Original Title: Exploring a stablecoin bank Original Author: Bridge Harris, Crypto Kol Original Translation: Zhouzhou, BlockBeats

Editor's note: Stablecoins have the potential to challenge the market monopoly of Visa and Mastercard, especially in a context where both merchants and consumers are eager to lower payment fees. The concept of stablecoin banks could potentially become a mainstream payment method by offering lower payment fees and a better user experience. However, widespread adoption of stablecoin payments still faces multiple challenges, including legal regulations, changes in consumer behavior, and competition with traditional financial institutions. Despite some hope, the current regulatory and legislative environment is uncertain, and the actual implementation of stablecoin banks still faces significant difficulties.

Below is the original content (for the sake of readability, the original content has been slightly rearranged):

For the $1 trillion Visa and Mastercard duopoly, stablecoins are a problem. Unless Visa and Mastercard learn to adapt, regulatory policies supporting cryptocurrencies and aggressive new competitors will put them in an unprecedentedly vulnerable position.

(Credit Card Competition Act) (CCCA), if passed, would require large banks to provide at least one additional payment network for merchants (in addition to Visa and Mastercard, the two payment networks merchants are currently locked into) to process credit card transactions. This would weaken Visa and Mastercard's pricing power, and more importantly, it could provide a golden opportunity for stablecoin networks to compete by lowering fees. It is worth mentioning that the chances of this bill passing (unfortunately) are only 3% (in the Senate) and 9% (in the House), so while its passage would be great, the current likelihood of passing is not high.

Currently, Visa and Mastercard charge merchants card processing fees of up to 2-3% — which is often the second-largest expense for merchants, after labor costs. Unfortunately, small merchants bear the brunt of these card fees. Corporate giants like Walmart can negotiate lower interchange fees, allowing them to obtain better rates than small stores, which are locked into the Visa and Mastercard systems. This is also one reason why both Visa and Mastercard have profit margins above 50%: small businesses have no choice but to accept Visa and Mastercard because they control 80% of the credit card market. In short, merchants cannot escape these two payment networks — this is a classic example of monopolistic (duopolistic) behavior (Senator Josh Hawley).

A stablecoin network can reduce these card fees to near zero; merchants hate card fees — which is completely justified — if they can choose a network with lower fees and this network does not limit their Total Addressable Market (TAM), they will switch without hesitation.

It is not new for merchants to try to avoid card processing fees, but the real question is how to properly incentivize consumers to switch payment methods: "Why would the first person use a new payment method instead of the millionth person?" (Peter Thiel). The increasingly popular bank payments (A2A) as an option is already a small proof that, under the right conditions, consumers will change their behavior.

Fred Wilson of Union Square Ventures even predicts that by 2025, direct bank-to-bank payments will surpass credit card interchange payments in certain areas of the U.S. Improved regulations, particularly the Consumer Financial Protection Bureau's (CFPB) Section 1033, will make it easier for retailers to offer A2A transactions — thereby enabling them to avoid card processing fees.

More importantly, the user experience of A2A could be better for consumers — imagine features similar to ShopPay. Walmart has already launched A2A payment products, and both large and small retailers are beginning to follow suit. To persuade consumers to choose this payment method, Walmart is integrating instant transfer features, allowing consumers to avoid overdraft issues caused by multiple pending transactions.

"New technologies are making A2A payments more accessible to small merchants, providing a viable alternative to avoid card processing fees." — Sophia Goldberg, co-founder of Ansa.

The demand for a cheaper, faster, and more efficient payment method (i.e., stablecoins) is clearly very strong. So the question becomes: how exactly does the transformation of a stablecoin network work? Functionally speaking, do consumers need a differently branded credit card? Or can they use regular Visa/Mastercard cards while merchants have the option to route payments to other networks through mandatory regulation?

This point is not explicitly mentioned in the CCCA bill, so we need to see how the card compatibility of these new networks develops. Mass adoption requires: 1) strong incentives for customers to completely switch cards (active adoption); or 2) backend transformations that allow consumers to continue using existing cards, but the actual processing is done through the stablecoin network (passive adoption).

A potential incentive mechanism that could bring all parties to agreement is to launch a completely new stablecoin bank: account holders could receive discounts at participating merchants (such as Amazon and Walmart), while merchants would be willing to offer rewards because they could avoid the 2-3% card fees charged by Visa/Mastercard.

Consumers are already increasingly concentrating their spending on a few dominant platforms, so as long as: 1) the rewards customers receive are enough to offset the friction costs of switching; and 2) the rewards offered by merchants are less than the 2% transaction amount (TPV) they pay to Visa/Mastercard, then stablecoin banks will be a win-win situation. Consumers can still earn returns on their deposits because stablecoins will operate in the background, and credit issuance itself can also be done through stablecoins. But from the user experience perspective, consumers are still just paying with a plastic card. By then, banks can be completely bypassed: when customers spend at retailers, they are essentially just transferring from one wallet to another.

Stablecoin banks can earn money by processing fees (which are clearly lower than current fees), deposit yields (revenue sharing), and charging fees when users convert stablecoins to fiat. Some believe that stablecoin issuers are essentially shadow banks, but for mainstream adoption, a new stablecoin bank that collaborates with merchants and operates from the top down may be the most effective option. If the incentive mechanisms are in place, consumers will join.

Take Brazil's Nubank as an example: it has succeeded in a banking environment that is both the status quo and notorious for charging excessive fees. Nubank has reduced fees by offering a fully functional, mobile-first product, and it stands out when traditional banks in Brazil fail to provide convenient basic financial services.

In contrast, traditional banks in the U.S. — although far from perfect — provide enough online and mobile functionality to make most customers unwilling to switch. Nubank is known for its excellent user experience — which could theoretically be replicated in the U.S. But a unified financial platform is not just about having a great interface: it must allow customers to move across deposit accounts, stablecoins, cryptocurrencies, and even BNPL or other credit products — without forcing them to switch between different platforms. This is precisely where Nubank excels and highlights a gap in the U.S. market.

Of course, regulatory issues in the U.S. are a major obstacle: challenger banks trying to replicate the Nubank model in the U.S. (but with stablecoins) face overlapping regulatory requirements from the OCC, the Federal Reserve, and state regulators. The viability of stablecoin banks hinges on whether they will need a banking charter, the required money transmitter licenses (MTLs), and other regulatory issues.

The last bank to receive a national charter in the U.S. was Sofi (through the acquisition of Golden Pacific Bank), which obtained its charter in January 2022, nearly three years ago. Stablecoin banks could consider creative avenues: for example, partnering with existing FDIC-insured banks or trust companies instead of directly seeking a national charter. However, without the CCCA, any new bank stablecoin payment network — even if it obtains a charter — will be limited to non-merchant payments (i.e., B2B and P2P payments).

The bipartisan stablecoin bill recently proposed by Lummis and Gillibrand will help achieve this goal — the explicit aim of the bill is to "create a clear regulatory framework for payment stablecoins, protect consumers, promote innovation, and advance the dominance of the dollar." While this bill is undoubtedly the first step in the right direction, its specificity is far less than that of the CCCA, which explicitly requires banks to comply.

One factor influencing the likelihood of success for stablecoin banks is the immense influence of the banking sector in Washington; it is one of the most powerful lobbying forces in the U.S. Because of this, getting the necessary legislation through Congress will face enormous pressure. Overall, the banking industry (including large, medium, and small banks) spent about $85 million on lobbying in 2023. It is worth noting that the actual public lobbying expenditure numbers we see are likely much higher, given the creative maneuvers lobbyists engage in through various complex entities.

A stablecoin bank needs to have a clear regulatory strategy from the outset, along with sufficient financial backing to withstand the lobbying pressure from traditional financial institutions. However, the potential rewards are immense. A successful challenger could bring the integrated financial model missing in the U.S., built entirely on stablecoins.

If executed properly, this would be the biggest transformation in the way consumers, merchants, and banks interact — something we haven't seen since the advent of the internet. Despite being a trillion-dollar market (literally) and technically feasible, stablecoin banks unfortunately depend on the CCCA, which has a very slim chance of passing. Traditional institutions will fight tooth and nail against it because the natural law is that the old always resists the new. But the new will eventually come — at least in some form.

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