a16z: Stablecoins will reconstruct the trillion-dollar payment industry

Original author: Sam Broner

Original text compilation: DeepTech TechFlow

The current payments market is dominated by “gatekeepers” who charge high fees that cut into each business’s profits, justifying these fees under the pretext of popularity and convenience, while inhibiting competition and limiting the creativity of innovators.

Stablecoins can provide better solutions.

Stablecoins provide lower fees, more competition among payment service providers, and greater accessibility. By reducing transaction costs to almost zero, stablecoins can help businesses overcome the frictions caused by existing payment methods. The adoption of stablecoins will start with those businesses that are most affected by the current payment methods, and this process will disrupt the entire payment industry.

Stablecoins have become the cheapest way to send US dollars. Last month, there were 28.5 million stablecoin users worldwide, completing over 600 million transactions. Stablecoin users are spread across the globe, and they use stablecoins because they provide a secure, inexpensive, and inflation-resistant storage and spending method. In addition to 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 have permissionless programmability, scalability, and interoperability - anyone can build payment platforms on stablecoin payment infrastructure.

This kind of transformation may take time, but it is likely to be faster than many people expected. Businesses such as restaurants, retailers, enterprises, and payment processors will benefit the most from stablecoin platforms, seeing a significant improvement 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 to the blockchain. I will explain the reasons and methods in detail in the following text, starting with some background on the payment industry.

Payment Participants

• Payment Rail: The technology, rules, and network for processing transactions
• Payment Processor: An operator above the payment track, responsible for facilitating transactions.
• Payment service provider: an entity that provides access to payment systems to end users or other systems
• Payment Solution: Products provided by payment service providers
• Payment platform: 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 34 trillion transactions, involving a transaction value of 180 trillion US dollars, and generated 24 trillion US dollars in revenue. In the United States alone, credit card payments reached 56 trillion US dollars, and debit card payments reached 44 trillion US dollars.

Although the payment industry is large and widespread, payment solutions are still expensive and complex, and payment applications often mask consumers’ complex experiences. For example, Venmo, a peer-to-peer payment application, may seem simple on the surface, but it hides complex bank integrations, debit card vulnerabilities, and numerous compliance obligations in the background. Adding to the complexity, payment solutions often overlap, 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 measures of payment products are timeliness, cost, reliability, and convenience.

Consumers typically care about how much fees they need to pay, while merchants are concerned about whether they can receive payments. However, these four criteria are crucial for both parties.

Since the era when businesses needed to search 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 promoted the growth of transaction volume and consumption amount.

However, many customers still fail to benefit from modern payment products or receive inadequate service. For merchants, credit card fees are expensive and directly erode their profits. Despite the adoption of real-time payments (RTP), bank transfers in the United States are still too slow, often taking several days. Meanwhile, peer-to-peer applications are slow, expensive, and complicated for transfers between ecosystems due to regional and network limitations.

Although enterprises and consumers have begun to expect payment platforms to provide more complex functions, existing solutions cannot meet all users’ needs well. In fact, the fees paid by most users are too high.

Stablecoins are emerging in the payment industry.

Stablecoins find a foothold where existing payment solutions fail (such as high costs, low availability, or high friction), especially in areas where there is less demand for additional products in payment solutions, such as identity, loans, compliance, fraud protection, and bank integration.

Taking remittances as an example, this demand often arises from urgent needs. Many remittance users have insufficient banking services and use highly fragmented banking services. Therefore, they do not consider the local integration of traditional payments and banking services to be of great value. Stablecoin payments offer the advantages of instant settlement, low cost, and no intermediaries, which are beneficial for any payment user or developer. After all, the cost of remitting $200 from the United States to Colombia using stablecoins is less than $0.01, while traditional channels require $12.13. (Remittance users need to remit money back home regardless of transaction costs, but lower costs can bring them substantial benefits.)

International business payments, especially for small businesses in emerging markets, also face high fees, long processing times, and lack of bank support. For example, payments between a clothing manufacturer in Mexico and a textile manufacturer in Vietnam require four or more intermediaries - local banks, foreign exchange, agent banks, foreign exchange, and local banks. Each intermediary takes a share and increases the risk of transaction failure.

Fortunately, these transactions typically occur between parties with a long-term working relationship. By using stablecoins, the payer in Mexico and the payee in Vietnam can attempt to eliminate the slow, bureaucratic, and costly 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 transactions in restaurants, cafes, or corner stores - are also a potential opportunity. Due to the low-profit margins of these businesses, they are very sensitive to costs, so the 15-cent transaction fee charged in payment solutions has a significant impact on their profitability.

When customers spend $2 on coffee, only $1.70 to $1.80 enters the coffee shop, and the remaining nearly 15% is paid to the credit card company - just to facilitate the transaction. But here, credit cards are only for convenience: neither consumers nor stores need 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 coffee shops have limited requirements for compliance and bank integration (coffee shops usually use comprehensive restaurant management software or none at all). Therefore, if there is a cheap and reliable alternative, we can expect these businesses to take advantage of it.

Cheaper payment methods improve profitability

The transaction fees of the current payment system directly affect the profitability of many businesses. Reducing these fees will release significant profit potential. The first signal has appeared: Stripe announced a fee of 1.5% 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.

The wider adoption of stablecoins will significantly improve the profitability of many businesses—not just small ones like coffee shops or restaurants. Let’s take a look at the financial situation of three listed companies in the 2024 fiscal year to estimate the effect of reducing payment processing fees to 0.1%. (For convenience, this assessment assumes that the business pays a 1.6% blended payment processing cost and the upper and lower channel costs are minimized. More information below.)

• Walmart’s annual revenue is $648 billion, may pay $10 billion in credit card fees, while the profit is $15.5 billion. Calculate: If the payment fees are eliminated, Walmart’s profitability and valuation may increase by more than 60% through cheaper payment solutions, assuming other factors remain unchanged.
• Mexican burritos, this rapidly growing fast food chain, with annual revenue of 98 billion US dollars. Paid 1.48 billion US dollars in credit card fees out of 12 billion US dollars in annual profits. Simply by reducing costs, the profitability of Mexican burritos can increase by 12% - a significant improvement that cannot be obtained in its income statement.
• Kroger, the national grocery store, will benefit the most due to the lowest profit margin. Surprisingly, Kroger’s net income and payment costs may be almost equal. Like many grocery stores, its profit margin is less than 2%, lower than the cost of enterprise payment processing credit cards. Kroger may double its profits through stablecoin payments.

How do Walmart, Mexican tortillas, and Kroger reduce transaction costs by using stablecoins? First, this is just an idealized scenario, and widespread adoption by consumers will not be realized immediately. There will still be significant costs, especially in terms of fund inflows and outflows, before stablecoins are widely used. Second, retailers and payment processors are generally opposed to high-cost payment solutions. Payment processors themselves are a low-profit industry, with most of the profits going to card networks and issuing banks. When payment processors process transactions, most of their fees are paid to the payment network. For example, when Stripe processes online retail checkout, it charges 2.9% plus $0.30 of the transaction amount, but more than 70% of it is paid to Visa and issuing banks. As more and more payment processors, such as Block (formerly Square), Fiserv, Stripe, and Toast, begin to adopt stablecoins to increase profitability, it will make it easier for more businesses to use stablecoins.

Due to the lower fees of stablecoins and no intermediary fees, 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 enterprises and use cases to use stablecoins. However, with the adoption of payment processors, it is expected that the payment fees for stablecoins will gradually decrease: for example, Stripe’s 1.5% fee may decrease due to market competition.

Next Step: Promoting widespread consumer adoption of stablecoins

Currently, stablecoins, as a new and permissionless way of fund transfer and storage, are being gradually adopted. Entrepreneurs are developing solutions to transform stablecoin infrastructure into stablecoin platforms. Like past innovations, the adoption of stablecoins will proceed gradually, starting with meeting the needs of edge consumers and forward-thinking enterprises, until the platform is mature enough to meet the needs of ordinary users and conservative enterprises. Three trends will drive more mainstream enterprises to adopt stablecoins.

1. Enhanced backend integration through stablecoin orchestration

Stablecoin orchestration, the ability to monitor, manage, and integrate stablecoins, will soon be integrated into payment processors like Stripe.

These arranged products allow businesses to process payments at a cost much lower than the current mechanism, without major process or engineering changes. Consumers may unknowingly receive cheaper products as the costs of invoices, payrolls, and subscriptions will automatically decrease. Many stablecoin arrangement companies have started serving customers who want instant settlement, low cost, and widespread availability for business-to-business or business-to-consumer payments. By integrating stablecoins in the background, businesses can enjoy the advantages of stablecoins without affecting user expectations for payment service quality, and the adoption of stablecoins is also increasing.

2. Improve user guidance and increase corporate incentive sharing

Stablecoin companies are becoming more mature in attracting end users to the chain through shared incentives and improved user guidance solutions. Channel fees continue to decrease, speeds are 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 such as Circle, Paypal, and Tether share their profits with regular businesses, just like Visa shares profits with United and Chase to attract credit card users. These partnerships and integrations bring benefits to stablecoin issuers by creating larger asset pools, but they can also benefit enterprises that successfully transition users from credit cards to stablecoins. These companies can now derive some revenue from the funds flowing through their products, a business model typically reserved for banks, fintech companies, and gift card issuers who profit from user float.

3. Enhancing Regulatory Transparency and Availability of Compliance Solutions

When companies 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 European Union’s Markets in Crypto-assets Regulation (MiCA) has established rules for stablecoin issuers, including 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 United States currently lacks a stablecoin framework, policymakers from both parties are increasingly recognizing the need to enact effective stablecoin legislation. Such regulation needs to ensure that issuers fully back their tokens with high-quality assets, undergo third-party audits of their reserves, and implement comprehensive measures to combat illegal financial activities. At the same time, the legislation needs to retain the ability for developers to create decentralized stablecoins, which reduce user risk by eliminating intermediaries and leveraging the benefits of decentralization.

These policies are aimed at enabling companies in various industries to consider transitioning from traditional payment rails to stablecoin infrastructure. While compliance solutions may not be as appealing, each stablecoin adopter helps demonstrate to existing businesses that stablecoins are a reliable, secure, regulated, and improved solution to the classic payment problem.

With the increasing adoption of stablecoins, the network effect of the platform will become stronger. Although it may take several years for stablecoins to be used at sales points or as alternatives to bank accounts, as the number of stablecoin users grows, stablecoin-centric solutions will become more mainstream and more attractive to consumers, businesses, and entrepreneurs.

Go with the Flow: Stablecoins Will Continue to Improve

During the adoption process, the product itself will continue to improve. The Web3 community has good reason to celebrate the adoption of stablecoins: due to years of infrastructure and on-chain application investments, stablecoins are experiencing a value innovation S-curve. With improved infrastructure, rich on-chain applications, and the growth of on-chain networks, stablecoins will become more attractive to users. This will happen in two ways.

First, technological advances in the cryptographic infrastructure make it possible for stable coin payment costs to be less than 1 cent. Future investments will continue to make transactions cheaper and faster. At the same time, better wallets, bridges, channels, developer experiences, and AMM will make stable coin arrangement and improved user guidance possible.

This technological foundation provides entrepreneurs with increasing motivation to build stablecoins, offering improved developer experience, rich ecosystems, widespread adoption, and permissionless composability of on-chain funds.

Second, stablecoins unlock new user scenarios through the permissionless composability of on-chain funds. Other payment platforms have gatekeepers, forcing entrepreneurs to work with exploitative networks, such as expensive intermediaries in credit card transactions or international payments. However, stablecoins are self-custodial and programmable, reducing 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 growing competition.

Stablecoins are expected to lead a new era of free, scalable, and instant payments. As Stripe’s CEO Patrick Collison put it, stablecoins are like ‘room-temperature superconductors’ in the financial services sector, enabling businesses to explore new commercial opportunities that may be difficult to realize under the burden 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 through revenue sharing, or providing services complementary to this emerging platform. As traditional enterprises gradually realize the changes in the market, entrepreneurs will develop new solutions to help these enterprises better utilize stablecoins.

In the long run, with the popularization of stablecoins and technological advancements, startups will seize the inherent opportunities in this world of freedom, frictionless, and instant payments. These startups will gradually emerge, bringing new and unexpected application scenarios, and further promoting the popularization of the global financial system, allowing more people to enjoy the opportunities within it.

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, which have contributed to the completion of this article.

Sam Broner is a partner at the a16z crypto investment team. Prior to joining a16z, Sam was a software engineer at Microsoft and was part of the founding teams for Fluid Framework and Microsoft Loop. During his time at MIT Sloan School of Management, Sam participated in Project Hamilton at the Boston Federal Reserve Bank, led the Sloan Blockchain Club, organized the inaugural Sloan AI Summit, and received the Patrick J. McGovern Award from MIT for creating an entrepreneurial community. You can follow his account @SamBroner on X platform.

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