Author: Daniel Barabander
Translation: AididiaoJP, Foresight News
Currently, discussions about stablecoins in the U.S. consumer payment space are very heated. However, most people view stablecoins as a "sustaining technology" rather than a "disruptive technology." They believe that while financial institutions will use stablecoins for more efficient settlements, the value offered by stablecoins is insufficient for most U.S. consumers to abandon the currently dominant and sticky payment method, which is credit cards.
This article argues how stablecoins can become a mainstream payment method in the U.S., rather than just a settlement tool.
How Credit Cards Built a Payment Network
First, we must acknowledge that getting people to adopt a new payment method is very difficult. A new payment method is only valuable when enough people in the network use it, and people will only join the network when it has value. Credit cards overcame the "cold start" problem in 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 that were limited to specific merchants or industries.
Step One: Leveraging Intrinsic Advantages That Do Not Require a Network
Credit cards initially expanded their market by addressing pain points for a small subset 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 without needing to carry cash or fill out checks at the checkout. Although merchants had previously offered similar delayed payment charge cards, these cards were limited to individual merchants or specific categories (such as travel and entertainment). BankAmericard could be used at any participating merchant, essentially meeting everyone's consumption needs.
- Incentives: Bank of America promoted the adoption 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, which was unprecedented at the time. Cash and checks could not provide similar incentives, while early charge cards, although offering short-term credit, were typically limited to high-income or long-standing customers and could only be used at specific merchants. The broad credit coverage of BankAmericard particularly attracted 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, while early charge cards could promote sales but required merchants to manage their own credit systems, customer access, collections, and risk control, which had high operational costs that only large merchants or associations could bear. BankAmericard provided small merchants with opportunities for sales growth through credit consumption.
BankAmericard achieved success in Fresno and gradually expanded to other cities in California. However, due to regulatory restrictions at the time, Bank of America could only operate in California. It quickly realized that "to make credit cards truly useful, they must be accepted nationwide," and thus authorized banks outside California to issue credit cards for a franchise fee of $25,000 and transaction royalties. Each authorized bank used this intellectual property to establish its own consumer and merchant network locally.
Step Two: Expansion and Connection of the Credit Card Payment Network
At this point, BankAmericard had evolved into a series of decentralized "territories," where consumers and merchants in each area used the card based on its intrinsic advantages. Although it operated well within each territory, it could not scale overall.
Interoperability between banks was a major issue at the operational level: when authorizing cross-bank transactions using the BankAmericard intellectual property, merchants needed to contact the acquiring bank, which would then contact the issuing bank to confirm the cardholder's authorization, leaving customers waiting in-store. This process could take up to 20 minutes, leading to fraud risks and poor customer experiences. Clearing and settlement were equally complex: although the acquiring bank received payment from the issuing bank, there was little incentive to share transaction details promptly for the issuing bank to collect 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" issue between banks.
To address these issues, BankAmericard planned to split in 1970 into a non-stock, non-profit membership association called National BankAmericard Inc. (NBI), which was later renamed Visa. Ownership and control shifted from Bank of America to the 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 a system called BASE, a swap-based authorization system that allowed the merchant's bank to route authorization requests directly to the issuing bank's system. Cross-bank authorization time was reduced to less than a minute and supported round-the-clock transactions, making it "competitive enough with cash and check payments, eliminating one of the key barriers to adoption." Subsequently, BASE further optimized the clearing and settlement processes, replacing paper processes with electronic records and transforming bilateral settlements between banks into centralized processing and net settlement through the BASE network. A process that originally took a week could now be completed overnight.
By connecting these decentralized payment networks, credit cards overcame the "cold start" problem of new payment methods through the aggregation of supply and demand. At this point, the motivation for mainstream consumers and merchants to join the network was the network itself, as it allowed them to reach additional users. For consumers, the network created a convenient flywheel effect, where each additional merchant increased the value of using credit cards. For merchants, the network brought incremental sales. Over time, the network began to leverage the interchange fees generated by interoperability to provide incentives, further driving adoption among consumers and merchants.
Intrinsic Advantages of Stablecoins
Stablecoins can become a mainstream payment method by following the same strategies that credit cards used to replace cash, checks, and early charge cards. Let's analyze the intrinsic advantages of stablecoins from the dimensions of convenience, incentives, and sales growth.
Convenience
Currently, stablecoins are not convenient enough for most consumers, as they need to convert fiat currency into cryptocurrency first. The user experience still requires significant improvement; for example, even if you have provided sensitive information to the bank, you still need to repeat this process. Additionally, you need another token (like ETH for gas fees) to pay for on-chain transactions and ensure that the stablecoin matches the chain where the merchant is located (for example, USDC on the Base chain is different from USDC on the 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) had prohibited banks from custodying cryptocurrencies (including stablecoins), but this regulation was revoked a few months ago. This means that banks will be able to custody stablecoins, vertically integrating fiat and cryptocurrency, fundamentally addressing many of the current user experience issues. Additionally, important technological developments such as account abstraction, gas subsidies, and zero-knowledge proofs are also improving user experience.
Merchant Incentives
Stablecoins provide merchants with a new way to incentivize, especially through permissioned stablecoins.
Note: Permissioned stablecoins refer to issuance channels that are not limited to merchants but include a broader 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 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 returns from the float of stablecoins.
Permissioned stablecoins bear a clear resemblance to Starbucks' rewards program. Both invest the float of funds in the system into 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 ecosystem.
Although permissioned stablecoins are structurally similar to prepaid rewards programs, important differences indicate that permissioned stablecoins are more viable for merchants than traditional prepaid rewards 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 class of issuers (non-bank licensed payment stablecoin issuers) with a lighter compliance burden 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 at minimal marginal costs. For merchants with enough influence to temporarily "lock" 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 the issuing merchant's ecosystem. Consumers will be more willing to temporarily lock value because they know they can convert it back to fiat, 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 likelihood of adoption will significantly increase; permanently locking value will make consumers feel very inconvenienced, thus reducing their willingness to adopt.
Consumer Incentives
Stablecoins offer a completely different way of rewarding consumers compared to credit cards. Merchants can indirectly use the profits 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 profits solely for holding stablecoins, I expect that such loyalty rewards will be acceptable.
Due to the programmability of stablecoins, which credit cards cannot match, they can natively access yield opportunities on-chain (specifically, I mean fiat-backed stablecoins accessing DeFi, rather than on-chain hedge funds disguised as stablecoins). Applications like Legend and YieldClub will encourage users to earn yields by routing their float into lending protocols like Morpho. I believe this is key to achieving breakthroughs in rewards with stablecoins. Yields attract users to convert fiat into stablecoins to participate in DeFi, and if spending in this experience is seamless, many will choose to transact directly with stablecoins.
If there is an advantage to cryptocurrencies, it is airdrops: incentivizing participation through instant value transfer on a global scale. Stablecoin issuers can adopt similar strategies to attract new users into the cryptocurrency space by airdropping free stablecoins (or other tokens) and incentivizing them to spend stablecoins.
Sales Growth
Stablecoins, like cash, are assets of the holder, so they do not inherently stimulate consumption like credit cards do. However, just as credit card companies built the concept of credit on the basis of bank deposits, it is not hard to imagine that providers could offer similar programs based on stablecoins. Moreover, an increasing number of companies are disrupting the credit model, believing that DeFi incentives can drive a new sales growth paradigm: "buy now, pay never." In this model, the "spent" stablecoins will be custodied, earning yields in DeFi, and at the end of the month, a portion of the earnings will be used to pay for the purchase. Theoretically, this would encourage consumers to increase spending, which merchants would want to leverage.
How to Build a Stablecoin Network
We can summarize the intrinsic advantages of stablecoins as follows:
- Stablecoins are currently neither convenient nor able to directly drive sales growth.
- Stablecoins can provide meaningful incentives for merchants and consumers.
The question is how stablecoins can follow the "two-step" strategy of credit cards to build a new payment method?
Step One: Leveraging Intrinsic Advantages That Do Not 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 have the motivation to offer stablecoins to consumers who are willing to sacrifice convenience for rewards.
Niche One: Relative Convenience and Sales Growth
Although stablecoins are currently not convenient enough for most people, they may be a better choice for consumers who are underserved 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 customers they could not serve before.
A typical example is the transactions between U.S. merchants and non-U.S. consumers. In certain regions (especially Latin America), it is extremely difficult or expensive for consumers to obtain U.S. dollars to purchase goods and services from American merchants. In Mexico, only those living within 20 kilometers of the U.S. border can open dollar accounts; in Colombia and Brazil, dollar banking services are completely prohibited; in Argentina, although dollar accounts exist, they are strictly controlled, have limits, and are often offered at official rates that are significantly lower than market rates. This means that U.S. merchants miss out on these sales opportunities.
Stablecoins provide non-U.S. consumers with an unprecedented channel to access U.S. dollars, enabling them to purchase these goods and services. For these consumers, stablecoins are actually relatively convenient, as they typically 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, so they will accept stablecoins to acquire these customers.
Niche Two: Incentive-Driven
Many customers in various industries are willing to sacrifice convenience for rewards. My favorite restaurant offers a 3% cash payment discount, for which I specifically go to the bank to withdraw cash, despite the inconvenience.
Merchants will have the motivation 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 endure the hassle of entering the cryptocurrency world and converting value into white-label stablecoins, especially when the incentives are strong enough and the products are ones they are passionate about or frequently use. The logic is simple: if I love a product, know I will use the balance, and can receive meaningful rewards, I am willing to endure a poor experience or even lock up 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 asks her fans to purchase concert tickets with "TaylorUSD," fans will still comply. She can incentivize fans to hold TaylorUSD by offering priority access to future tickets or merchandise discounts. Other merchants may also accept TaylorUSD for promotions.
- High-frequency use within a platform. For example, the second-hand goods marketplace Poshmark had 48% of sellers using part of their income for shopping on the platform in 2019. If Poshmark sellers start accepting "PoshUSD," many will hold that stablecoin for transactions with other sellers.
Step Two: Connecting the Stablecoin Payment Network
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. Additionally, stablecoins will be issued on multiple chains, increasing the technical difficulty of acceptance. Many stablecoins will be white-label, accepted only by a limited number of merchants. The result will be a decentralized payment network, where each network can operate sustainably in 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 supply and demand. To resolve coordination issues, the network needs to be open and jointly 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 massive way.
By aggregating these isolated supply and demand relationships, the stablecoin payment network will address the "cold start" problem of new payment methods. Just as today consumers are willing to endure a one-time inconvenience to register for a credit card, the value of joining the stablecoin network will ultimately outweigh the inconveniences of entering the stablecoin world. 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; rather, they will begin to infiltrate from the fringe 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 participant-owned network to coordinate supply and demand and achieve scalable human development. If this is achieved, the rise of stablecoins in U.S. consumer payments will be unstoppable.
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