"Trillion-dollar" stablecoin financial companies are on the way, is the countdown to the end of traditional payment systems beginning?

Original Author: Rob Hadick, Partner at Dragonfly Reposted by: Daisy, Mars Finance

Original title: Traditional payment models are on the verge of collapse, and trillion-dollar stablecoin financial companies are about to emerge?

Stablecoins are not meant to improve the existing payment networks, but rather to completely disrupt traditional payment networks. Stablecoins allow businesses to completely bypass traditional payment channels; in other words, these traditional payment channels may very well be completely replaced one day in the future.

When payment networks are based on stablecoins, all transactions are merely changes in numbers on the ledger. Many emerging companies are currently beginning to drive the reconstruction of capital flow methods.

There's been a lot of talk lately about how stablecoins can become banking-as-a-service (BaaS) networking platforms, i.e. connecting existing payment channels, from card-issuing banks to merchant acceptance, and everything in between. While I agree with these sentiments, when I think about how businesses and protocols can create and accumulate value in the new paradigm in the future, it is an underestimation of the true potential of stablecoins to be seen as mere platforms that connect existing payment channels. Stablecoin payments are a progressive improvement that represents the possibility of reimagining payment channels from the ground up.

To understand the direction of the future, we need to review history, as history reveals the obvious evolutionary path.

Evolution of Modern Payment Channels

The origins of modern payment systems can be traced back to the early 1950s. Diners Club, founded by Frank McNamara, launched the first multipurpose charge card. This charge card introduced a closed-loop credit model, making Diners Club a payment intermediary between merchants and cardholders. Before Diners Club, almost all payments were made directly between merchants and customers through cash or proprietary bilateral credit agreements.

Following the success of the Diners Club, Bank of America (BofA) saw a huge opportunity to expand its credit business and gain access to a wider customer base and launched its first consumer credit card for the mass market. Bank of America mailed more than 2 million unsolicited, pre-approved credit cards to middle-class consumers that can be used at more than 20,000 merchants in California. Due to regulatory restrictions at the time, BofA began to license its technology to other banks in the U.S. and even expanded to international markets, resulting in the first credit card payment network. But with that came huge operational challenges and serious credit risk, with the overdue rate soaring to over 20%. At the same time, along with rampant fraud, the entire project came to a near collapse.

People are beginning to realize that the challenges and confusion in the banking network can only be solved by the formation of a truly cooperative organization that will set the rules for managing the system and provide the infrastructure. Members of the organization can compete on product pricing, but they need to follow uniform standards. This organization later became Visa as we know it today. Another organization, founded by the Bank of California to compete with Bank of America, later became Mastercard. This was the birth of our modern global payment model and has become the dominant structure in the global payments industry.

From the 1960s to the early 21st century, almost all innovations in the payment sector were centered around enhancing, supplementing, and digitizing the current global payment model. After the internet flourished in the 1990s, many innovations shifted to software development.

E-commerce was born in the early 90s of the 20th century, and buying Sting's CDs on NetMarket was the first online payment. PizzaNet then became the first national retailer to accept online payments. Amazon, eBay, Rakuten, Alibaba and other well-known e-commerce companies were established in the following years. The boom in e-commerce companies gave rise to a number of early independent payment gateway and processor companies. The most well-known are Confinity and X.com, which were founded in late 1998 and early 1999, respectively, and merged to become the PayPal today.

Digital payments have given rise to numerous household-name companies with valuations in the hundreds of billions of dollars. These companies connect offline merchants and online retail, including payment service providers (PSPs) and payment facilitators (PayFacs) such as Stripe, Adyen, Checkout.com, and Square. They address merchant-side issues by bundling gateways, processing, reconciliation, fraud compliance tools, merchant accounts, and other value-added software and services. However, it is clear that they have not brought about a disruptive transformation to traditional financial payment networks.

Despite some startups focusing on disrupting traditional banking payment networks and card issuing infrastructure, well-known companies like Marqeta, Galileo, Lithic, and Synapse are primarily dedicated to integrating new companies into the existing banking networks and infrastructures, rather than disrupting the current payment networks. However, many companies have found that simply adding a software layer on top of the existing infrastructure does not lead to true explosive growth.

Some businesses are well aware of the limitations of traditional payment methods and foresee that payment solutions that do not rely on traditional banking infrastructure at all can be built with an internet-based native currency, most notably PayPal. Many startups at the beginning of the 21st century focused on the research and development of digital wallets, peer-to-peer transactions, and alternative payment networks. Bypass banks and card issuing alliances altogether and give end customers some monetary autonomy, including PayPal, Alipay, M-Pesa, Venmo, Wise, Airwallex, Affirm, and Klarna.

They initially focused on providing a better user experience, product portfolio, and cheaper transactions to groups that were overlooked by traditional finance, but gradually began to grab more and more market share. Sensing the threat of these alternative payment methods (APMs), traditional financial payment companies have since launched Visa Direct and Mastercard Send, which are also focused on providing real-time payment services for peer-to-peer transactions. While these models have been significantly improved, they are still plagued by the limitations of existing infrastructure. These companies still need to deposit funds or take on foreign exchange/credit risk, as well as hedge their own pools against each other, without the possibility of instant and transparent settlement.

Essentially, the evolution path of modern payment is: closed loop + trusted intermediary → open loop + trusted intermediary → open loop + partial personal autonomy. However, opacity and complexity still dominate, resulting in a poorer user experience, and there are instances of rent extraction at various stages throughout the network.

The Evolution of Merchant Payments

Businesses can bypass part or all of the traditional payment network's technical infrastructure using stablecoins. The diagram below is a simplified illustration of merchant payments:

and the responsibilities of each part in the stablecoin payment network:

Currently, Stripe is capable of handling a large portion of the work for payment merchants, including providing merchant accounts and various software for operating businesses and accepting payments. However, they have not established their own issuing organization or issued payment cards.

Now imagine a world where Stripe becomes the central bank, issuing its own stablecoin, backed by approved collateral by the GENIUS Act. Stablecoins enable atomic settlements between consumer and merchant accounts through a transparent open-source ledger (blockchain). You no longer need a payment card bank and an acquiring bank, Stripe (or any other issuer) only needs one (or several) bank to hold the collateral for its stablecoin issuance. They transact directly on the blockchain through their wallets, or by initiating a mint/redemption request to Stripe (issuer/central bank) and subsequently settle on the blockchain. The clearing and settlement of funds is done through a series of smart contracts that can handle refunds and disputes (see Circle's Refund Agreement). Similarly, the operation of payment routing or even exchange to other currencies/products can be achieved programmatically. Leveraging stablecoins and blockchain technology, bank-to-gateway, processor, and network data transfer standards become easier. With data transparency and fewer stakeholders, expenses and bookkeeping have become simpler.

In such a world, Stripe seems to have almost completely replaced the current payment model – with a complete infrastructure that provides accounts, card issuance, credit, payment services, and networks, all built on better technology, reducing intermediaries and giving wallet holders almost complete control over the flow of money.

Simon Taylor: "If you base everything on stablecoins, all transactions are just changes in numbers on a ledger. Merchants, gateways, PSPs, and banks used to need to reconcile different ledger entries. With stablecoins, anyone operating with stablecoins is simultaneously a gateway, PSP, and acquiring bank, and all transactions are just changes in numbers on a ledger."

It sounds like science fiction. Are there many issues related to fraud, compliance, availability of stablecoins, liquidity/cost, etc., in reality? Will there be incremental steps between today and this potential future? Technologies like real-time payments (RTPs) can also have drawbacks, and the programmability and interoperability of cross-border remittances are issues that RTP cannot solve.

The future is gradually approaching, and some companies are preparing for it. Top issuers such as Circle, Paxos, and withausd are expanding their products, while blockchain networks focused on payments like Codex, Sphere, and PlasmaFDN are also moving closer to end consumers and businesses. Future payment networks will significantly reduce intermediaries, increase autonomy, enhance transparency, improve interoperability, and deliver more value to customers.

Cross-border Payment

B2B cross-border payments are one of the areas where the application of stablecoins has seen significant growth.

Matt Brown wrote an article about cross-border payments last year, from which we can see:

In many cases, there are multiple banks in the middle of cross-border transactions, all of which use SWIFT to deliver information, and SWIFT itself is not a problem, but there is an additional time cost associated with back-and-forth communication between banks, often involving other clearing counterparties. The fact that the liquidation process typically takes 7-14 days to complete is a huge risk and cost, and the process is extremely opaque. For example, it is not uncommon for JPMorgan Chase to "lose" millions of dollars for an extended period of time when transferring funds from a U.S. parent company to a foreign subsidiary. In addition to this, there was foreign exchange risk between multiple counterparties, resulting in a 6.6% increase in average transaction costs. In addition, when a company's capital flows across borders, it is almost impossible to earn interest.

So it's no surprise that Stripe recently announced the launch of stablecoin-based financial accounts. This enables businesses to access stablecoin-backed USD financial accounts, mint/redeem stablecoins directly through Bridge, and transfer funds to other wallet addresses through the Stripe dashboard. Use the Bridge API for fiat deposits and withdrawals, issue payment cards backed by stablecoin balances (depending on region, currently using Lead Bank), exchange for other currencies, and eventually convert directly to interest-bearing products for money management. While many of the current functions still rely on traditional systems as temporary solutions, stablecoins and tokenized assets do not rely on traditional systems for sending, receiving, issuance, and exchanging. Fiat deposit and withdrawal solutions are similar to the current state of alternative payment methods (APMs), with companies such as Wise and Airwallex essentially creating their own banking networks to deposit funds in different countries and net them at the end of the day. Airwallex's co-founder, Jack Zhang, rightly pointed this out last week, but he didn't consider how the world would change if fiat deposits and withdrawals were no longer required.

If you're just buying tokenized assets through stablecoins without converting them to fiat, you're basically bypassing the traditional correspondent bank model entirely. This will greatly reduce the user's reliance on a third party to actually hold and send the asset, allowing customers to capture more value and reduce the cost of payment for everyone. Startups such as Squads protocol, Rain cards, and Stablesea are all working on the possibility of buying and selling tokenized assets directly through stablecoins, and all companies operating in this space will eventually expand to the entire network.

But if you want to swap stablecoins for fiat use, Conduit Pay can work directly with the largest foreign exchange banks in the local market to enable seamless, cheap, and almost instant on-chain cross-border transactions. Wallets become accounts, tokenized assets become products, and blockchains become networks, significantly improving the user experience and lowering costs if fiat deposits and withdrawals are not required. It's all possible with better technology and the ability to provide simpler reconciliation, more autonomy, more transparency, faster speed, greater interoperability, and even lower costs.

So what does all this mean?

This means that a payment-native world existing on the chain, based on stablecoins (digital changes on the ledger), is coming. It will not only connect current payment models but will gradually replace them. This is why we will see the first trillion-dollar fintech company based on stablecoins about to be born.

I know this article will provoke many reasonable criticisms, such as my failure to consider certain issues. But please understand that I and many entrepreneurs who are starting businesses in this field are already aware of these issues and are working hard to address them. This is the nature of innovation; building incrementally on old systems will never truly lead to a brand new system, as vested interests will always obstruct the occurrence of this.

Closed loop + Trusted intermediary → Open loop + Trusted intermediary → Open loop + Partial individual autonomy → A truly open digital native system where everyone can compete in the entire payment network, and customers exercise autonomy through the open network.