Here is the English translation of the text, with the specified terms retained as is:
The article analyzes how stablecoins can challenge the market monopoly of Visa and Mastercard through low fees, and discusses the challenges and potential of their development under regulation and banking industry pressure.
Original: Exploring a stablecoin bank (X)
Author: @bridge__harris
Translated by: Bai Hua Blockchain
For the $1 trillion "duopoly" of Visa and Mastercard, stablecoins have become a challenge. Unless these two companies can adapt in time, they will face increasing pressure as cryptocurrency regulation changes and new competitors emerge fiercely. If the Credit Card Competition Act (CCCA) is passed, it will require large banks to provide merchants with at least one additional network option, in addition to the current Visa and Mastercard that merchants can only choose from, to process credit card transactions. This will weaken Visa and Mastercard's pricing power, and most importantly, stablecoin networks may seize the opportunity to compete with them through lower fees. However, it should be noted that the likelihood of the Credit Card Competition Act being passed is very low - it has only a 3% chance of passing in the Senate and a 9% chance in the House, so while it would be very beneficial if passed, it currently seems unlikely.
Currently, Visa and Mastercard charge merchants swipe fees as high as 2-3%, which is usually the second largest cost for merchants after payroll. Unfortunately, small merchants are particularly affected by these high fees. Large corporate enterprises like Walmart have enough bargaining power to negotiate lower transaction fees, getting more favorable rates than small merchants, who are firmly locked in by Visa and Mastercard. This is also one of the reasons why Visa and Mastercard have profit margins over 50%:
small merchants have no choice but to rely on Visa and Mastercard, as they control 80% of the credit card market. In short, merchants cannot afford the additional costs of breaking away from these two companies - this is what is called a "classic duopoly" (Senator Josh Hawley).
A stablecoin network can reduce swipe fees to near zero. Merchants hate swipe fees - this is completely reasonable - if they can choose a low-cost network that does not limit their market size, they will switch without hesitation.
The idea of merchants wanting to avoid card processing fees is not new, the key question is how to incentivize consumers to change their payment habits: "Why can the first person using a new currency succeed, while the millionth user?" (Peter Thiel) The gradual popularity of account-to-account (A2A) payments as a payment method has
proven that under the right conditions, consumers are willing to change their payment habits. Fred Wilson of Union Square Ventures even predicts that by 2025, direct bank-to-bank payments will exceed credit card payments in certain areas of the US. Better regulation, especially the implementation of Section 1033 of the Consumer Financial Protection Bureau (CFPB),
by clearly supporting the government's backing of open banking, makes it easier for retailers to offer A2A transactions, not only helping them avoid card processing fees, but also providing consumers with more payment options.
Furthermore, the user experience of A2A payments may ultimately be more consumer-friendly - similar to the experience of ShopPay. Walmart has already launched A2A payment products, and both large and small merchants are starting to follow suit. To convince consumers to choose this payment method, Walmart has added instant transfer functionality, allowing consumers to avoid multiple pending transactions and thus avoid overdrafts.
"New technologies are making A2A payments more feasible for small merchants, providing a viable alternative to avoid card processing fees." - Sophia Goldberg, co-founder of Ansa.
The demand for cheaper, faster, and more efficient payment methods (i.e., stablecoins) is clearly very strong. So the question is: how does the transition to a stablecoin network actually work? From a functional perspective, do consumers need a card with a different brand, or can they continue to use their regular Visa/Mastercard cards, while merchants have the option to process through other networks through mandatory regulation? The Credit Card Competition Act does not explicitly address this, so we can only see how the compatibility of these new networks and cards will ultimately develop. Large-scale adoption requires meeting one of two conditions:
1) Provide customers with a strong incentive to switch cards (active adoption); or 2) Transition behind the scenes, with customers continuing to use their existing cards, but the actual processing taking place on the stablecoin network (passive adoption).
One way to align incentives is to launch a new stablecoin bank: account holders can enjoy discounts at participating merchants like Amazon and Walmart, and these merchants will be happy to offer rewards because they can avoid the 2-3% Visa/Mastercard swipe fees.
Today, customer spending is increasingly concentrated on a few major platforms, so as long as the following conditions are met: 1) The rewards customers receive are enough to offset the hassle of switching cards, and 2) The rewards offered by merchants are lower than the 2% transaction fee they pay to Visa/Mastercard, the stablecoin bank can achieve a win-win situation.
Customers can still earn interest on their deposits, as the stablecoin operates in the background, and credit issuance itself can also be done in stablecoins. But from a user experience perspective, customers are still just swiping cards. At that point, banks can be completely bypassed: when customers make purchases at retailers, they are essentially transferring from one wallet to another.
Stablecoin banks can make money by charging processing fees (obviously lower than current fees), deposit interest (profit sharing), and fees when users convert stablecoins to fiat currency. Some believe that stablecoin issuers are actually shadow banks, but for mainstream adoption, a new stablecoin bank that collaborates with merchants from top to bottom may be the most effective choice. If the incentive measures are in place, customers will be willing to join.
Brazil's Nubank can be used as a reference, which has stood out in a market still dominated by banks and notorious for charging excessively high fees. Nubank succeeded in attracting a large number of consumers by launching a mobile-centric full-featured product and significantly reducing fees, while traditional Brazilian banks often failed to provide basic financial services in a convenient manner. In contrast, while not perfect, traditional banks in the US already have sufficient online and mobile functionality to make most customers unwilling to switch easily. Nubank's success was based on its excellent user experience, and this model can theoretically be replicated in the US. But a successful currency platform is not just a great interface, it must also allow users to easily transfer between deposit accounts, stablecoins, and cryptocurrencies, and even enter "buy now, pay later" (BNPL) or other credit products - without having to switch to other platforms. This is the key to Nubank's success and a gap in the US market.
However, the regulatory issues in the US cannot be ignored: challenger banks that want to replicate the Nubank model (and use stablecoins) in the US will face overlapping regulatory requirements from multiple regulators such as the OCC, Federal Reserve, and various state governments. The feasibility of stablecoin banks ultimately depends on whether a banking license is required, which money transfer licenses (MTLs) are needed, and other relevant regulatory issues. The last company to obtain a nationwide banking license in the US was Sofi (through the acquisition of Golden Pacific Bank), which obtained that license almost 3 years ago in January 2022. Stablecoin banks can consider some innovative paths, such as partnering with existing FDIC-insured banks or trust companies, rather than directly pursuing a nationwide license. However, without the Credit Card Competition Act (CCCA), any new bank-based stablecoin payment network - even with a license - would be limited to non-merchant payments (i.e., B2B and peer-to-peer payments).
The bipartisan stablecoin bill recently proposed by Lummis and Gillibrand helps to drive this process forward. The clear goal of this bill is to "create a clear regulatory framework for payment stablecoins that protects consumers, supports innovation, and promotes the dominance of the US dollar." While this bill is undoubtedly an important step in the right direction, it is far less specific than the CCCA, which provides a more detailed action plan in terms of forcing banks to comply.
A potential obstacle to the success of stablecoin banks is the banking industry's huge influence in Washington, which is one of the most powerful lobbying forces in the US. Therefore, pushing the necessary legislation through Congress will be a tough battle. In 2023, the total lobbying spending of banks, large and small, is estimated to be around $85 million. It's worth noting that the publicly reported lobbying spending figures may actually be much higher, given the complex entities and methods used by lobbyists.
The establishment of stablecoin banks first requires a clear regulatory strategy and sufficient financial support to withstand the strong lobbying pressure from existing banks. Nevertheless, the potential returns are enormous. A successful challenger bank can fill the missing comprehensive financial model in the US market, and it will be entirely built on stablecoins. If executed properly, this will be the biggest transformation of the way consumers, merchants, and banks interact since the internet.
Even though this is a potentially trillion-dollar market and technically feasible, stablecoin banks still depend on the CCCA, which currently seems difficult to pass. The existing banking powers will fight back fiercely, as the old naturally opposes the new. But the new will eventually come - at least in some form.
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