Stablecoins will replace credit cards as the mainstream payment method in the United States

Written by Daniel Barabander

Compiled by AididiaoJP, Foresight News

The discussion about stablecoins in the U.S. consumer payment space is currently very hot. But most people see stablecoins as a "sustaining technology" rather than a "disruptive technology." They argue that while financial institutions will use stablecoins for more efficient settlements, for most U.S. consumers, stablecoins provide not enough value to make them abandon the current dominant and sticky payment method, which is credit cards.

This article argues how stablecoins have become a mainstream means of payment in the United States, not just a settlement tool.

How credit cards build payment networks

First, we must admit that it is very difficult to get people to accept a new payment method. New payment methods are only valuable if enough people use them, and people only join when they are valuable. Credit cards have overcome the "cold start" problem through these two steps and have become the most widely used method of payments for U.S. consumers (37%), surpassing the previously dominant cash, checks, and early merchant-specific or industry-specific charge cards.

Step 1: Harness the Inherent Benefits Without the Internet Credit

cards initially expanded the market by addressing a small percentage of consumer and merchant pain points across three dimensions: convenience, incentives, and sales growth. Take BankAmericard, the first mass-market bank credit card introduced by Bank of America in 1958 (which later evolved into today's Visa credit card network):

1. Convenience: BankAmericard allows consumers to make flat payments at the end of the month without having to carry cash or fill out checks at the checkout. Although merchants have previously offered debit cards with similar late payments, these cards are limited to a single merchant or specific categories (such as travel and entertainment). BankAmericard can be used at any partner merchant and basically meets everyone's consumption needs.

2. Incentives: Bank of America has driven credit card adoption by mailing 65,000 unapplied BankAmericard credit cards to Fresno residents. Each card comes with a pre-approved flexible credit limit, an unprecedented move at the time. Cash and checks did not offer similar incentives, and early charge cards, while offering short-term credit, were usually limited to high-income or regular customers and could only be used at select merchants. BankAmericard's extensive credit coverage particularly appeals to low-income consumers who were previously excluded.

3. Sales Growth: BankAmericard helps merchants increase sales through credit spending. Cash and checks cannot expand the purchasing power of consumers, and although early charge cards can promote sales, they require merchants to manage their own credit systems, customer access, collection and risk control, and the operating costs are extremely high, which only large merchants or associations can afford. BankAmericard provides small merchants with the opportunity to grow sales on credit spending.

BankAmericard was successful in Fresno and gradually expanded to other cities in California. But because regulations at the time restricted Bank of America from operating only in California, it quickly realized that "for credit cards to be truly useful, they had to be accepted nationwide," so they licensed credit cards to banks outside California for $25,000 in franchise fees and transaction royalties. Each authorized bank uses this intellectual property to build its own network of consumers and merchants locally.

Step 2: Credit Card Payment Network Expansion and Connectivity

At this point, BankAmericard has evolved into a series of decentralized "territories" where consumers and merchants in each region use the card based on its inherent advantages. Although it works well within each territory, it cannot be scaled as a whole.

At the operational level, interoperability between banks is a big issue: when using BankAmericard IP for interbank transaction authorization, merchants need to contact the acquiring bank, which in turn contacts the issuing bank to confirm the cardholder's authorization, while customers can only wait in-store. This process can take up to 20 minutes, leading to fraud risks and poor customer experiences. Clearing and settlement are equally complex: although the acquiring bank receives payment from the issuing bank, there is a lack of incentive to share transaction details in a timely manner so that the issuing bank can collect the cardholder. At the organizational level, the program is run by Bank of America (a competitor to authorized banks), leading to a "fundamental mistrust" issue among banks.

To address these issues, BankAmericard planned to spin off into a non-share, for-profit membership association called National BankAmericard Inc. (NBI), which was later renamed Visa. Ownership and control are transferred from Bank of America to the participating banks. In addition to adjusting control, the NBI has established a standardized set of rules, procedures, and dispute resolution mechanisms to address challenges. At the operational level, it builds a swap-based authorization system called BASE, which allows merchants' banks to route authorization requests directly into the issuing bank's system. The reduction in interbank authorization time to less than a minute and the support for round-the-clock transactions make it "sufficient to compete with cash and check payments, removing one of the key barriers to adoption." BASE then further optimized the clearing and settlement process, replacing paper processes with electronic records and transforming bilateral settlements between banks to centralized processing and netting through the BASE network. Processes that would have taken a week can now be completed overnight.

By connecting these decentralized payment networks, credit cards overcome the "cold start" problem of new payment methods by aggregating supply and demand. At this time, mainstream consumers and merchants are motivated to join the network because it allows them to reach additional users. For consumers, the Internet creates a convenient flywheel effect, and the value of credit cards increases by one point for each additional merchant. For merchants, the network brings incremental sales. Over time, networks began to offer incentives using interchange fees generated by interoperability, further driving adoption among consumers and merchants.

Inherent Advantages of Stablecoins Stablecoins

can become a mainstream payment method by following the same strategy of replacing cash, checks, and early debit cards with credit cards. Let's analyze the inherent advantages of stablecoins from three dimensions: convenience, incentives, and sales growth.

Convenience Currently,

stablecoins are not convenient enough for most consumers, who need to convert fiat currency to cryptocurrency first. The user experience still needs to be greatly improved, such as repeating the process even if you have provided sensitive information to your bank. In addition, you need another token (like ETH as a gas fee) to pay for on-chain transactions and make sure the stablecoin matches the chain the merchant is on (e.g., USDC on the Base chain is different from USDC on the Solana chain). From the point of view of consumer convenience, this is completely unacceptable.

Nevertheless, I believe these issues will be resolved soon. During the Biden administration, the Office of the Comptroller of the Currency (OCC) banned banks from custody of cryptocurrencies, including stablecoins, but this bill was revoked a few months ago. This means that banks will be able to host stablecoins, vertically integrate fiat and cryptocurrency, and fundamentally solve many of the current user experience problems. In addition, important technological developments such as account abstraction, gas subsidies, and zero-knowledge proofs are improving the user experience.

Merchant incentive

stablecoins offer a new way to incentivize merchants, especially through permissioned stablecoins.

Note: Permissioned stablecoins, i.e., issuance channels, are not limited to merchants, but also include a wider range of fields. For example, fintech companies, trading platforms, credit card networks, banks, and payment service providers. This article focuses only on merchants.

Permissioned stablecoins issued by regulated financial or infrastructure providers such as Paxos, Bridge, M^0, BitGo, Agora, and Brale, but branded and distributed by another entity. Brand partners, such as merchants, can earn from the floating deposit of stablecoins.

Permissioned stablecoins share clear similarities with the Starbucks rewards program. Both invest funds in the system's floating funds in short-term instruments and retain the interest earned. Similar to Starbucks rewards, permissioned stablecoins can be structured to provide customers with points and rewards that can only be redeemed within the merchant ecosystem.

Although permissioned stablecoins are structurally similar to prepaid reward programs, important differences suggest that permissioned stablecoins are more viable for merchants than traditional prepaid reward programs.

First, as permissioned stablecoin issuance becomes commoditized, the difficulty of launching such a program will approach zero. The GENIUS Act provides a framework for issuing stablecoins in the United States and establishes a new category of issuers (non-bank licensed payment stablecoin issuers) with a lighter compliance burden than banks. Therefore, supporting industries around permissioned stablecoins will develop. Service providers will abstract user experience, consumer protection, and compliance functions. Merchants will be able to launch branded digital dollars at minimal marginal cost. For businesses that have enough influence to temporarily "lock in" value, the question is: why not launch their own rewards program?

Second, these stablecoins differ from traditional rewards programs in that they can be used outside of the issuing merchant's ecosystem. Consumers will prefer to lock in value temporarily because they know they can convert it back to fiat, transfer it to others, and eventually use it at other merchants. Although merchants can request customized non-transferable stablecoins, I think they will realize that if the stablecoin is transferable, the likelihood of its adoption increases significantly; Permanent value lock-in can be very inconvenient for consumers, reducing their willingness to adopt.

Consumer-incentivized

stablecoins offer a completely different way of rewarding consumers than credit cards. Merchants can indirectly leverage the earnings earned from permissioned stablecoins to provide targeted incentives, such as instant discounts, shipping credits, early access, or VIP queues. Although the GENIUS Act prohibits sharing of benefits solely for holding stablecoins, I expect such loyalty rewards to be acceptable.

Because stablecoins have programmability that credit cards can't match, they have native access to on-chain yield opportunities (to be clear, I'm referring to fiat-backed stablecoins accessing DeFi, not on-chain hedge funds disguised as stablecoins). Apps like Legend and YieldClub will encourage users to earn yield by routing floating deposits into lending protocols like Morpho. I think this is the key to a breakthrough for stablecoins in terms of rewards. Yields entice users to convert fiat currency to stablecoins to participate in DeFi, and if spending in this experience is seamless, many will choose to trade directly with stablecoins.

If there's anything good about crypto, it's airdrops: incentivizing participation through instant value transfers on a global scale. Stablecoin issuers can employ similar strategies to attract new users to the crypto space by airdropping free stablecoins (or other tokens) and incentivize them to spend stablecoins.

Sales growth

stablecoins are holder assets like cash and therefore do not inherently stimulate consumption like credit cards. However, just as credit card companies build the concept of credit on bank deposits, it is not difficult to imagine that providers can offer similar programs on the basis of stablecoins. And more and more companies are disrupting the credit model, believing that DeFi incentives can drive a new sales growth primitive: "Buy now, never pay." In this model, the "spent" stablecoin will be held in custody, earning yield in DeFi, and paying for purchases with a portion of the proceeds at the end of the month. In theory, this would encourage consumers to spend more, and merchants want to take advantage of this.

How to build a stablecoin network

We can summarize the inherent advantages of stablecoins as follows:

• Stablecoins are currently neither convenient nor can they directly lead to sales growth.

• Stablecoins can provide meaningful incentives for merchants and consumers.

The question is, how can stablecoins follow the "two-step" strategy of credit cards to build new payment methods?

Step 1: Leverage the Inherent Advantages of Not Being Needed

Stablecoins can focus on the following niche scenarios:

(1) Stablecoins are more convenient for consumers than existing payment methods, leading to sales growth;

(2) Merchants are incentivized to offer stablecoins to consumers who are willing to sacrifice convenience for rewards.

Niche 1: Relative Convenience and Sales Growth Although

stablecoins are not currently convenient enough for most people, they may be a better choice for consumers who are not served by existing payment methods. These consumers are willing to overcome barriers to entry into the world of stablecoins, and merchants will accept stablecoins to reach customers they were previously unable to serve.

A prime example is a transaction between a U.S. merchant and a non-U.S. consumer. In certain regions, especially Latin America, consumers find it extremely difficult or expensive to obtain dollars to purchase goods and services from U.S. merchants. In Mexico, only those who live within 20 kilometers of the U.S. border can open a dollar account; In Colombia and Brazil, dollar banking services are completely banned; In Argentina, despite the existence of USD accounts, they are tightly controlled, quota-limited, and often offered at official rates well below the market rate. This means that U.S. merchants are losing these sales opportunities.

Stablecoins provide non-US consumers with unprecedented access to US dollars, enabling them to purchase these goods and services. Stablecoins are actually relatively convenient for these consumers, as they often have no other reasonable way to get dollars for consumption. For merchants, stablecoins represent a new sales channel because these consumers were previously unreachable. Many U.S. merchants, such as AI service companies, have a large number of non-U.S. consumers and therefore accept stablecoins to acquire these customers.

Niche 2: Incentive-led customers in

many industries are willing to sacrifice convenience for rewards. My favorite restaurant offers a 3% discount on cash payments, for which I specifically go to the bank to withdraw cash, albeit very inconveniently.

Merchants will be incentivized to launch branded white-label stablecoins as a way to fund loyalty programs, offering consumers discounts and privileges to drive sales growth. Certain consumers will be willing to put up with the hassle of entering the world of cryptocurrencies and converting value into white-label stablecoins, especially if the incentives are strong enough and the product is something they are obsessed with or use regularly. The logic is simple, if I love a product, know that the balance will be used, and can get a meaningful return, I am willing to put up with a bad experience or even keep money.

Ideal merchants for white-label stablecoins include at least one of the following characteristics:

• Avid fan base. For example, if Taylor Swift asks fans to buy concert tickets with "TaylorUSD", fans will still do so. She can incentivize fans to keep TaylorUSD by offering preemptive access to future tickets or discounts on merchandise. Other merchants may also accept TaylorUSD for promotions.

• High-frequency use within the platform. For example, in 2019, 48% of sellers on the second-hand goods marketplace Poshmark spent a portion of their revenue on in-platform purchases. If Poshmark sellers start accepting "PoshUSD", many will keep the stablecoin to trade with other sellers as buyers.

Step 2: Connect to the Stablecoin Payment Network

Since the above scenario is a niche market, the use of stablecoins will be temporary and fragmented. Parties in the ecosystem will define their own rules and standards. Additionally, stablecoins will be issued on multiple chains, increasing the technical difficulty of acceptance. Many stablecoins will be white-labeled and only accepted by limited merchants. The result will be a decentralized payment network, each operating sustainably in a local niche but lacking standardization and interoperability.

They require a completely neutral and open network to connect. The network will establish rules, compliance and consumer protection standards, and technology interoperability. The open and permissionless nature of stablecoins makes it possible to aggregate these decentralized supply and demand. To solve the coordination problem, the network needs to be open and co-owned by participants, rather than vertically integrated with the rest of the payment stack. Turn users into owners to enable networks to scale at scale.

By aggregating these siloed supply and demand relationships, stablecoin payment networks will solve the "cold start" problem of new payment methods. Just as consumers today are willing to endure the one-time inconvenience of signing up for a credit card, the value of joining a stablecoin network will eventually be enough to offset the inconvenience of entering the world of stablecoins. At this point, stablecoins will enter mainstream adoption of consumer payments in the United States.

Conclusion

Stablecoins will not directly compete with credit cards in the mainstream market and replace the latter, but will start to seep in from the marginal market. By addressing real pain points in niche scenarios, stablecoins can create sustainable adoption based on relative convenience or better incentives. The key breakthrough lies in aggregating these fragmented use cases into an open, standardized, and co-owned network of participants to align supply and demand and enable human development at scale. If this is achieved, the rise of stablecoins in US consumer payments will be unstoppable.