The other advantages of stablecoins will attract more users, businesses, and products onto the chain.
Article author: Sam Broner, a16z
Article translated by: Deep Tides TechFlow
The current payment market is dominated by some high-fee 'gatekeepers' who cut into every business's profits, 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 offer lower fees, more competition among payment service providers, and broader accessibility. As stablecoins reduce transaction costs to nearly zero, they can help businesses escape the friction caused by existing payment methods. The adoption of stablecoins will start with those businesses most affected by current payment methods, disrupting 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. Stablecoin users are spread across the globe, 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 such as banks, payment networks, or central banks. At the same time, stablecoins feature permissionless programmability, scalability, and interoperability—anyone can build payment platforms on stablecoin payment infrastructure.
This transformation may take time, but it will likely happen faster than many expect. Businesses such as restaurants, retailers, enterprises, and payment processors will reap the greatest benefits from stablecoin platforms and see significant improvements in profit margins. This demand will drive the adoption of stablecoins, and as their usage grows, the other advantages of stablecoins—permissionless composability and enhanced programmability—will attract more users, businesses, and products onto the chain. I will detail the reasons and methods below, starting with some background on the payment industry.
Payment participants
Payment rails: The technology, rules, and networks that process transactions
Payment processors: Operators on top of payment rails responsible for facilitating transactions
Payment service providers: Entities that provide access to payment systems to end-users or other systems
Payment solutions: Products provided by payment service providers
Payment platforms: A set of related payment solutions covering 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, and debit card payments reached $4.4 trillion.
Despite the enormous scale and ubiquity of the payment industry, payment solutions remain expensive and complex, even though payment apps often obscure the complex experience for consumers. For example, Venmo, a peer-to-peer payment app, seems simple on the surface, but hides complex bank integrations, debit card loopholes, and countless compliance obligations in the background. Adding to the complexity, payment solutions often stack on top of each other, and people still use various payment methods: cash, debit cards, credit cards, peer-to-peer payment apps, ACH (automated clearing house), checks, etc.
The four main metrics for payment products are timeliness, cost, reliability, and convenience.
Consumers typically ask: How much will I have to pay? Merchants ask: Will I receive payment? But in reality, these 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 the payment experience. 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 spending amounts.
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 days. Peer-to-peer applications, due to regional and network limitations, make transfers between ecosystems slow, expensive, and complex.
While businesses and consumers have begun to expect payment platforms to offer more complex functionalities, existing solutions do not adequately meet all user needs. In fact, most users pay excessively high fees.
Stablecoins are emerging in the payment industry
Stablecoins find entry points where existing payment solutions fail (e.g., high costs, low availability, or high friction), especially in payment solutions where there is less demand for ancillary products (such as identity, loans, compliance, fraud protection, and bank integration).
Take remittances as an example; this demand often stems from urgent needs. Many remittance users are underserved by banks and the banking services they use are highly fragmented. Therefore, they do not perceive much value in the local integration of traditional payments and banking services. Stablecoin payments offer the advantages of instant settlement, low cost, and no intermediaries, benefiting any payment user or developer. After all, the cost of sending $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 can provide substantial benefits to them.)
International business payments, especially for small businesses in emerging markets, also face high fees, long processing times, and insufficient banking 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 adds to the risk of transaction failure.
Fortunately, these transactions often occur between parties with long-term relationships. By using stablecoins, payers in Mexico and payees in Vietnam can attempt to eliminate 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, cafes, or corner stores—also present a potential opportunity. Due to the low profit margins of these businesses, they are highly sensitive to costs, so the 15-cent transaction fee charged in payment solutions has a significant impact on 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% paid to the credit card company—just to facilitate the transaction. But here, credit cards are just for convenience: neither the consumer nor the store needs those additional features that argue for fees. Consumers don't need fraud protection (they just bought a cup of coffee) or loans (the coffee only costs $2). And the coffee shop has limited needs for compliance and bank integration (coffee shops typically use integrated restaurant management software or don't use it at all). Therefore, if there were a cheap, reliable alternative, we could expect these businesses to take advantage of it.
Cheaper payment methods enhance profitability
Current transaction fees in the payment system directly impact the profitability of many businesses. Reducing these fees will free up significant profit margins. The first signal has already appeared: Stripe announced a 1.5% fee for stablecoin payments, 30% lower than the fees they charge for card payments. To support this effort, Stripe announced a $1 billion acquisition of Bridge.xyz.
Wider adoption of stablecoins will significantly increase profitability for many businesses—not limited to small businesses like cafes or restaurants. Let's take a look at the financials of three public companies for fiscal year 2024 to estimate the effect of reducing payment processing fees to 0.1%. (For simplicity, this assessment assumes businesses pay a 1.6% blended payment processing cost, and the upper and lower channel costs are minimal. More information is provided below.)
Walmart's annual revenue of $648 billion could incur $10 billion in credit card fees, with a profit of $15.5 billion. Do the math: eliminating payment fees could increase Walmart's profitability and valuation by over 60% under unchanged conditions.
Chipotle, a fast-growing fast-food chain, has an annual revenue of $9.8 billion. It paid $148 million in credit card fees out of $1.2 billion in annual profit. Just by reducing fees, Chipotle's profitability could increase by 12%—a significant boost not reflected in its income statement.
Kroger, a national grocery store, stands to benefit the most due to its low profit margins. Surprisingly, Kroger's net income and payment costs may be nearly equal. Like many grocery stores, its profit margin is less than 2%, lower than the fees businesses incur for processing credit card payments. Kroger could potentially double its profit through stablecoin payments.
How do Walmart, Chipotle, and Kroger reduce transaction fees by using stablecoins? First, this is just an idealized concept: widespread consumer adoption will not happen overnight. Significant fees will still exist, especially related to the flow of funds in and out of channels, before stablecoins can be widely used. Second, retailers and payment processors generally oppose high-fee payment solutions. Payment processors themselves operate on low margins, with most profits captured by card networks and issuing banks. When payment processors handle transactions, most of their fees are taken by payment networks. For example, Stripe charges 2.9% of the total transaction amount plus a $0.30 fee 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 adopting stablecoins to improve margins, it will make it easier for more businesses to use stablecoins.
With lower fees from stablecoins and no intermediary costs, payment processors can achieve higher profit margins on stablecoin transactions. Higher profit margins may incentivize payment processors to support and push more businesses and use cases to adopt stablecoins. However, as payment processors adopt them, it is expected that the payment fees for stablecoins will gradually decrease: for example, Stripe's 1.5% fee may drop due to market competition.
Next step: Drive widespread consumer adoption of stablecoins
Currently, stablecoins are gradually being adopted as a new, permissionless means of transferring and storing funds. Entrepreneurs are developing solutions that transform stablecoin infrastructure into stablecoin platforms. Like past innovations, the adoption of stablecoins will proceed gradually, initially satisfying the needs of edge consumers and forward-thinking businesses, until the platforms mature enough to meet the needs of the average user and conservative enterprises. The following three trends will drive more mainstream businesses to adopt stablecoins.
1. Enhance backend integration through stablecoin orchestration
The orchestration of stablecoins, that is, 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 lower than current mechanisms without requiring significant changes in processes or engineering. 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 seek instant settlement, low cost, and widely available business-to-business or business-to-consumer payments. By integrating stablecoins into the backend, businesses can enjoy the advantages of stablecoins without compromising users' expectations for the quality of payment services, while stablecoin adoption also increases.
2. Improve user onboarding and increase shared incentives for businesses
Stablecoin companies are becoming more mature in attracting end users to on-chain through shared incentives and improved 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, an increasing number of consumer applications support cryptocurrencies, allowing users to benefit from an expanded stablecoin ecosystem without changing existing applications or user behavior. Popular applications like Venmo, ApplePay, Paypal, CashApp, Nubank, and Revolut now allow users to use stablecoins.
Companies also have more incentive 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 generate benefits for 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 earn a portion of the funds flowing through their products, a business model traditionally 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 feel confident in 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 guidelines for stablecoins, allowing entrepreneurs to start building compliant and user-friendly businesses.
For instance, the EU's Markets in Crypto-Assets Regulation (MiCA) has set rules for stablecoin issuers that include prudential and behavioral 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 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 must 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 various industries to consider shifting from traditional payment rails to stablecoin infrastructure. While compliance solutions may not be as appealing, every stablecoin adopter helps demonstrate to existing businesses that stablecoins are a reliable, secure, regulated, and improved classic payment problem-solving solution.
With the increase in stablecoin adoption, 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 and attractive to consumers, businesses, and entrepreneurs.
Riding the wave: Stablecoins will continue to improve
As adoption occurs, 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 investments, stablecoins are climbing the value innovation S-curve. With improvements in infrastructure, a rich array of on-chain applications, and growth in the 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 less than one cent. Future investments will continue to make transactions cheaper and faster. Meanwhile, stablecoin orchestration and improved user onboarding will become possible due to better wallets, bridges, channels, developer experiences, and AMMs.
This technological foundation provides entrepreneurs with increasing incentives 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 permissionless composability of on-chain funds. Other payment platforms have gatekeepers that force entrepreneurs to work with exploitative networks, such as costly intermediaries in credit card transactions or international payments. But stablecoins are self-custodied and programmable, lowering the barriers 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 heightened competition.
Stablecoins are poised to lead a new era of free, scalable, and instant payments. As Stripe's CEO Patrick Collison puts it, stablecoins are like 'room-temperature superconductors in the financial services domain,' enabling businesses to explore new business opportunities that may 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 revenue models, possibly through profit-sharing or providing services that complement this emerging platform. As traditional businesses gradually realize 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 and instant payment world. These startups will gradually emerge, bringing new and unexpected use cases, further driving the democratization of the global financial system and enabling more people to benefit from the opportunities it offers.
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. He also participated in the Federal Reserve Bank of Boston's Project Hamilton during his studies at MIT Sloan School of Management, led the Sloan Blockchain Club, organized the first Sloan AI Summit, and was awarded the Patrick J. McGovern Award at MIT for creating a startup community. You can follow him on X platform at @SamBroner.
The views expressed in this article are solely those of individuals associated with AH Capital Management, L.L.C. ('a16z') and do not represent the position of a16z or its affiliates. Some information in this article comes from third-party sources, including portfolio companies of funds managed by a16z. Although this information comes from sources deemed reliable, a16z has not independently verified its accuracy and makes no guarantees regarding its current or long-term accuracy or applicability. Additionally, this article may contain third-party advertisements; a16z has not reviewed these advertisements and does not endorse any of the content within them.
This article is for informational purposes only and should not be construed as legal, business, investment, or tax advice. You should consult your own advisors regarding these matters. References to any securities or digital assets are for illustrative purposes only and do not constitute investment advice or an offer to provide investment advisory services. Furthermore, this article is not directed at or intended to be used by any investor or potential investor, and should not be relied upon in making a decision to invest in any fund managed by a16z. (Investment offers for a16z funds are made only through the fund’s private placement memorandum, subscription agreement, and other relevant documents and should be read in their entirety.) Any investments mentioned, referenced, or described do not represent all investments in all investment vehicles managed by a16z and there is no guarantee that these investments will be profitable or that other investments made in the future will have similar characteristics or results. A list of investments made by funds managed by Andreessen Horowitz (excluding investments in issuers that have not allowed a16z to publicly disclose investments and undisclosed investments in publicly traded digital assets) is available here.
The content of this article is only valid as of the date shown. Any predictions, estimates, forecasts, targets, outlooks, and/or opinions expressed in this material are subject to change without notice and may differ from or conflict with the opinions expressed by others. Please refer here for more important information.