The traditional payment model is on the verge of collapse, and trillion-dollar scale stablecoin financial companies are about to emerge?

Author: Rob Hadick, Partner at Dragonfly

Compiled by: AididiaoJP, Foresight News

Stablecoins are not intended to improve existing payment networks, but rather to completely disrupt traditional payment networks. Stablecoins enable businesses to completely bypass traditional payment channels; in other words, these traditional payment channels are likely to 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 have begun to drive the reconstruction of capital flow methods.

Recently, many people have been discussing how stablecoins can become a Banking as a Service (BaaS) network platform, connecting existing payment channels, from issuing banks to merchant acceptance, and everything in between. While I agree with these views, when I think about how enterprises and protocols can create and accumulate value in the future under the new paradigm, viewing stablecoins merely as a platform for connecting existing payment channels actually underestimates their true potential. Stablecoin payments represent a gradual improvement, signifying the possibility of rethinking payment channels from the ground up.

To understand the direction of the future, we need to review history, as history reveals the obvious evolution 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, with Diners Club serving as a payment intermediary between merchants and cardholders. Before Diners Club, almost all payments were made through cash or proprietary bilateral credit agreements directly between merchants and customers.

After the great success of Diners Club, Bank of America (BofA) saw a huge opportunity to expand its credit business and reach a broader customer base, launching the first consumer credit card aimed at the mass market. BofA mailed over 2 million unsolicited, pre-approved credit cards to middle-class consumers, which could be used at more than 20,000 merchants in California. Due to regulatory constraints at the time, BofA began licensing its technology to other banks in the U.S. and even expanding to international markets, leading to the creation of the first credit card payment network. However, this was accompanied by enormous operational challenges and serious credit risks, with delinquency rates soaring above 20%. At the same time, rampant fraud nearly caused the entire project to collapse.

People began to realize that the challenges and chaos within the banking network could only be addressed by establishing a genuine cooperative organization that would set the rules for managing systems and provide infrastructure. Organization members could compete on product pricing but were required to adhere to unified standards. This organization later became known as Visa. Another organization founded by California banks, which competed with American banks, later became Mastercard. This marked the birth of our modern global payment model, which has become the dominant structure in the global payment industry.

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

E-commerce was born in the early 1990s, with the purchase of Sting's CD on NetMarket being the first online payment. Subsequently, PizzaNet became the first national retailer to accept online payments. Well-known e-commerce companies such as Amazon, eBay, Rakuten, and Alibaba were established in the following years. The prosperity of e-commerce companies further gave rise to many early independent payment gateway and processor companies. The most famous are Confinity and X.com, which were founded in late 1998 and early 1999, respectively, and merged to become what is now PayPal.

Digital payments have given rise to numerous household names, companies worth 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 evident that they have not brought about a disruptive transformation of the 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 primarily aim to integrate new companies into existing banking networks and infrastructure, rather than disrupting the existing payment networks. However, many companies find that simply adding a software layer on top of the existing infrastructure does not lead to true explosive growth.

Some companies are well aware of the limitations of traditional payment methods and foresee that a payment solution can be built completely independent of traditional banking infrastructure through internet-based native currencies, the most famous of which is PayPal. In the early 21st century, many startups focused on the development of digital wallets, peer-to-peer transactions, and alternative payment networks. By completely bypassing banks and card associations, these companies, including PayPal, Alipay, M-Pesa, Venmo, Wise, Airwallex, Affirm, and Klarna, allow end customers a certain degree of monetary autonomy.

They initially focused on providing a better user experience, product portfolio, and cheaper transactions for groups overlooked by traditional finance, but gradually began to capture an increasing market share. Traditional financial payment companies felt the threat of these alternative payment methods (APMs), leading Visa and Mastercard to respectively launch Visa Direct and Mastercard Send, also focusing on providing real-time payment services for peer-to-peer transactions. Although these models have seen significant improvements, they are still troubled by the limitations of existing infrastructure. These companies still need to pre-fund or bear forex/credit risks, while needing to hedge their own capital pools against each other, making it impossible to achieve instant transparent settlement.

The evolution of modern payment essentially follows this path: closed loop + trusted intermediary → open loop + trusted intermediary → open loop + partial individual autonomy. However, opacity and complexity still dominate, resulting in a poorer user experience, with rent-seeking occurring at various stages throughout the network.

The Evolution of Merchant Payment

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

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 a central bank, issuing its own stablecoin supported by collateral approved by the GENIUS Act. The stablecoin can achieve atomic settlement between consumer and merchant accounts through a transparent open-source ledger (blockchain). You no longer need to pay card-issuing banks and acquiring banks; Stripe (or any other issuer) only needs one (or a few) banks to host the collateral for its issued stablecoin. They transact directly on the blockchain via wallets or initiate minting/redemption requests to Stripe (the issuer/central bank), which is then settled on the blockchain. The clearing and settlement of funds are done through a series of smart contracts that can handle refunds and disputes (see Circle's refund agreement). Similarly, payment routing and even conversions to other currencies/products can be programmed. With stablecoins and blockchain technology, the data transfer standards from banks to gateways, processors, and networks become easier. The transparency of data and the reduction of stakeholders make fees and accounting simpler.

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

Simon Taylor: "If you base everything on stablecoins, all transactions are just changes in numbers on a ledger. Merchants, gateways, PSPs, and banks previously needed 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."

This sounds like science fiction. Do many issues related to fraud, compliance, the availability of stablecoins, liquidity / cost, etc. exist in reality? Will there be incremental steps between today and this potential future? Similar to real-time payment (RTP) technology, there are also flaws, and the programmability and interoperability of cross-border remittances are problems that RTP cannot solve.

The future is gradually arriving regardless, and some companies are preparing for it. Top issuers like Circle, Paxos, and withausd are expanding their products, while blockchain payment platforms 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 bring 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 it can be seen that:

In many cases, there are multiple banks involved as intermediaries in cross-border transactions, all using SWIFT to transmit information. SWIFT itself is not the issue, but the back-and-forth communication between banks creates additional time costs and usually involves other clearing counterparties. In fact, the clearing process typically takes 7-14 days to complete, which undoubtedly brings significant risks and costs, and the process is extremely opaque. For example, it is not uncommon for JPMorgan to "lose" millions of dollars for long periods when transferring funds from its U.S. parent company to foreign subsidiaries. Additionally, there is foreign exchange risk among multiple counterparties, leading to an average increase in transaction costs of 6.6%. Furthermore, when a company's funds are circulating cross-border, they are almost unable to generate interest.

Therefore, it is not surprising that Stripe recently announced the launch of a stablecoin-based financial account. This allows businesses to access dollar financial accounts backed by stablecoins, mint/redeem stablecoins directly through Bridge, and transfer funds to other wallet addresses via the Stripe dashboard. Using the Bridge API for fiat deposits and withdrawals, issuing payment cards supported by stablecoin balances (depending on the region, currently using Lead Bank), exchanging for other currencies, and ultimately converting directly into interest-bearing products for fund management. Although many features still rely on traditional systems as temporary solutions, the sending, receiving, issuing, and exchanging of stablecoins and tokenized assets does not depend on traditional systems. The solutions for fiat deposits and withdrawals are similar to the status of current alternative payment methods (APMs), as companies like Wise and Airwallex essentially create their own banking networks to hold funds in different countries and settle net amounts at the end of the day. Airwallex co-founder Jack Zhang rightly pointed this out last week, but he did not consider how the world would change if fiat deposits and withdrawals were no longer needed.

If you are just buying tokenized assets with stablecoins and do not need to convert them into fiat currency, you are essentially bypassing the traditional agency model. This will significantly reduce users' reliance on third parties that actually hold and transfer assets, allowing customers to capture more value and lower payment costs for everyone. Startups like Squads protocol, Rain cards, and Stablesea are all working to make it possible to buy and sell tokenized assets directly with stablecoins, and all companies operating in this field will ultimately expand to the entire network.

But if you want to convert stablecoins into fiat for use, Conduit Pay can directly collaborate with the largest foreign exchange banks in the local market to achieve seamless, low-cost, and almost instant on-chain cross-border transactions. Wallets become accounts, tokenized assets become products, and blockchain becomes the network, significantly improving the user experience. If fiat currency deposits and withdrawals are not needed, costs can be even lower. All of this can be achieved through better technology, providing simpler reconciliation, more autonomy, higher transparency, faster speeds, stronger 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 with current payment models but will gradually replace them. This is why we will see the first trillion-dollar financial technology company based on stablecoins soon.

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. That's how innovation works; building incrementally on old systems will never truly lead to a brand new system, because vested interests will always obstruct such occurrences.

Closed loop + trusted intermediary → open loop + trusted intermediary → open loop + partial personal autonomy → a truly open digital native system where everyone can compete in the entire payment network and customers exercise autonomy through an open network.

This article only represents the author's subjective views and does not necessarily reflect the views of Dragonfly or its affiliated companies. Dragonfly may have invested in the entities mentioned in this article.

Source: Foresight News