Stablecoins – a threat to traditional payment methods?

On Friday 13th June, reports that some large retailers such as ecommerce-giant Amazon and Walmart were exploring the use of stablecoins to bypass the traditional financial system of banks and card networks. Shortly after, the US Senate passed stablecoin legislation, the so-called GENIUS Act, marking a major step in allowing this innovation to potentially revolutionise how we make payments.

What is a stablecoin?

Stablecoins are a type of cryptocurrency designed to maintain a constant value with a fiat currency, such as the US Dollar. Up to this point they’ve mostly been used by crypto traders to move funds between different cryptocurrencies.

After the result, the market value of all stablecoins surged to an all-time high, including the shares of newly public company Circle, issuer of the USDC stablecoin, which jumped roughly 20% on the day. The stock price of the more-well known cryptocurrency exchange, Coinbase, which recently offered a platform on Shopify to accept stablecoin payments, also rallied by 10%. On the other side of the trade, traditional card networks Visa and Mastercard saw falls of around 8-9% from highs.

What could this mean for traditional payment methods?

On the face of it, the threat to traditional card networks is apparent. Stablecoins do not require the use of banks (for debit payments) and therefore can offer lower fees, quicker settlement, and less restrictions when making cross-border payments than equivalent transactions using card networks. Estimates vary, but 2-4% of the purchase price has been quoted as the transaction fee levied when using card networks in the USA and 0.8-1.5% in Europe due to regulatory caps. This compares to around 1% for stripe accepting USDC stablecoin and potentially 0.1% or less for direct stablecoin acceptance.

While the latter figure is eye-opening, in reality, the retailers would first need to build a system to accept direct stablecoin payments. This would include secure wallets, point of sale systems, new transaction and fraud monitoring which incorporates blockchain technology, accounting systems that can track the conversion back to fiat currency, and anti-money laundering and other regulatory requirements outlined in the GENIUS Act. All of this would be a huge infrastructure investment in an area most retailers know little about, so they are likely to use a 3rd party platform like Coinbase or Stripe who already offer this service.

Comparing the fees using a third-party platform with card networks is much narrower. Moreover, due to their incumbency, card networks are able to offer volume-based rebates to the largest retailers, reducing the fees they actually pay. As such it could mean small and medium sized businesses are the first to delve into the use of stablecoins, which softens the blow somewhat for card networks as they don’t have near enough the transaction volume as larger retailers.

The traditional card networks have not been caught unaware. They have fledgling businesses that offer stablecoin acceptance and executives have mostly been supportive of alternative forms of payment, viewing them as opportunities rather than threats. The brands, distribution, customer relationships and value-added services built by the card networks supports this, as it can allow them to keep business by offering the alternative service.

Are stablecoins a threat?

At this stage, stablecoins will only really be in competition for the debit businesses of the card networks. This is a relatively small segment, estimated at only 10-15% of profits for Visa and 5-10% for Mastercard, due to lower transaction fees on debit payments vs higher-margin credit businesses which interact with banks for the provision of credit. As such, the share price falls seen in the card networks while understandable could be an overreaction. The fact that both stocks were trading above historical valuation levels probably contributed to some of the weakness too.

It should be noted that another big question remains as to why consumers would use stablecoins. It has been discussed the merits for retailers accepting stablecoin payment over card payment, but there isn’t a significant direct benefit to the consumer. Will the cost of rewards and promotions likely needed by retailers to change consumer behaviour be enough to convince them and to keep them using stablecoin? We have already had open banking, crypto, cash app and real time payment innovation yet the trusty bit of plastic either physically or digitally seems to do a good enough job so far and probably for a while yet.