Stablecoins have emerged as a potential challenger to the $1 trillion duopoly of Visa and Mastercard. These stablecoins offer the promise of significantly lower transaction fees, which could disrupt the current market dynamics dominated by Visa and Mastercard. However, the path to widespread adoption is fraught with regulatory and banking industry pressures.

Visa and Mastercard currently charge merchants transaction fees of up to 2-3%, which is often the second-largest expense for merchants after wages. Small businesses, in particular, are severely impacted by these high fees, as they lack the negotiating power of larger corporations like Walmart, which can secure lower rates. This results in a situation where Visa and Mastercard maintain a profit margin of over 50%, partly because small merchants have no alternative but to rely on these payment processors.

Stablecoin networks have the potential to reduce transaction fees to near-zero levels. This would be highly attractive to merchants who are eager to avoid high card processing fees. The key challenge lies in incentivizing consumers to switch payment methods. The concept of Account-to-Account (A2A) payments has shown that consumers are willing to change their payment habits under the right conditions. For example, Walmart has introduced an A2A payment product that offers instant transfers, helping consumers avoid overdraft fees.

The regulatory environment poses significant challenges for stablecoins. In the United States, the proposed Credit Card Competition Act (CCCA) could require large banks to offer at least one additional network option for merchants, beyond Visa and Mastercard. This could weaken the pricing power of Visa and Mastercard and create an opportunity for stablecoin networks to compete with lower fees. However, the likelihood of the CCCA passing is very low, with only a 3% chance in the Senate and a 9% chance in the House.

For stablecoins to achieve mass adoption, one of two conditions must be met: either providing a strong incentive for consumers to switch payment methods (active adoption) or a backend transition where consumers continue using their existing cards, but transactions are processed through stablecoin networks (passive adoption). One potential solution is the creation of new stablecoin banks that offer discounts to consumers at participating merchants like Amazon and Walmart, which would be willing to provide rewards to avoid Visa/Mastercard fees.

The regulatory landscape in the United States is complex, with multiple agencies such as the OCC, Federal Reserve, and state governments imposing overlapping requirements. The feasibility of stablecoin banks will depend on whether they require a banking license, which specific money transfer licenses (MTL) are needed, and other regulatory issues. One potential path for stablecoin banks could be partnering with existing FDIC-insured banks or trust companies instead of directly pursuing a national license.

While stablecoins hold the potential to disrupt the payment industry dominated by Visa and Mastercard, significant regulatory hurdles and industry resistance remain. The success of stablecoin banks will depend on clear regulatory strategies and sufficient funding to overcome the lobbying power of existing banks. Despite the challenges, the potential rewards are substantial, as a successful challenger bank could revolutionize the way consumers, merchants, and banks interact, much like the advent of the internet.

Stablecoins have emerged as a potential challenger to the $1 trillion duopoly of Visa and Mastercard. These stablecoins offer the promise of significantly lower transaction fees, which could disrupt the current market dynamics dominated by Visa and Mastercard. However, the path to widespread adoption is fraught with regulatory and banking industry pressures.

Visa and Mastercard currently charge merchants transaction fees of up to 2-3%, which is often the second-largest expense for merchants after wages. Small businesses, in particular, are severely impacted by these high fees, as they lack the negotiating power of larger corporations like Walmart, which can secure lower rates. This results in a situation where Visa and Mastercard maintain a profit margin of over 50%, partly because small merchants have no alternative but to rely on these payment processors.

Stablecoin networks have the potential to reduce transaction fees to near-zero levels. This would be highly attractive to merchants who are eager to avoid high card processing fees. The key challenge lies in incentivizing consumers to switch payment methods. The concept of Account-to-Account (A2A) payments has shown that consumers are willing to change their payment habits under the right conditions. For example, Walmart has introduced an A2A payment product that offers instant transfers, helping consumers avoid overdraft fees.

The regulatory environment poses significant challenges for stablecoins. In the United States, the proposed Credit Card Competition Act (CCCA) could require large banks to offer at least one additional network option for merchants, beyond Visa and Mastercard. This could weaken the pricing power of Visa and Mastercard and create an opportunity for stablecoin networks to compete with lower fees. However, the likelihood of the CCCA passing is very low, with only a 3% chance in the Senate and a 9% chance in the House.

For stablecoins to achieve mass adoption, one of two conditions must be met: either providing a strong incentive for consumers to switch payment methods (active adoption) or a backend transition where consumers continue using their existing cards, but transactions are processed through stablecoin networks (passive adoption). One potential solution is the creation of new stablecoin banks that offer discounts to consumers at participating merchants like Amazon and Walmart, which would be willing to provide rewards to avoid Visa/Mastercard fees.

The regulatory landscape in the United States is complex, with multiple agencies such as the OCC, Federal Reserve, and state governments imposing overlapping requirements. The feasibility of stablecoin banks will depend on whether they require a banking license, which specific money transfer licenses (MTL) are needed, and other regulatory issues. One potential path for stablecoin banks could be partnering with existing FDIC-insured banks or trust companies instead of directly pursuing a national license.

While stablecoins hold the potential to disrupt the payment industry dominated by Visa and Mastercard, significant regulatory hurdles and industry resistance remain. The success of stablecoin banks will depend on clear regulatory strategies and sufficient funding to overcome the lobbying power of existing banks. Despite the challenges, the potential rewards are substantial, as a successful challenger bank could revolutionize the way consumers, merchants, and banks interact, much like the advent of the internet.