a16z: Stablecoins Will Reshape the Trillion-Dollar Payment Industry

Author: Sam Broner, a16z

Compiled by: Deep Tide TechFlow

The current payment market is dominated by some "gatekeepers" that charge high fees, which cut into the profits of every business. They justify these fees under the guise of ubiquity and convenience, while stifling competition and limiting the creativity of innovators.

Stablecoins can provide a better solution.

Stablecoins offer lower fees, more competition among payment service providers, and broader accessibility. By reducing transaction costs to nearly zero, they can help businesses overcome the friction caused by existing payment methods. The adoption of stablecoins will begin with those businesses most affected by current payment methods, and this process will disrupt the entire payment industry.

Stablecoins have become the cheapest way to send dollars. Last month, globally, 28.5 million stablecoin users completed over 600 million transactions. Stablecoin users are almost everywhere in the world, using stablecoins because they provide a secure, cheap, and inflation-resistant way to store and spend money. Aside from cash and gold, stablecoins are the only widely adopted payment method that does not require intermediaries like banks, payment networks, or central banks. At the same time, stablecoins offer permissionless programmability, scalability, and interoperability—anyone can build payment platforms on stablecoin payment infrastructure.

This transformation may take time, but it is likely to happen faster than many expect. Businesses such as restaurants, retailers, enterprises, and payment processors will reap the greatest benefits from stablecoin platforms, seeing significant improvements in profit margins. This demand will drive the adoption of stablecoins, and as their use grows, other advantages of stablecoins—permissionless composability and enhanced programmability—will attract more users, businesses, and products onto the chain. I will elaborate on the reasons and methods below, starting with some background on the payment industry.

Payment Participants

• Payment Rails: The technology, rules, and networks that process transactions

• Payment Processors: Operators above the payment rails responsible for facilitating transactions

• Payment Service Providers: Entities that provide access to payment systems for end-users or other systems

• Payment Solutions: Products offered by payment service providers

• Payment Platforms: A set of related payment solutions covering providers, processors, and payment rails

Background of the Payment Industry

The scale of the payment industry is hard to estimate. In 2023, the global payment industry processed 340 trillion transactions, involving 18 trillion dollars in transaction volume, generating 2.4 trillion dollars in revenue. In the U.S. alone, credit card payments reached 5.6 trillion dollars, while debit card payments reached 4.4 trillion dollars.

Despite the vast scale and ubiquity of the payment industry, payment solutions remain expensive and complex, even though payment applications often obscure the consumer's ++complex++ experience. For example, Venmo, a peer-to-peer payment app, appears simple on the surface but hides complex bank integrations, debit card loopholes, and countless compliance obligations in the background. Adding to the complexity, payment solutions often stack on top of each other, 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 metrics for payment products are timeliness, cost, reliability, and convenience.

The question consumers typically care about is, how much do I need to pay? Merchants, on the other hand, care about whether they will receive payment. But in reality, all four metrics are crucial for both parties.

Since the days when businesses needed to look 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 have driven increases in transaction volume and spending.

However, many customers still fail to benefit from modern payment products or are underserved. For merchants, credit card fees are expensive and directly erode their profits. Although the adoption of real-time payments (RTP) is increasing, bank transfers in the U.S. remain too slow, often taking several days. Peer-to-peer applications are also slow, expensive, and complex due to regional and network limitations, making transfers between ecosystems cumbersome.

While businesses and consumers have begun to expect payment platforms to offer more complex features, existing solutions do not adequately meet the needs of all users. In fact, most users are paying too much in fees.

The Rise of Stablecoins in the Payment Industry

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

Take remittances as an example, where this demand often stems from urgent needs. Many remittance users are unbanked, and the banking services they use are highly fragmented. Therefore, they do not see much value in the local integration of traditional payments with banking services. Stablecoin payments offer the advantages of instant settlement, low cost, and no intermediaries, which is beneficial for any payment user or developer. After all, the cost of sending $200 from the U.S. to Colombia using stablecoins is less than $0.01, while traditional channels require 12.13 dollars. (Remittance users need to send money home regardless of transaction fees, but lower fees can provide them with substantial benefits.)

International business payments, especially for small businesses in emerging markets, also face high fees, long processing times, and insufficient 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, correspondent banks, foreign exchange, and local banks. Each intermediary takes a cut and increases the risk of transaction failure.

Fortunately, these transactions often occur between parties with long-standing relationships. By using stablecoins, the payer in Mexico and the payee in Vietnam can attempt to eliminate those slow, bureaucratic, and expensive intermediaries. They may need to work hard to find local channels and workflows, but ultimately they can enjoy faster, cheaper transactions and have more control over the payment process.

Low-value transactions—especially low-fraud-risk face-to-face transactions, such as those in restaurants, coffee shops, or corner stores—also present a significant opportunity. Due to their low profit margins, these businesses are very cost-sensitive, so a 15-cent transaction fee charged in payment solutions can significantly impact their profitability.

Whenever a customer spends $2 on coffee, only $1.70 to $1.80 goes to the coffee shop, with nearly 15% going to the credit card company—just to facilitate the transaction. But here, credit cards are merely for convenience: neither consumers nor shops need those additional features that justify the fees. Consumers do not need fraud protection (they just bought a cup of coffee) or loans (the coffee costs only $2). And coffee shops have limited needs for compliance and bank integration (they typically use integrated 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 Enhance Profitability

The transaction fees of current payment systems directly impact the profitability of many businesses. Reducing these fees would free up significant profit margins. The first signal has already emerged: Stripe announced it would charge a 1.5% fee for stablecoin payments, which is 30% lower than the fees it charges for card payments. To support this effort, Stripe announced the acquisition of Bridge.xyz for approximately 1 billion dollars.

Wider adoption of stablecoins will significantly improve the profitability of many businesses—not limited to small businesses like coffee shops or restaurants. Let’s look at the financials of three publicly traded companies for fiscal year 2024 to estimate the effect of reducing payment processing fees to 0.1%. (For convenience, this assessment assumes businesses pay a 1.6% blended payment processing cost and that upstream and downstream costs are minimal. More information follows.)

• Walmart has annual revenue of $648 billion and may pay $10 billion in credit card fees, with profits of $15.5 billion. Calculate this: if payment fees were eliminated, Walmart's profitability and valuation could increase by over 60%, all else being equal, through cheaper payment solutions.

• Chipotle, a rapidly growing fast-food chain, has annual revenue of $9.8 billion. It paid $148 million in credit card fees out of $1.2 billion in annual profits. By simply reducing fees, Chipotle's profitability could increase by 12%—a significant enhancement not achievable through its income statement.

• Kroger, a national grocery chain, stands to benefit the most due to its low profit margins. Surprisingly, Kroger's net income and payment costs may be nearly equal. Like many grocery stores, its profit margin is below 2%, lower than the fees businesses pay for credit card processing. Kroger could potentially double its profits through stablecoin payments.

How could Walmart, Chipotle, and Kroger reduce transaction fees by using stablecoins? First, this is an idealized scenario: widespread consumer adoption will not happen overnight. There will still be significant fees before stablecoins are widely used, especially regarding the inflow and outflow channels. Second, retailers and payment processors generally oppose high-fee payment solutions. Payment processors themselves operate in a low-margin industry, with most profits captured by card networks and issuing banks. When payment processors handle transactions, most of their fees are taken by the payment networks. For example, Stripe charges 2.9% of the total transaction amount plus $0.30 when processing online retail checkouts, but over 70% of that goes to Visa and issuing banks. As more payment processors, such as Block (formerly Square), Fiserv, Stripe, and Toast, begin adopting stablecoins to improve profit margins, it will become easier for more businesses to utilize stablecoins.

With lower fees and no intermediary costs, stablecoins mean payment processors can achieve higher profit margins in stablecoin transactions. Higher profit margins may incentivize payment processors to support and drive more businesses and use cases to adopt stablecoins. However, as payment processors adopt stablecoins, it is expected that stablecoin payment fees will gradually decrease: for example, Stripe's 1.5% fee may drop due to market competition.

Next Steps: Driving Widespread Consumer Adoption of Stablecoins

Currently, stablecoins are gradually being adopted as a new, permissionless means of transferring and storing funds. Entrepreneurs are developing solutions to transform stablecoin infrastructure into stablecoin platforms. Like past innovations, the adoption of stablecoins will be gradual, starting with meeting the needs of marginal consumers and forward-thinking businesses until the platform matures enough to meet the needs of mainstream users and conservative enterprises. The following three trends will drive more mainstream businesses to adopt stablecoins.

1. Enhancing Backend Integration through Stablecoin Orchestration

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

   These orchestration products can allow businesses to process payments at a cost far lower than current mechanisms without requiring significant changes in processes or engineering. Consumers may unknowingly receive cheaper products as the costs of invoices, payroll, and subscriptions will automatically decrease. Many stablecoin orchestration companies have already begun serving clients seeking instant settlement, low costs, and widespread availability for business-to-business or business-to-consumer payments. By integrating stablecoins into their backend, businesses can enjoy the advantages of stablecoins without compromising user expectations for payment service quality, while stablecoin adoption also increases.

2. Improving User Onboarding and Increasing Business Shared Incentives

   Stablecoin companies are becoming more sophisticated in attracting end-users onto the chain through shared incentives and improved user onboarding solutions. Lower channel fees, faster speeds, and greater accessibility make 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 behaviors. Popular applications like Venmo, ApplePay, Paypal, CashApp, Nubank, and Revolut now allow users to use stablecoins.

   Companies also have more motivation to use these channels to integrate stablecoins and keep funds in stablecoins. Fiat-backed stablecoin issuers like Circle, Paypal, and Tether share their profits with ordinary businesses, just as Visa shares profits with United and Chase to attract credit card users. Such partnerships and integrations benefit stablecoin issuers by creating larger asset pools, but they can also benefit businesses that successfully transition users from credit cards to stablecoins. These businesses can now earn a portion of the funds flowing through their products, a business model typically reserved for banks, fintech companies, and gift card issuers that profit from user float.

3. Enhancing Regulatory Clarity and Availability of Compliance Solutions

   When businesses feel confident about the regulatory environment, they are more likely to adopt stablecoins. While we have yet to see comprehensive global regulation of stablecoins, many regions have already issued rules and guidance for stablecoins, allowing entrepreneurs to start building compliant and user-friendly businesses.

   For example, the EU's Markets in Crypto-Assets Regulation (MiCA) has established rules for stablecoin issuers, including prudential and conduct requirements. Since the stablecoin provisions of this regulation took effect earlier this year, it has significantly changed the stablecoin market in Europe.

   While the U.S. currently lacks a stablecoin framework, bipartisan policymakers are increasingly recognizing the need for effective stablecoin legislation. Such regulation needs to ensure that issuers fully back their tokens with high-quality assets, have their reserves audited by third parties, and implement comprehensive measures to combat illicit finance. At the same time, legislation needs to preserve developers' ability to create decentralized stablecoins that reduce user risk by eliminating intermediaries, leveraging the benefits of decentralization.

   These policy efforts will allow companies across various industries to consider transitioning from traditional payment rails to stablecoin infrastructure. While compliance solutions may be less glamorous, every stablecoin adopter helps demonstrate to existing businesses that stablecoins are a reliable, secure, regulated, and improved solution to classic payment problems.

As the adoption of stablecoins increases, the network effects of platforms will strengthen. While it may take years for stablecoins to be used at the point of sale or as a bank account alternative, as the number of stablecoin users grows, stablecoin-centric solutions will become more mainstream and more appealing to consumers, businesses, and entrepreneurs.

Riding the Wave: Stablecoins Will Continually Improve

During the adoption process, the products themselves will continually improve. The Web3 community has ample reason to celebrate the adoption of stablecoins: due to years of investment in infrastructure and on-chain applications, stablecoins are climbing the value innovation S-curve. As infrastructure improves, on-chain applications proliferate, and on-chain networks grow, stablecoins will become more attractive to users. This will happen in two ways.

First, technological advancements in crypto infrastructure will make it possible for stablecoin payment costs to drop below 1 cent. Future investments will continue to make transactions cheaper and faster. At the same time, better wallets, bridges, channels, developer experiences, and AMMs will enable stablecoin orchestration and improved user onboarding.

This technological foundation provides entrepreneurs with increasing motivation to build stablecoins, offering improved developer experiences, 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 collaborate with extractive networks, such as expensive intermediaries in credit card transactions or international payments. But stablecoins are self-custodied and programmable, lowering the barrier to creating new payment experiences and integrating value-added services. Stablecoins are also composable, allowing users to benefit from an increasingly powerful on-chain application and increased competition.

Stablecoins are poised to lead a new era of free, scalable, and instant payments. As Stripe's CEO Patrick Collison stated, stablecoins are like "room-temperature superconductors in the financial services space," enabling businesses to explore new opportunities that may be challenging to achieve under the burdens of traditional payment channels.

In the short term, as payments become freer and more 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 that complement this emerging platform. As traditional businesses gradually recognize the market changes, entrepreneurs will develop new solutions to help these businesses better leverage stablecoins.

In the long run, as stablecoins become more widespread and technology advances, startups will seize the inherent opportunities in this free, frictionless, and instant payment world. These startups will gradually emerge, bringing new and unexpected use cases and further driving the democratization of the global financial system, allowing more people to benefit from the opportunities it presents.

Acknowledgments: 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 that made this article possible.

Sam Broner is a partner on the a16z crypto investment team. Before joining a16z, Sam was a software engineer at Microsoft and was part of the founding team of Fluid Framework and Microsoft Loop. While studying at MIT's Sloan School of Management, Sam participated in the Boston Federal Reserve's Project Hamilton, led the Sloan Blockchain Club, organized the first Sloan AI Summit, and received the Patrick J. McGovern Award from MIT for creating an entrepreneurial community. You can follow him on the X platform @SamBroner.

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