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

Original author: Daniel Barabander

Original text compiled by: AididiaoJP, Foresight News

Currently, discussions about stablecoins in the U.S. consumer payment sector 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 not sufficient for most U.S. consumers to abandon their current dominant and sticky payment method, which is credit cards.

This article argues how stablecoins have become a mainstream payment method in the United States, rather than just a settlement tool.

How to build a payment network with a credit card

First, we must acknowledge that it is very difficult to get people to accept a new payment method. A new payment method only has value when there are enough people using it within the network, and people will only join the network when it is valuable. Credit cards overcame the "cold start" problem in two steps and became the most widely used payment method among American consumers (accounting for 37%), surpassing the previously dominant cash, checks, and early charge cards that were limited to specific merchants or industries.

Step 1: Utilize the inherent advantages that can be realized without the need for a network.

Credit cards initially expanded the market by addressing a small number of pain points for consumers and merchants, which involved three dimensions: convenience, incentives, and sales growth. Taking 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 allows consumers to make a single payment at the end of the month without the need to carry cash or fill out a check at the checkout. Although merchants previously offered similar delayed payment charge cards, these cards were limited to a single merchant or specific categories (such as travel and entertainment). BankAmericard can be used at any participating merchant, essentially meeting the spending needs of everyone.

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 an unprecedented initiative at the time. Cash and checks could not provide similar incentives, while early charge cards, although they offered short-term credit, were usually limited to high-income or long-standing customers and could only be used at specific merchants. The extensive credit coverage of BankAmericard particularly appealed to low-income consumers who had previously been excluded.

Sales Growth: BankAmericard helps merchants increase sales through credit consumption. Cash and checks cannot expand consumers' purchasing power, and while early charge cards could promote sales, they required merchants to manage their own credit systems, customer access, collections, and risk control, resulting in extremely high operational costs that only large merchants or associations could afford. BankAmericard provides small merchants with the opportunity 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 soon realized that "for credit cards to be 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 2: Expansion and Connection of Credit Card Payment Networks

At this time, BankAmericard has evolved into a series of decentralized "territories," where consumers and merchants in each area use the card based on its intrinsic advantages. Although it operates well within each territory, it cannot scale overall.

On the operational level, interbank interoperability is a major issue: when authorizing cross-bank transactions using BankAmericard intellectual property, merchants need to contact the acquiring bank, which then contacts the issuing bank to confirm the cardholder's authorization, leaving customers waiting in-store. This process can take up to 20 minutes, leading to fraud risks and poor customer experience. Clearing and settlement are equally complex: although the acquiring bank receives payment from the issuing bank, there is little incentive to share transaction details promptly so that the issuing bank can collect from the cardholder. At the organizational level, the program is operated by Bank of America (a competitor of the authorized banks), resulting in a "fundamental distrust" issue between banks.

To address these issues, BankAmericard planned to split in 1970 into a non-stock, non-profit membership association named 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 tackle challenges. On the operational side, it built an authorization system called BASE based on exchange, which allowed merchant banks to directly route authorization requests to the card-issuing banks' systems. Interbank authorization times were reduced to less than a minute, and it 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.

Connecting these fragmented payment networks, credit cards overcome 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 lies in the network itself, as it allows them to reach additional users. For consumers, the network creates a convenient flywheel effect, where each additional merchant increases the value of using credit cards. For merchants, the network brings incremental sales. Over time, the network starts to leverage the interchange fees generated by interoperability to provide incentives, further driving the adoption of consumers and merchants.

The 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 inherent advantages of stablecoins from three dimensions: convenience, incentives, and sales growth.

Convenience

Currently, stablecoins are not yet convenient enough for most consumers, as they need to first convert fiat currency into cryptocurrency. The user experience still requires significant improvement; for example, even if you have already 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 that the merchant is on (for instance, 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 cryptocurrencies, fundamentally addressing many 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 brand new incentive model, especially through permissioned stablecoins.

Note: Permissioned stablecoins are issued through channels that are not limited to merchants but also include broader sectors. For example, fintech companies, trading platforms, credit card networks, banks, and payment service providers. This article focuses solely on merchants.

Regulated financial or infrastructure providers (such as Paxos, Bridge, M^0, BitGo, Agora, and Brale) issue licensed stablecoins, which are branded and distributed by another entity. Brand partners (such as merchants) can earn returns from the reserve of the stablecoins.

Permissioned stablecoins share notable similarities with the 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 constructed 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 indicate that permissioned stablecoins are more viable for merchants than traditional prepaid reward programs.

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 United States and establishes a new class of issuers (non-bank licensed payment stablecoin issuers) with a lighter compliance burden than banks. As a result, 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 sufficient influence to temporarily "lock in" value, the question is: why not launch their own rewards program?

Secondly, the difference between these stablecoins and traditional reward programs is that they can be used outside of the issuing merchant's ecosystem. Consumers are more willing to temporarily lock in value because they know they can convert it back to fiat, transfer it to others, and ultimately use it with other merchants. Although merchants may request customized non-transferable stablecoins, I believe they will realize that if stablecoins are transferable, their likelihood of adoption will significantly increase; permanently locking in value will make consumers feel very inconvenienced, thereby reducing their willingness to adopt.

Consumer Incentives

Stablecoins provide a completely different way of consumer rewards compared to credit cards. Merchants can indirectly use the earnings from permissioned stablecoins to offer targeted incentives, such as instant discounts, shipping fee waivers, early access, or VIP queues. Although the GENIUS Act prohibits sharing earnings solely for holding stablecoins, I anticipate that such loyalty rewards will be acceptable.

Due to the programmability of stablecoins, which is unmatched by credit cards, 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 floating deposits into lending protocols like Morpho. I believe this is key to stablecoins making breakthroughs in rewards. Yield attracts users to convert fiat into stablecoins to participate in DeFi, and if the experience of spending in this context is seamless, many will choose to trade directly with stablecoins.

If we talk about the advantages of 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 distributing free stablecoins (or other tokens) through airdrops and encouraging them to spend stablecoins.

Sales Growth

Stablecoins, like cash, are assets of the holders, and thus do not inherently stimulate consumption in the same way that credit cards do. However, just as credit card companies have built a credit concept on the basis of bank deposits, it is not difficult to imagine that providers could offer similar programs based on stablecoins. Moreover, more and more companies are disrupting credit models, believing that DeFi incentives can drive a new sales growth mantra: "Buy now, pay never." In this model, the stablecoins spent will be held in custody, earning yields in DeFi, and at the end of the month, a portion of the earnings will be used to pay for the purchases. Theoretically, this would encourage consumers to increase spending, which merchants hope to capitalize on.

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 1: Utilize the inherent advantages that can be realized without the need for the internet.

Stablecoins can focus on the following niche scenarios:

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

(2) Merchants have the incentive 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 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 also accept stablecoins to reach customers that were previously inaccessible.

A typical example is the transaction between American merchants and non-American consumers. In certain regions (especially Latin America), it is extremely difficult or expensive for consumers to obtain US dollars to purchase goods and services from American merchants. In Mexico, only those living within 20 kilometers of the US 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 usually offered at official rates far below market exchange rates. This means that American merchants lose these sales opportunities.

Stablecoins provide non-U.S. consumers with an unprecedented channel to access U.S. dollars, allowing them to purchase these goods and services. For these consumers, stablecoins are actually relatively convenient, as they often have no other reasonable way to obtain U.S. 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 therefore will accept stablecoins to access these customers.

Niche Two: 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 is very inconvenient.

Merchants will be motivated to launch branded white-label stablecoins as a way to fund loyalty programs, providing consumers with discounts and privileges to drive sales growth. Some consumers will be willing to endure the complexities 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 hold onto funds.

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

Fervent fan base. For example, if Taylor Swift asks her fans to purchase concert tickets with "TaylorUSD", they would still comply. She could incentivize fans to hold onto TaylorUSD by offering future ticket purchase priority or merchandise discounts. 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 market Poshmark used part of their income for shopping within the platform. If Poshmark sellers start accepting "PoshUSD", many people will keep this stablecoin for transactions between buyers and other sellers.

Step 2: Connect to the stablecoin payment network

Due to the fact that the above scenario is a niche market, the use of stablecoins will be temporary and fragmented. Parties within the ecosystem will define their own rules and standards. In addition, stablecoins will be issued across multiple chains, increasing the technical difficulty of acceptance. Many stablecoins will be white-labeled, accepted only by a limited number of merchants. The result will be a decentralized payment network, with each network sustainably operating in local niches, but lacking standardization and interoperability.

They need a completely neutral and open network for connectivity. This network will establish rules, compliance and consumer protection standards, as well as technical interoperability. The open and permissionless nature of stablecoins enables the aggregation of these decentralized supply and demand. To address coordination issues, the network needs to be open and jointly owned by participants, rather than being 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 the one-time inconvenience of registering for a credit card, the value of joining the stablecoin network will ultimately be sufficient to offset the inconveniences of entering the stablecoin world. At this point, stablecoins will enter the mainstream adoption of consumer payments in the United States.

Conclusion

Stablecoins will not compete directly with credit cards in the mainstream market and replace the latter; instead, they will start to penetrate 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 network co-owned by participants to coordinate supply and demand and achieve scalable human development. If this is achieved, the rise of stablecoins in consumer payments in the U.S. will be unstoppable.