How Similar Are Credit Card and Stablecoin Networks?

To consumers and merchants, all stablecoins should simply feel like a dollar. But in reality, each stablecoin issuer treats a dollar differently – stemming from distinct issuance & redemption processes, the reserves backing each stablecoin supply, varying regulatory regimes, the frequency of financial audits, and more. Reconciling these complexities will be big business.

We’ve seen a version of this before with credit cards. Consumers spend using almost-but-not-quite fungible assets that proxy the dollar (they’re loans on dollars, but those loans aren’t fungible because people have varying credit scores). There are networks – like Visa and Mastercard – that handle orchestration of payments throughout the system. And the stakeholders in both systems are (or will likely end up) looking similar: the consumer, the consumer’s bank, the merchant’s bank, and the merchant.

An example might help unpack the similarities in network structure.

Let’s say you go out to dinner and pay the bill using your credit card. How does your payment make it into the restaurant’s account?

1. Your bank (the credit card issuer) will authorize the transaction and send funds to the restaurant’s bank (called the acquirer).
2. An interchange network – such as Visa or Mastercard – facilitates this exchange of funds and takes a small fee.
3. The acquirer then deposits the funds into the restaurant’s account, minus a fee.

Now say you instead want to pay using stablecoins. Your bank, Bank A, issues the AUSD stablecoin. The restaurant’s bank, Bank F, uses FUSD. These are two different stablecoins, even though both represent dollars. The restaurant’s bank will only accept FUSD. How does the AUSD payment convert into FUSD?¹

It should end up looking pretty similar to the flow through credit card networks:

1. The consumer’s bank (which issues AUSD) authorizes the transaction.²
2. An orchestration service facilitates the exchange from AUSD to FUSD and likely takes a small fee. This exchange could happen in at least a few ways:
   1. Path 1: utilize stablecoin-to-stablecoin swaps on a decentralized exchange. For instance, Uniswap offers a number of such pools with fees as low as 0.01%.³
   2. Path 2: redeem AUSD for the dollar deposit, and then deposit that dollar with the acquirer to issue FUSD.
   3. Path 3: orchestration services could net flows through the network against each other; this would likely only come with scale.
3. FUSD is deposited into the merchant’s account, maybe minus a fee.

Where the Analogy Starts to Diverge

The above draws what I see as clear parallels between credit card and stablecoin networks. It also provides a useful framing for thinking about where stablecoins start to meaningfully upgrade and outperform elements of card networks.

The first is in cross-border transactions. If the scenario above had instead been an American consumer paying at a restaurant in Italy – where the consumer wanted to pay in US dollars, and the merchant wanted to receive euros – existing credit cards would charge upwards of 3%. That same conversion between stablecoins on a DEX could be as little as 0.05% (a 60x difference). Apply that magnitude of fee reduction to cross-border payments broadly and it becomes clear just how much productivity stablecoins could add to global GDP.

The second is in payment flows from businesses to individuals. The time between when the payment is authorized and when the funds actually leave the payor’s account is fast: as soon as the funds are authorized, they can leave the account. Instant settlement is both valuable and desired. Additionally, many businesses operate with global workforces. The frequency and size of cross-border payments may be much higher and larger than that of the average individual consumer. Workforces continuing to globalize should provide a strong tailwind for this opportunity.

Thinking Ahead: Where Might There Be Opportunity?

If the comparison between network structures is even directionally true, it helps shed some light on where there could be startup opportunity. Within the card ecosystem, major businesses have emerged from orchestration, issuance innovations, form factor enablement, and more. The same could be true for stablecoins.

The earlier example primarily describes the role of orchestration. That’s because moving money is big business. Visa, Mastercard, American Express, and Discover are all worth at least tens of billions. In aggregate, they constitute over $1T in value. That multiple card networks exist in equilibrium suggests that competition is healthy and the market is large enough to support major businesses. It seems reasonable to believe that similar competition for stablecoin orchestration will exist in a mature market. We’re really only 1-2 years into having sufficient underlying infrastructure for stablecoins to succeed at scale. There is still plenty of time for new startups to pursue this opportunity.

Issuance is another area for innovation. Akin to how business charge cards have grown in popularity, we may see a similar trend of corporations wanting their own white-labeled stablecoins. Owning the unit of spend provides greater control over end-to-end accounting, from expense management to dealing with foreign taxes. It’s possible that these become direct business lines for stablecoin orchestration networks, but they could also be opportunities for entirely new startups (e.g. similar to Lithic). The byproducts of that corporate demand could lead to even more new businesses.

There are also a lot of ways issuance can become increasingly specialized. Consider the emergence of tiering. With many credit cards, customers can pay an upfront fee for better reward structures. Think: the Chase Sapphire Reserve or the AmEx Gold. Some companies (often airlines and retailers) even offer their own specialized cards. I wouldn’t be surprised if similar experimentation in stablecoin reward tiering follows suit.⁴ This, too, might be an inroad for a startup.

In many ways, all of these trends feed each others’ growth. As more variation in issuance emerges, demand for orchestration services increases. As orchestration networks mature, they’ll lower the barrier for new issuers to compete. All of these are massive opportunities and I’d love to see more startups in the space. Long-term, these will be trillion-dollar markets that should support many large businesses.

Disclaimer：

1. This article is reprinted from [Back of the Envelope], Forward the Original Title‘What Credit Card Networks Can Teach Us About Stablecoin Opportunities’, All copyrights belong to the original author [Alana]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.

2. Liability Disclaimer: The views and opinions expressed in this article are solely those of the author and do not constitute any investment advice.

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