Credit cards versus stablecoins is one of the less-discussed competitive battles ahead, but it’s one where traditional finance faces the most coherent threat. The constant-dollar-value crypto tokens offer a route to cheap, fast payments — and in the US, that could make a real difference to consumers and retailers who still pay unusually high fees for card transactions compared with Europe.
The growth prospects for stablecoins are overblown in my view, but they may offer an opportunity for merchants and airlines to recover costs from big banks and networks like Visa Inc. and Mastercard Inc. If customers can be persuaded to use coins sponsored by Amazon.com Inc. or American Airlines Group Inc., the companies could boost profit margins and still run points-based loyalty schemes. There are some big “ifs” here, but this makes more sense to me than people giving up insured deposits in favor of stablecoins, or companies deciding they’re a better way to store cash than money market funds.
Traditional finance keeps seeking to influence rules for stablecoins following July’s passage of the Guiding and Establishing National Innovation for U.S. Stablecoins (Genius) act, which sets a framework for regulating and legitimizing a technology that remains mostly a gateway to speculative trading of Bitcoin and other cryptocurrencies. Lobbying groups including the Bank Policy Institute and American Bankers Association wrote to Congress last month to warn against the loophole that allows coin holders to receive various types of rewards despite interest payments being banned by the act.
Issuers can earn good income from assets such as Treasury bills that they hold to back the value of stablecoins. The US legislation blocked companies like Tether Inc. from passing that income to holders in an effort to ensure deposit accounts and money funds remain attractive places to park money.
Companies like American Express Co. are playing down the threat posed to the revenue they earn from high swipe fees in the US. Chief Executive Officer Stephen Squeri reckons traditional payment rails have too many advantages to be overtaken by the upstart technology, he told Amex investors in July. Benefits include dispute resolution, protection against fraud, ease of use and card-reward programs.
But those programs are funded by the swipe fees that some retailers and politicians have long campaigned against. And while rewards schemes remain wildly popular among US credit-card customers, they typically only benefit high-spending customers who regularly repay monthly balances. Stablecoins could offer a real alternative.
Big retailers like Amazon and Walmart Inc. are reportedly already exploring how to create their own stablecoins. That could cut their transaction fees and give them the income from assets backing their coins, leaving plenty of extra profit margin on sales to fund loyalty schemes. Swipe fees typically cost between 1.5% to 3%, compared with yields of more than 4% on Treasury bills.
There are some wrinkles to overcome beyond Squeri’s arguments, however. First, non-financial companies are barred from issuing their own coins under the Genius act. But retailers can get around this by partnering with a stablecoin specialist like Circle Internet Group Inc., which issues USDC. Indeed, Circle CEO Jeremy Allaire has ambitions to partner with retailers and build a payments network for stablecoins and become a direct challenger to Visa, Mastercard and Amex, as well as running USDC.
Of course, big banks can see this threat coming. Some including JPMorgan Chase & Co. and Bank of America Corp. that have been developing their own blockchain-based payments could also look at partnering with retailers and airlines as they already do for branded credit cards.
Another issue is that the yield available on assets backing stablecoins will change over time: 4.1% on three-month bills looks great next to swipe fees now, but in 10 of the past 16 years they’ve paid closer to zero. Rewards schemes will be costly if short-term yields crash again.
Lastly, many credit cards are used for borrowing over extended periods — as costly as that is. Still, a three-way partnership of a leading retailer with a coin issuer and a Buy-Now-Pay-Later company could pose a stiff challenge to big US banks.
Senator Richard Durbin has been trying for years to pass legislation that would force the credit card industry to slash swipe fees — just as he successfully did with debit cards more than a decade ago, and Europe and the UK have done for all card payments. There are good profits in these frictional costs to card payments for US banks. As Jeff Bezos once said: “Your margin is my opportunity.”
The payments industry has had it too comfortable for too long in the US. Stablecoins can bring far more disruption to credit card transactions than they ever will to money funds and deposit accounts.
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