Original author: Sam Broner.
Original translation: Deep Tide TechFlow.
The current payment market is dominated by some 'gatekeepers' that charge high fees, cutting into the profits of each business, which they justify under the guise of ubiquity and convenience, while stifling competition and limiting the creativity of innovators.
Stablecoins can provide better solutions.
Stablecoins offer lower fees, more competition among payment service providers, and broader accessibility. By reducing transaction costs to almost zero, stablecoins can help businesses overcome the friction of existing payment methods. The adoption of stablecoins will start with those businesses most impacted 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 almost everywhere in the world, using stablecoins because they offer a secure, inexpensive, and inflation-resistant way to store and spend. Besides cash and gold, stablecoins are the only widely adopted payment method that does not require intermediaries like banks, payment networks, or central banks. At the same time, stablecoins offer permissionless programmability, scalability, and integrability—anyone can build payment platforms on stablecoin payment infrastructure.
This transformation may take time, but it will likely happen faster than many expect. Businesses like restaurants, retailers, enterprises, and payment processors will reap the most benefits from stablecoin platforms, witnessing significant improvements in their profit margins. This demand will drive the adoption of stablecoins, and as their usage grows, other advantages of stablecoins—permissionless composability and enhanced programmability—will attract more users, businesses, and products on-chain. I will elaborate on the reasons and methods below, starting with some background on the payments industry.
Payment participants
Payment rails: the technology, rules, and networks for processing transactions.
Payment processors: operators above the payment rails responsible for facilitating transactions.
Payment service providers: entities that provide access to payment systems for end users or other systems.
Payment solutions: products offered by payment service providers.
Payment platforms: a set of related payment solutions covering providers, processors, and payment rails.
Background on the payments industry
The scale of the payments industry is difficult to estimate. In 2023, the global payments industry processed 3.4 trillion transactions, involving $18 trillion in transaction volume and 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 massive scale and ubiquity of the payments industry, payment solutions remain expensive and complex, even though payment applications often mask the complex experience for consumers. For example, Venmo, a peer-to-peer payment application, appears simple on the surface, but hides complex banking integrations, debit card loopholes, and countless compliance obligations in the background. Adding to the complexity, payment solutions often stack on top of each other, resulting in people still using 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.
The questions consumers typically care about are, how much will I need to pay? Merchants care about, will I receive payment? But in reality, these four metrics are critical for both parties.
Since the era when businesses had 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 have driven growth in transaction volume and spending.
However, many customers still fail to benefit from modern payment products or are underserved. For merchants, credit card fees are expensive and directly erode their profits. Despite the increasing adoption of real-time payments (RTP), bank transfers in the U.S. remain too slow, often taking several days. Peer-to-peer applications, due to regional and network constraints, make transfers between ecosystems slow, expensive, and complex.
While businesses and consumers have begun to expect payment platforms to offer more sophisticated features, existing solutions do not meet all users' needs very well. In fact, most users pay too much in fees.
Stablecoins are emerging in the payments industry.
Stablecoins find entry points where existing payment solutions fail (such as high costs, low availability, or high friction), especially in areas where the demand for supplementary products in payment solutions (like identity, loans, compliance, fraud protection, and bank integration) is low.
Take remittances as an example; this demand often arises from an urgent need. Many remittance users are underserved by banks and the banking services they use are highly fragmented. Thus, they do not see much value in the local integration of traditional payments and banking services. Stablecoin payments offer instant settlement, low costs, and the advantage of being intermediary-free, which is beneficial for any payment user or developer. After all, the fee for remitting $200 from the U.S. to Colombia using stablecoins is less than $0.01, while traditional channels require $12.13. (Remittance users need to send money home regardless of transaction fees, but lower fees can provide them with substantial benefits.)
International business payments, especially for small businesses in emerging markets, also face high fees, long processing times, and inadequate bank support. For instance, payments between clothing manufacturers in Mexico and textile manufacturers in Vietnam require passing through four or more intermediaries—local banks, foreign exchange brokers, correspondent banks, foreign exchange, local banks. Each intermediary takes a cut, increasing the risk of transaction failures.
Fortunately, these transactions often occur between parties with a long-standing relationship. By using stablecoins, the payers in Mexico and the payees in Vietnam can try 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 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 promising opportunity. Because these businesses operate on thin margins, they are very cost-sensitive, making a 15-cent transaction fee charged in payment solutions significantly impact their profitability.
Whenever a customer spends $2 on coffee, only $1.70 to $1.80 enters the coffee shop, with nearly 15% going to the credit card company—just for facilitating the transaction. But here, credit cards are only for convenience: neither consumers nor shops need those additional features that justify the fees. Consumers do not need fraud protection (they just bought a cup of coffee) or loans (the coffee only costs $2). And coffee shops have limited demands for compliance and bank integration (they usually use integrated restaurant management software or don’t use any at all). Therefore, if there is a cheap, reliable alternative, we can expect these businesses to take advantage of it.
Cheaper payment methods enhance profitability.
The transaction fees of current payment systems directly affect the profitability of many businesses. Lowering these fees would unlock enormous profit potential. The first signals are already appearing: Stripe announced it would charge a 1.5% fee for stablecoin payments, which is 30% lower than the fees they charge for card payments. To support this effort, Stripe announced an acquisition of Bridge.xyz for about $1 billion.
Wider adoption of stablecoins will significantly improve the profitability of many businesses—not limited to small businesses like coffee shops or restaurants. Let's look at the financials of three publicly traded companies in fiscal year 2024 to estimate the impact of reducing payment processing fees to 0.1%. (For convenience, this assessment assumes businesses pay a 1.6% blended payment processing cost and that upstream and downstream costs are minimal. More information follows.)
Walmart's annual revenue is $648 billion, potentially paying $10 billion in credit card fees, with profits of $15.5 billion. Do the math: if payment fees were eliminated, Walmart's profitability and valuation could increase by over 60% under other unchanged factors.
Chipotle, a rapidly growing fast-food chain, has annual revenues of $9.8 billion. It pays $148 million in credit card fees on $1.2 billion in annual profits. Just by reducing fees, Chipotle could improve its profitability by 12%—a significant boost not reflected in its income statement.
Kroger, a national grocery chain, stands to benefit the most due to its low profit margins. Surprisingly, Kroger's net income and payment costs might be nearly equal. Like many grocery stores, its profit margin is below 2%, less than the fees businesses pay to process credit card payments. Kroger could potentially double its profits through stablecoin payments.
How can Walmart, Chipotle, and Kroger reduce transaction costs by using stablecoins? First, this is an idealized scenario: widespread adoption by consumers will not happen overnight. Before stablecoins are widely used, there will still be significant costs, particularly in terms of the flow of funds into and out of channels. Secondly, retailers and payment processors generally oppose high-fee payment solutions. Payment processors themselves operate in a low-margin industry, with most profits being captured by card networks and issuing banks. When payment processors handle transactions, a large portion of their fees is taken by payment networks. For instance, Stripe charges a 2.9% fee plus $0.30 when processing 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 to adopt stablecoins to improve profit margins, it will become easier for more businesses to use stablecoins.
Due to the lower fees of stablecoins and the absence of intermediary costs, payment processors can achieve higher profit margins on 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 stablecoins, it is expected that payment fees for stablecoins will gradually decrease: for example, Stripe's 1.5% fee may drop due to market competition.
Next steps: Drive widespread consumer adoption of stablecoins.
Currently, stablecoins are gradually being adopted as a new, permissionless way of transferring and storing funds. Entrepreneurs are developing solutions to transform stablecoin infrastructure into stablecoin platforms. Like past innovations, the adoption of stablecoins will proceed incrementally, beginning with meeting the needs of edge-case consumers and forward-thinking businesses, until platforms are mature enough to meet the requirements of average users and conservative enterprises. The following three trends will drive more mainstream adoption of stablecoins.
1. Orchestrate enhanced backend integration through stablecoins.
Stablecoin orchestration, which includes monitoring, managing, and integrating stablecoins, will soon be integrated into payment processors like Stripe.
These orchestration products can enable businesses to process payments at a cost far below current mechanisms without requiring significant changes in processes or engineering. Consumers may unknowingly receive cheaper products as the costs of invoices, payroll, and subscriptions will automatically decrease. Many stablecoin orchestration companies have already begun to serve customers seeking instant settlement, low costs, and broadly available business-to-business or business-to-consumer payment solutions. By integrating stablecoins on the backend, businesses can enjoy the advantages of stablecoins without impacting users' quality expectations for payment services, while the adoption of stablecoins is also increasing.
2. Improve user onboarding and increase shared incentives for businesses.
Stablecoin companies are maturing in their ability to attract end users on-chain by sharing incentives and improving user onboarding solutions. Channel fees are continuously decreasing, becoming faster and more widespread, making it easier for users to start using cryptocurrencies. At the same time, more and more consumer applications support cryptocurrencies, allowing users to benefit from an expanded stablecoin ecosystem without changing 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, just as 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 shift users from credit cards to stablecoins. These businesses can now earn a portion of the revenue from the funds flowing through their products, a business model typically reserved for banks, fintech companies, and gift card issuers that profit from user float.
3. Enhanced regulatory transparency and availability of compliance solutions.
When businesses feel confident about the regulatory environment, they are more likely to adopt stablecoins. While we have not yet seen comprehensive global regulation of stablecoins, many regions have already issued rules and guidance on stablecoins, allowing entrepreneurs to start building compliant and user-friendly businesses.
For example, the EU's (Markets in Crypto-Assets Regulation) (MiCA) has established rules for stablecoin issuers that include prudential and conduct requirements. Since its stablecoin provisions took effect earlier this year, the regulation has significantly changed the stablecoin market in Europe.
Although the U.S. currently lacks a stablecoin framework, bipartisan policymakers are increasingly recognizing 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 illegal financial activities. At the same time, legislation needs to preserve developers' ability to create decentralized stablecoins that reduce user risk by eliminating intermediaries and leveraging the benefits of decentralization.
These policy efforts will allow companies across industries to consider transitioning from traditional payment rails to stablecoin infrastructure. While compliance solutions may be less appealing, each stablecoin adopter helps demonstrate to existing businesses that stablecoins are a reliable, secure, regulated, and improved solution to classic payment problems.
As the adoption of stablecoins increases, the network effects of platforms will become stronger. While it may take years for stablecoins to be used at points of sale or as alternatives to bank accounts, as the number of stablecoin users grows, stablecoin-centric solutions will become more mainstream, attracting more consumers, businesses, and entrepreneurs.
Ride the wave: Stablecoins will continuously improve.
During the adoption process, the products themselves will continuously improve. The Web3 community has ample reason to celebrate the adoption of stablecoins: due to years of infrastructure and on-chain application investment, stablecoins are climbing the value innovation S-curve. With improvements in infrastructure, an abundance 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 have made stablecoin payment costs below one cent possible. Future investments will continue to make transactions cheaper and faster. Meanwhile, with better wallets, bridges, channels, developer experience, and AMMs, stablecoin orchestration and improved user onboarding will become possible.
This technological foundation provides entrepreneurs with increasing motivation to build stablecoins, offering improved developer experience, a rich ecosystem, 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, forcing entrepreneurs to collaborate 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 growing competition.
Stablecoins are poised to lead a new era of free, scalable, and instant payments. As Stripe's CEO Patrick Collison has said, stablecoins are like 'room-temperature superconductors in the financial services sector,' enabling businesses to explore new opportunities that may be difficult to realize under the burdens of traditional payment channels.
In the short term, as payments become more free and open, stablecoins will trigger structural changes in financial products. Existing payment companies will need to find new profit models, possibly by sharing revenue, or providing services that complement this emerging platform. As traditional businesses gradually recognize changes in the market, entrepreneurs will develop new solutions to help these businesses better leverage stablecoins.
In the long run, as stablecoins gain popularity and technology improves, startups will seize the inherent opportunities in this free, frictionless, and instant payment world. These startups will gradually emerge, bringing new, unexpected use cases and furthering the democratization of the global financial system, allowing more people to benefit from the opportunities within it.
Acknowledgments: 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. Prior to joining a16z, Sam was a software engineer at Microsoft and was part of the founding team for Fluid Framework and Microsoft Loop. Sam was also involved in Project Hamilton at the Federal Reserve Bank of Boston during his studies at MIT's Sloan School of Management, led the Sloan Blockchain Club, organized the first Sloan AI Summit, and received MIT's Patrick J. McGovern Award for creating an entrepreneurial community. You can follow him on X platform @SamBroner.
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