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

Stablecoins will replicate the development path of credit cards and then replace them.

Author: Daniel Barabander

Translators: AididiaoJP, Foresight News

Currently, there is a lively discussion about stablecoins in the field of U.S. consumer payments. However, most people view stablecoins as a "sustaining technology" rather than a "disruptive technology." They believe that although financial institutions will use stablecoins for more efficient settlements, for most U.S. consumers, the value provided by stablecoins is not sufficient to make them abandon the currently dominant and highly sticky payment method, namely credit cards.

This article argues how stablecoins can become a mainstream payment method in the U.S., not just a settlement tool.

How Credit Cards Built Their Payment Network

First, we must acknowledge that getting people to adopt a new payment method is extremely difficult. A new payment method only has value when enough people in the network use it, and people will only join the network when it has value. Credit cards overcame this "cold start" problem through the following two steps and became the most widely used payment method among U.S. consumers (accounting for 37%), surpassing the previously dominant cash, checks, and early charge cards limited to specific merchants or industries.

Step 1: Leveraging Inherent Advantages That Don't Require a Network

Credit cards initially expanded their market by addressing the pain points of a small group of consumers and merchants, which involved three dimensions: convenience, incentives, and sales growth. Take the first mass-market bank credit card, BankAmericard (which later evolved into today's Visa credit card network) launched by Bank of America in 1958 as an example:

Convenience: BankAmericard allowed consumers to make a single payment at the end of the month instead of carrying cash or writing checks at the checkout counter. Although merchants had previously offered charge cards with similar deferred payment options, these cards were limited to a single merchant or specific categories (such as travel and entertainment). BankAmericard, on the other hand, could be used at any participating merchant, basically meeting everyone's consumption needs.

Incentives: Bank of America promoted the popularity of credit cards by mailing 65,000 unsolicited BankAmericard credit cards to residents of Fresno. Each card came with a pre-approved flexible credit limit, an unprecedented move at the time. Cash and checks could not provide similar incentives, while early charge cards, although offering short-term credit, were usually limited to high-income or long-term customers and could only be used at specific merchants. BankAmericard's extensive credit coverage was particularly attractive to low-income consumers who had previously been excluded.

Sales growth: BankAmericard helped merchants increase sales through credit consumption. Cash and checks could not expand consumers' purchasing power, and although early charge cards could boost sales, they required merchants to manage their own credit systems, customer access, collections, and risk control, resulting in extremely high operating costs that only large merchants or associations could afford. BankAmericard provided small merchants with opportunities for sales growth through credit consumption.

BankAmericard achieved success in Fresno and then gradually expanded to other cities in California. However, due to regulatory restrictions at the time that only allowed Bank of America to operate within California, it soon realized that "for credit cards to be truly useful, they must be accepted nationwide."于是，它以 25,000 美元的 franchise fee and transaction royalties to license the credit card to banks outside California. Each authorized bank used this intellectual property to build its own local network of consumers and merchants.

Step 2: Expansion and Connection of Credit Card Payment Networks

At this point, BankAmericard had evolved into a series of fragmented "territories," where consumers and merchants in each region used the card based on its inherent advantages. Although it worked well within each territory, it could not scale overall.

At the operational level, interoperability between banks was a major issue: when using BankAmericard intellectual property for cross-bank transaction authorization, merchants needed to contact the acquiring bank, which then contacted the issuing bank to confirm the cardholder's authorization, while customers could only wait in the store. This process could take 20 minutes, leading to fraud risks and a poor customer experience. Clearing and settlement were also complex: although the acquiring bank received payment from the issuing bank, it lacked motivation to promptly share transaction details to allow the issuing bank to collect payment from the cardholder. At the organizational level, the program was operated by Bank of America (a competitor of the authorized banks), leading to a "fundamental distrust" among banks.

To address these issues, the BankAmericard program was spun off in 1970 into a non-stock, non-profit membership association called National BankAmericard Inc. (NBI), later renamed Visa. Ownership and control were transferred from Bank of America to participating banks. In addition to adjusting control, NBI established a set of standardized rules, procedures, and dispute resolution mechanisms to address challenges. At the operational level, it built an exchange-based authorization system called BASE, which allowed merchants' banks to directly route authorization requests to the issuing banks' systems. Cross-bank authorization time was reduced to less than a minute, and it supported round-the-clock transactions, making it "sufficiently competitive with cash and check payments and eliminating one of the key barriers to adoption." BASE then further optimized clearing and settlement processes, replacing paper-based processes with electronic records and transforming bilateral settlement between banks into centralized processing and netting through the BASE network. What originally took a week could now be completed overnight.

By connecting these fragmented payment networks, credit cards overcame the "cold start" problem of new payment methods by aggregating supply and demand. At this point, mainstream consumers and merchants joined the network because of the network itself, as it allowed them to reach additional users. For consumers, the network created a convenience flywheel effect; each additional merchant increased the value of using the credit card. For merchants, the network brought incremental sales. Over time, the network began to use interchange fees generated by interoperability to provide incentives, further driving adoption by consumers and merchants.

Inherent Advantages of Stablecoins

Stablecoins can become a mainstream payment method by following the same strategy that credit cards used to replace cash, checks, and early charge cards. Let's analyze the inherent advantages of stablecoins from the three dimensions of convenience, incentives, and sales growth.

Convenience

Currently, stablecoins are not convenient enough for most consumers, who need to first convert fiat currency into cryptocurrency. The user experience still needs significant improvement; for example, even if you have already provided sensitive information to your bank, you still need to repeat the process. In addition, you need another token (such as ETH for gas fees) to pay for on-chain transactions and ensure that the stablecoin matches the chain the merchant is on (e.g., USDC on Base chain is different from USDC on Solana chain). From the perspective 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 custodying cryptocurrencies (including stablecoins), but this rule was revoked a few months ago. This means that banks will be able to custody stablecoins, vertically integrating fiat currency and cryptocurrency, fundamentally solving many of the current user experience problems. In addition, important technological developments such as account abstraction, gas subsidies, and zero-knowledge proofs are also improving the user experience.

Merchant Incentives

Stablecoins provide new incentives for merchants, especially through permissioned stablecoins.

Note: Permissioned stablecoins are not limited to issuance through merchants but also include a wider range of entities, such as fintech companies, trading platforms, credit card networks, banks, and payment service providers. This article focuses only on merchants.

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

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

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

First, as the issuance of permissioned stablecoins becomes commoditized, the difficulty of launching such programs will approach zero. The GENIUS Act provides a framework for issuing stablecoins in the U.S. and establishes a new category of issuers (non-bank licensed payment stablecoin issuers) with lighter compliance burdens than banks. Therefore, a supporting industry 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 with minimal marginal cost. For merchants with sufficient influence to temporarily "lock in" value, the question is: why not launch their own reward programs?

Second, these stablecoins differ from traditional reward programs in that they can be used outside the issuing merchant's ecosystem. Consumers will be more willing to temporarily lock in value because they know they can convert it back to fiat currency, transfer it to others, and ultimately use it at other merchants. Although merchants can request customized non-transferable stablecoins, I believe they will realize that if stablecoins are transferable, their adoption rate will significantly increase; permanently locking in value will make consumers feel very inconvenient, thereby reducing adoption willingness.

Consumer Incentives

Stablecoins offer a completely different way of rewarding consumers compared to credit cards. Merchants can indirectly use the revenue 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 revenue solely for holding stablecoins, I expect such loyalty rewards to be acceptable.

Due to the programmability that stablecoins have, which credit cards cannot match, they can natively access on-chain yield opportunities (specifically, I refer to fiat-backed stablecoins accessing DeFi, not on-chain hedge funds disguised as stablecoins). Applications like Legend and YieldClub will encourage users to earn yield by routing their float to lending protocols such as Morpho. I believe this is the key to stablecoins achieving a breakthrough in rewards. Yields attract users to convert fiat currency to stablecoins to participate in DeFi, and if spending is seamless in this experience, many will choose to transact directly with stablecoins.

If there is one advantage of cryptocurrencies, it is airdrops: incentivizing participation through instant value transfers on a global scale. Stablecoin issuers can adopt a similar strategy to attract new users to the cryptocurrency space by airdropping free stablecoins (or other tokens) and incentivize them to spend stablecoins.

Sales Growth

Stablecoins, like cash, are holder assets, so they do not inherently stimulate consumption like credit cards. However, just as credit card companies built the concept of credit on top of bank deposits, it is not hard to imagine that providers can offer similar programs based on stablecoins. Moreover, 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, "spent" stablecoins will be custodied, earn yield in DeFi, and part of the yield will be used to pay for purchases at the end of the month. Theoretically, this will encourage consumers to increase spending, which merchants will want to take advantage of.

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 drive sales growth.

Stablecoins can provide meaningful incentives for both merchants and consumers.

The question is how stablecoins can follow the "two-step" strategy of credit cards to build a new payment method.

Step 1: Leveraging Inherent Advantages That Don't Require a Network

Stablecoins can focus on the following niche scenarios:

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

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

Niche 1: Relative Convenience and Sales Growth

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

A typical example is transactions between U.S. merchants and non-U.S. consumers. Consumers in certain regions (especially Latin America) find it extremely difficult or expensive to obtain U.S. dollars to purchase goods and services from U.S. merchants. In Mexico, only people living within 20 kilometers of the U.S. border can open a dollar account; in Colombia and Brazil, dollar banking services are completely prohibited; in Argentina, although dollar accounts exist, they are strictly controlled, have limits, and are usually offered at official exchange rates far below the market rate. This means U.S. merchants are losing these sales opportunities.

Stablecoins provide non-U.S. consumers with unprecedented access to U.S. dollars, enabling them to purchase these goods and services. For these consumers, stablecoins are actually relatively convenient because they usually have no other reasonable way to obtain dollars for consumption. For merchants, stablecoins represent a new sales channel, as these consumers were previously unreachable. Many U.S. merchants (such as AI service companies) have significant demand from non-U.S. consumers and will therefore accept stablecoins to acquire these customers.

Niche 2: Incentive-Driven

Customers in many industries are willing to sacrifice convenience for rewards. My favorite restaurant offers a 3% cash payment discount, so I specifically go to the bank to withdraw cash, even though it's very inconvenient.

Merchants will be motivated to launch branded white-label stablecoins as a way to fund loyalty programs, offering consumers discounts and privileges to drive sales growth. Some consumers will be willing to endure the hassle of entering the cryptocurrency world and converting value into white-label stablecoins, especially when the incentives are strong enough and the product is something they are obsessed with or use frequently. The logic is simple: if I love a product, know I will use the balance, and can get meaningful rewards, I am willing to endure a poor experience and even retain funds.

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

A passionate fan base. For example, if Taylor Swift requires fans to use "TaylorUSD" to buy concert tickets, fans will still do so. She can incentivize fans to retain TaylorUSD by offering priority access to future tickets or merchandise discounts. Other merchants may also accept TaylorUSD for promotions.

High-frequency in-platform usage. For example, the second-hand goods market Poshmark had 48% of sellers using part of their income for in-platform shopping in 2019. If Poshmark sellers start accepting "PoshUSD," many will retain the stablecoin to transact with other sellers as buyers.

Step 2: Connecting Stablecoin Payment Networks

Since the above scenarios are niche markets, the use of stablecoins will be temporary and fragmented. Parties in the ecosystem will define their own rules and standards. In addition, stablecoins will be issued on multiple chains, increasing the technical difficulty of acceptance. Many stablecoins will be white-labeled and accepted by only a limited number of merchants. The result will be a fragmented payment network, where each network is sustainable within its local niche but lacks standardization and interoperability.

They need a completely neutral and open network for connection. This network will establish rules, compliance and consumer protection standards, and technical interoperability. The open and permissionless nature of stablecoins makes it possible to aggregate these fragmented supplies and demands. To solve the coordination problem, the network needs to be open and collectively owned by participants, rather than vertically integrated with other parts of the payment stack. Turning users into owners allows the network to scale in a large way.

By aggregating these isolated supply and demand relationships, the stablecoin payment network 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 the stablecoin network will eventually be sufficient to offset the inconvenience of entering the world of stablecoins. At this point, stablecoins will enter mainstream adoption in U.S. consumer payments.

Conclusion

Stablecoins will not directly compete with credit cards in the mainstream market and replace them; instead, they will infiltrate from the edge markets. By addressing real pain points in niche scenarios, stablecoins can create sustainable adoption based on relative convenience or better incentives. The key breakthrough is to aggregate these fragmented use cases into an open, standardized, and collectively owned network by participants to coordinate supply and demand and achieve large-scale development. If this is achieved, the rise of stablecoins in U.S. consumer payments will be unstoppable.

Disclaimer: The views in this article only represent the author's personal opinions and do not constitute investment advice for this platform. This platform does not guarantee the accuracy, completeness, originality, and timeliness of the information in the article, nor does it bear any responsibility for any losses caused by the use or reliance on the information in the article.