Other advantages of stablecoins will attract more users, businesses, and products onto the blockchain.
Article Author: Sam Broner, a16z
Article Translated by: Deep Tide TechFlow
The current payment market is dominated by some 'gatekeepers' that charge high fees, which cut into the profits of each business, justifying these fees under the guise of ubiquity and convenience while stifling competition and limiting the creativity of innovators.
Stablecoins can provide better solutions.
Stablecoins provide lower fees, more competition among payment service providers, and broader accessibility. By bringing transaction costs down to nearly zero, stablecoins can help businesses escape the friction caused by existing payment methods. The adoption of stablecoins will begin with those businesses 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 completed over 600 million transactions globally. Stablecoin users are nearly ubiquitous around the world, using stablecoins because they provide a secure, inexpensive, and inflation-resistant means of storing and spending. Besides cash and gold, stablecoins are the only widely adopted means of payment that do not require intermediaries such as banks, payment networks, or central banks. At the same time, stablecoins offer permissionless programmability, scalability, and integration—anyone can build payment platforms on stablecoin payment infrastructure.
This transformation may take time, but it is likely to happen faster than many expect. Businesses such as restaurants, retailers, corporations, and payment processors will benefit most from stablecoin platforms, seeing significant improvements in profit margins. This demand will drive the adoption of stablecoins, and as their use grows, other advantages of stablecoins—such as permissionless composability and enhanced programmability—will attract more users, businesses, and products onto the blockchain. I will elaborate on the reasons and methods below, beginning with some background on the payment industry.
Payment Participants
Payment rails: the technology, rules, and networks that process transactions.
Payment Processor: Operators above the payment rails responsible for facilitating transactions.
Payment Service Provider: An entity that provides access to payment systems for end users or other systems.
Payment Solutions: Products provided by payment service providers.
Payment Platform: A set of related payment solutions that encompass providers, processors, and payment rails.
Background of the Payment Industry
The scale of the payment industry is difficult to estimate. In 2023, the global payment industry processed 3.4 trillion transactions involving $18 trillion in transaction volume, generating $2.4 trillion in revenue. In the U.S. alone, credit card payments reached $5.6 trillion, while debit card payments reached $4.4 trillion.
Despite the vast scale and prevalence of the payment industry, payment solutions remain expensive and complex, even though payment applications often obscure the complex experiences for consumers. For example, Venmo, a peer-to-peer payment application, appears simple on the surface but hides complex bank integrations, debit card loopholes, and countless compliance obligations in the backend. Compounding the complexity is that payment solutions often layer on top of each other, as people still use various payment methods: cash, debit cards, credit cards, peer-to-peer payment applications, ACH (Automated Clearing House), checks, etc.
The four main metrics for payment products are timeliness, cost, reliability, and convenience.
Consumers typically focus on the question: How much will I have to pay? Merchants, on the other hand, focus on whether they will receive payment. But in reality, all four criteria are crucial for both parties.
Since the era when businesses had to look for fraudulent credit cards in physical ledgers, waves of innovation have improved payment experiences. Each wave of innovation has brought faster, more reliable, more convenient, and cheaper payment methods, which in turn has driven growth in transaction volumes and consumer spending.
However, many customers still fail to benefit from modern payment products or feel underserved. For merchants, credit card fees are expensive and directly erode their profits. Despite the increasing adoption of real-time payments (RTP), U.S. bank transfers remain too slow, often taking several days. Peer-to-peer applications, meanwhile, are slow, expensive, and complex due to regional and network constraints, making transfers between ecosystems cumbersome.
While businesses and consumers have begun to expect payment platforms to offer more complex features, existing solutions do not meet all users' needs well. In fact, most users pay excessively high fees.
Stablecoins emerge in the payment industry.
Stablecoins find entry points where existing payment solutions fail (e.g., high costs, low availability, or high friction), especially in areas with lower demand for additional products in payment solutions (e.g., identity, loans, compliance, fraud protection, and bank integration).
Take remittances as an example; the demand often arises from urgent needs. Many remittance users are unbanked, and the banking services they use are highly fragmented. Therefore, they do not see much value in the local integration of traditional payments with banking services. Stablecoin payments offer the advantages of instant settlement, low costs, and no intermediaries, benefiting any payment user or developer. After all, the cost of remitting $200 from the U.S. to Colombia using stablecoins is less than $0.01, while through traditional channels it costs $12.13. (Remittance users need to send money home regardless of transaction fees, but lower fees provide them with tangible benefits.)
International business payments, especially for small businesses in emerging markets, also face high fees, long processing times, and insufficient bank support. For example, payments between clothing manufacturers in Mexico and textile manufacturers in Vietnam require four or more intermediaries—local banks, foreign exchange, correspondent banks, foreign exchange, local banks. Each intermediary takes a cut and increases the risk of transaction failures.
Fortunately, these transactions usually occur between parties with long-standing relationships. By using stablecoins, payers in Mexico and payees in Vietnam can attempt to eliminate those 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 have more control over the payment process.
Low-value transactions—especially low-fraud-risk face-to-face transactions, such as those in restaurants, coffee shops, or corner stores—also present a potential opportunity. Due to the low profit margins of these businesses, they are very sensitive to costs, so a 15-cent transaction fee charged in payment solutions significantly impacts their profitability.
Whenever a customer spends $2 on coffee, only $1.70 to $1.80 goes to the coffee shop, with the remaining nearly 15% going to the credit card company—just to facilitate the transaction. But here, the credit card only serves as a convenience: neither the consumer nor the shop needs those additional features to justify the fees. Consumers do not need fraud protection (they just bought a coffee) or loans (the coffee only costs $2). And coffee shops have limited needs for compliance and bank integration (they typically use integrated restaurant management software or don’t use it at all). Therefore, if there were a cheap and reliable alternative, we could expect these businesses to take advantage of it.
Cheaper payment methods enhance profitability.
Current transaction fees in payment systems directly impact the profitability of many businesses. Lowering these fees would free up significant profit margins. The first signal has already emerged: Stripe announced a 1.5% fee for stablecoin payments, which is 30% lower than the fee they charge for card payments. To support this effort, Stripe announced the acquisition of Bridge.xyz for approximately $1 billion.
Wider adoption of stablecoins will significantly enhance profitability for many businesses—not limited to small enterprises like coffee shops or restaurants. Let's look at the financial status of three public companies for fiscal year 2024 to estimate the effect of reducing payment processing fees to 0.1%. (For convenience, this assessment assumes businesses paying a 1.6% blended payment processing cost and minimal upstream and downstream costs. More information is provided below.)
Walmart's annual revenue is $648 billion, which could result in $10 billion in credit card fees, with profits at $15.5 billion. Let's calculate: if payment fees were eliminated, Walmart's profitability and valuation could increase by over 60% under unchanged other factors.
Chipotle, a rapidly growing fast-food chain, has an annual revenue of $9.8 billion. It paid $148 million in credit card fees from its annual profit of $1.2 billion. Just by reducing fees, Chipotle's profitability could improve by 12%—a significant boost not reflected in its income statement.
Kroger, a national grocery store chain, stands to benefit the most due to its low margins. Surprisingly, Kroger's net income and payment costs may be almost equal. Like many grocery stores, its profit margin is below 2%, lower than the fees for processing credit cards in corporate payments. Kroger could potentially double its profits through stablecoin payments.
How can Walmart, Chipotle, and Kroger reduce transaction fees by using stablecoins? First, this is an idealized scenario: widespread consumer adoption will not happen overnight. Before stablecoins are widely used, there will still be significant fees, particularly regarding the channels for inflows and outflows of funds. Secondly, retailers and payment processors generally oppose high-fee payment solutions. The payment processor industry itself has low margins, with most profits going to card networks and issuing banks. When payment processors handle transactions, most of their fees are taken by the payment networks. For example, Stripe charges a 2.9% fee plus $0.30 on online retail checkouts, but over 70% of that goes to Visa and issuing banks. As more payment processors like Block (formerly Square), Fiserv, Stripe, and Toast begin adopting stablecoins to improve margins, more businesses will find it easier to use stablecoins.
With lower fees for stablecoins and no intermediary costs, this means that payment processors can achieve higher profit margins in stablecoin transactions. Higher profit margins may incentivize payment processors to support and drive more businesses and use cases to adopt stablecoins. However, as payment processors adopt them, stablecoin payment fees are expected to gradually decrease: for instance, Stripe's 1.5% fee may decrease due to market competition.
Next Steps: Drive Wide Consumer Adoption of Stablecoins
Currently, stablecoins are gradually being adopted as a new type of permissionless means of transferring and storing funds. Entrepreneurs are developing solutions to transform stablecoin infrastructure into stablecoin platforms. As with past innovations, the adoption of stablecoins will be gradual, starting with meeting the needs of edge consumers and forward-thinking businesses until the platforms are mature enough to meet the demands of mainstream users and conservative enterprises. The following three trends will drive more mainstream businesses to adopt stablecoins.
1. Enhance backend integration through stablecoin orchestration.
Stablecoin orchestration, i.e., the ability to monitor, manage, and integrate stablecoins, will soon be integrated into payment processors like Stripe.
These orchestration products can allow businesses to process payments at costs far below current mechanisms without making significant process or engineering changes. Consumers may unknowingly receive cheaper products as the costs of invoices, payrolls, and subscriptions will automatically decrease. Many stablecoin orchestration companies have already begun serving businesses that wish to obtain instant settlements, low costs, and widely available B2B or B2C payments. By integrating stablecoins in the backend, businesses can enjoy the benefits of stablecoins without compromising user expectations for payment service quality, while stablecoin adoption is also increasing.
2. Improve user onboarding and increase business shared incentives.
Stablecoin companies are becoming more mature in attracting end users onto the blockchain through shared incentives and improved user onboarding solutions. Channel fees are continuously decreasing, and speeds are faster and more widespread, making it easier for users to start using cryptocurrencies. Meanwhile, more consumer applications are supporting cryptocurrencies, allowing users to benefit from an extended stablecoin ecosystem without changing their existing applications or user behaviors. Popular applications like Venmo, ApplePay, Paypal, CashApp, Nubank, and Revolut now allow users to use stablecoins.
Companies also have more motivation to use these channels to integrate stablecoins and keep funds in stablecoins. Fiat-backed stablecoin issuers like Circle, Paypal, and Tether share their profits with ordinary businesses, similar to how Visa shares profits with United and Chase to attract credit card users. Such partnerships and integrations benefit stablecoin issuers by creating larger asset pools, but they can also benefit businesses that successfully transition users from credit cards to stablecoins. These businesses can now receive a portion of the revenue generated from the funds flowing through their products, a business model that has typically been reserved for banks, fintech companies, and gift card issuers that profit from user float.
3. Enhance regulatory transparency and the availability of compliance solutions
When businesses are confident in the regulatory environment, they are more likely to adopt stablecoins. Although we have not yet seen comprehensive global regulation on stablecoins, many regions have released rules and guidance for stablecoins, allowing entrepreneurs to begin building compliant and user-friendly businesses.
For example, the EU's (Markets in Crypto-Assets Regulation) (MiCA) has established rules for stablecoin issuers, including prudential and conduct requirements. Since the stablecoin provisions of this regulation came into effect earlier this year, it has significantly changed the stablecoin market in Europe.
Although the U.S. currently lacks a stablecoin framework, bipartisan policymakers increasingly recognize the need for effective stablecoin legislation. Such regulation must ensure that issuers fully back their tokens with high-quality assets, have their reserves audited by third parties, and implement comprehensive measures to combat illegal financial activities. At the same time, legislation needs to preserve developers' ability to create decentralized stablecoins that reduce user risks by eliminating intermediaries and leveraging the benefits of decentralization.
These policy efforts will allow companies across various sectors to consider shifting from traditional payment rails to stablecoin infrastructure. While compliance solutions may be less appealing, every stablecoin adopter helps demonstrate to existing businesses that stablecoins are a reliable, secure, regulated, and improved classic payment problem-solving solution.
As stablecoin adoption increases, the network effects of the platforms will become stronger. While it may take several years for stablecoins to be used at points of sale or as alternatives to bank accounts, as the number of stablecoin users grows, stablecoin-centered solutions will become more mainstream and attractive to consumers, businesses, and entrepreneurs.
Leverage the trend: stablecoins will continually improve.
As adoption progresses, the products themselves will continue to improve. The Web3 community has ample reason to celebrate the adoption of stablecoins: due to years of investment in infrastructure and on-chain applications, stablecoins are climbing the value innovation S curve. With improvements in infrastructure, a wealth of on-chain applications, and growth in on-chain networks, stablecoins will become more attractive to users. This will happen in two ways.
First, technological advances in crypto infrastructure make it possible for stablecoin payment costs to be below 1 cent. Future investments will continue to make transactions cheaper and faster. Meanwhile, better wallets, bridges, channels, developer experiences, and AMMs will enable stablecoin orchestration and improved user onboarding.
This technological foundation provides entrepreneurs with increasing motivation to build stablecoins, offering improved developer experiences, rich ecosystems, widespread adoption, and permissionless composability of on-chain funds.
Secondly, stablecoins unlock new user scenarios through the permissionless composability of on-chain funds. Other payment platforms have gatekeepers that force entrepreneurs to collaborate with exploitative 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 are expected to lead a new era of free, scalable, and instant payments. As Patrick Collison, CEO of Stripe, said, stablecoins are like 'room-temperature superconductors in the financial services space,' enabling businesses to explore new opportunities that might be difficult to realize under the burdens of traditional payment channels.
In the short term, as payments become freer and more open, stablecoins will trigger structural changes in financial products. Existing payment companies will need to find new profit models, perhaps through profit-sharing or providing services complementary to this emerging platform. As traditional businesses gradually become aware of market changes, entrepreneurs will develop new solutions to help these businesses better leverage stablecoins.
In the long run, as stablecoins become more popular and technology advances, startups will seize the inherent opportunities in this frictionless, instant payment world. These startups will gradually emerge, bringing new and unexpected use cases and further promoting the democratization of the global financial system, allowing more people to benefit from the opportunities it offers.
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 on the a16z crypto investment team. Before joining a16z, Sam was a software engineer at Microsoft and was involved in the founding team of Fluid Framework and Microsoft Loop. While studying at MIT's Sloan School of Management, Sam participated in the Boston Federal Reserve's Project Hamilton, led the Sloan Blockchain Club, organized the first Sloan AI Summit, and received MIT's Patrick J. McGovern Award for creating an entrepreneurship community. You can follow him on the X platform at @SamBroner.
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