet the needs of ordinary users and conservative enterprises. The following three trends will drive more mainstream enterprise adoption of stablecoins.
1. Enhanced backend integration through stablecoin orchestration
Stablecoin orchestration, the ability to monitor, manage, and integrate stablecoins, will soon be integrated into payment processors like Stripe.
These orchestration products allow businesses to process payments at a fraction of the cost of current mechanisms, without requiring major process or engineering changes. Consumers may unknowingly receive cheaper products as costs for invoices, payrolls, and subscriptions will automatically be reduced. Many stablecoin orchestration companies have begun serving clients who want instant settlement, low cost, and broad availability for business-to-business or business-to-consumer payments. By integrating stablecoins in the backend, businesses can enjoy the benefits of stablecoins without compromising the quality of payment service expectations of their users, while stablecoin adoption increases.
2. Improve user guidance and increase corporate sharing incentives
Stablecoin companies are becoming more sophisticated in attracting end users to the chain through shared incentives and improved user onboarding solutions. Channel fees continue to decrease, and faster and more ubiquitous channels make it easier for users to get started with cryptocurrencies. At the same time, more and more consumer applications support cryptocurrencies, allowing users to benefit from the expanding stablecoin ecosystem without changing existing applications or user behavior. Popular applications like Venmo, ApplePay, Paypal, CashApp, Nubank, and Revolut now allow users to use stablecoins.
Companies also have more incentive to use these corridors to integrate stablecoins and keep funds in stablecoins. Fiat-backed stablecoin issuers like Circle, Paypal, and Tether share their profits with regular businesses, just as Visa shares profits with United and Chase to attract credit card users. These types of partnerships and integrations generate revenue for stablecoin issuers by creating larger pools of assets, but can also benefit businesses that successfully switch users from credit cards to stablecoins. These businesses can now earn a portion of the revenue from the funds that flow through their products, a business model usually reserved for banks, fintech companies, and gift card issuers that make money on user float.
3. Enhance regulatory transparency and availability of compliance solutions
When businesses feel confident in the regulatory environment, they are more likely to adopt stablecoins. While we have yet to see comprehensive global regulation of stablecoins, many regions have issued rules and guidance for stablecoins, allowing entrepreneurs to start building compliant and user-friendly businesses.
For example, the EU’s Markets in Crypto-Assets (MiCA) regulation sets out rules for stablecoin issuers, including prudential and behavioral requirements. The regulation has already significantly changed the European stablecoin market since its stablecoin provisions came into effect earlier this year.
While the United States currently lacks a stablecoin framework, bipartisan policymakers increasingly recognize the need for effective stablecoin legislation. Such regulation needs to ensure that issuers fully back their tokens with high-quality assets, have their reserves audited by a third party, and implement comprehensive measures to combat illicit financial activities. At the same time, legislation needs to preserve the ability of developers to create decentralized stablecoins that reduce user risk by eliminating intermediaries and leverage the benefits of decentralization.
These policy efforts will allow companies across industries to consider moving from traditional payment rails to stablecoin infrastructure. While compliance solutions are less attractive, each stablecoin adopter helps prove to incumbents that stablecoins are a reliable, secure, regulated, and improved solution to classic payment problems.
As stablecoin adoption increases, the platform’s network effects will grow stronger. While it may take years before stablecoins can be used at the point of sale or as a replacement for a bank account, as the number of stablecoin users grows, stablecoin-centric solutions will become more mainstream and more appealing to consumers, businesses, and entrepreneurs.
Go with the flow: Stablecoins will continue to improve
During the adoption process, the product itself will continue to improve. The Web3 community is celebrating the adoption of stablecoins for good reason: stablecoins are climbing the value innovation S-curve due to years of infrastructure and on-chain application investment. As infrastructure improves, on-chain applications become richer, and on-chain networks grow, stablecoins will become more attractive to users. This will happen in two ways.
First, technological advances in crypto infrastructure have made stablecoin payments possible at a cost of less than 1 cent. Future investments will continue to make transactions cheaper and faster. At the same time, stablecoin orchestration and improved user onboarding will be possible thanks to better wallets, bridges, channels, developer experience, and AMMs.
This technological foundation provides entrepreneurs with increasing incentives to build stablecoins, offering an improved developer experience, a rich ecosystem, broad adoption, and permissionless composability of on-chain funds.
Second, stablecoins unlock new use cases through the permissionless composability of on-chain funds. Other payment platforms have gatekeepers, forcing entrepreneurs to work with extractive networks, such as expensive intermediaries in credit card transactions or international payments. But stablecoins are self-custodial and programmable, lowering the barrier 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 increased competition.
Stablecoins promise to usher in a new era of fee-free, scalable, and instant payments. As Stripe CEO Patrick Collison puts it, stablecoins are like “room-temperature superconductors for financial services,” enabling businesses to explore new business opportunities that might otherwise be difficult to achieve with the burden of traditional payment rails.
In the short term, stablecoins will trigger a structural change in financial products as payments become more free and open. Existing payment companies will need to find new profit models, perhaps by sharing revenue or providing services that complement this emerging platform. As traditional companies gradually realize the changes in the market, entrepreneurs will develop new solutions to help these companies better use stablecoins.
In the long run, as stablecoins become more popular and technology advances, startups will seize the opportunities inherent in this world of free, frictionless and instant payments. These startups will gradually emerge, bringing new and unexpected application scenarios, and further promote the popularization of the global financial system, allowing more people to enjoy the opportunities therein.
Acknowledgements: Special thanks to Tim Sullivan, Aiden Slavin, Eddy Lazzarin, Robert Hackett, Jay Drain, Liz Harkavy, Miles Jennings, and Scott Kominers for their valuable feedback and suggestions that made this article possible.
Sam Broner is a partner in the a16z crypto investment team. Prior to joining a16z, Sam was a software engineer at Microsoft and was part of the founding teams of Fluid Framework and Microsoft Loop. While studying at MIT Sloan School of Management, Sam participated in Project Hamilton at the Federal Reserve Bank of Boston, led the Sloan Blockchain Club, planned the first Sloan AI Summit, and won the Patrick J. McGovern Award from MIT for creating an entrepreneurial community. You can follow his account @SamBroner on the X platform.
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