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Industry Opinion
Is Crypto Going to Substitute for the Credit Card?
By Nironjan Roy, CPA, CMA — Certified Anti-money laundering Specialist and Banker
Consumers’ lifestyles have become credit card-driven, as people cannot imagine living without using a credit card. This credit card-driven consumption has begun to penetrate the emerging market’s society, as more and more people are becoming accustomed to spending on credit cards. This credit card payment is facilitated by two major credit card companies, Visa and Mastercard. Even debit cards offered by the banks to their customers are also facilitated by these two payment processing companies. In fact, Visa and Mastercard have been enjoying a monopoly in the payment processing business, which is now being challenged by emerging competitors, mostly cryptocurrency-based.
Stablecoins, a type of cryptocurrency, are now being utilized in various forms, particularly for making payments. This digital token is now considered a fiat currency, similar to the US Dollar, and as such, it can rapidly capture a significant portion of the large payment market, which is currently dominated by a few credit-card issuing companies, particularly Visa and Mastercard. The scope and opportunity of using cryptocurrency have been widened following the passage of a stablecoin regulation bill in the US Senate a few months back.
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As reported in the media, immediately after the passage of this bill, the share price of crypto companies such as Circle Internet Group, Coinbase shot up by almost 7% while the share price of Visa and Mastercard dropped, which implies that cryptocurrency is going to take a good share of the payment processing market.
The most important aspect of consumer payment includes not only technology but also other elements, which mostly cover public and private establishments where money can be exchanged. Nowadays, payment through cards, whether debit or credit, has surpassed traditional cash payments and, as such, has become very popular. Market conditions are such that we can live without cash but cannot live without cards. There are many reasons for the massive popularity of using cards; however, two common features include unique economic conditions and universality. In the developed world, including the USA, Canada, and other Western countries, debit or credit cards are held and used by nearly every person, and are gladly accepted as a means of payment by almost all merchants. Cards are used everywhere, from coffee shops to large retail stores and even remote fruit farms. Payment processing entities offer incentives to banks and consumers, providing financial benefits such as reward points and cashback, to encourage continued card usage. They also have a system in place to efficiently handle security and disputes whenever they arise between buyers and sellers.
All benefits and incentives of using cards have been extended to consumers and banks so far. On the other hand, merchants and sales centers that typically accept credit cards for payment do not receive any incentive; instead, they are required to pay a certain fee for each credit card transaction. Therefore, merchants and payment processing companies often find themselves in a conflicting situation, locked in negotiations to reduce the fee rate they pay and relax other terms and conditions. They are always in desperate need of finding an alternative option, and probably stablecoin is going to meet their demand for a suitable substitute to a credit card. Stablecoins can utilize public blockchains to transfer funds over the internet, making them widely accessible for receiving payments. Stablecoins are not going to confine their operation within the U.S.A., but rather have a plan to expand their market by targeting countries where people want to transact in US dollars but cannot open a bank account in this currency.
As the financial market diversifies, cryptocurrency is advancing in its legalization by various regulatory and government bodies. Authorities, this digital currency is likely to pose a significant threat to the monopoly enjoyed by Visa and Mastercard in the card industry. In response to such challenges, card-issuing companies have not sat idle, but rather have explored various options to maintain their competitive edge. Visa and Mastercard have already introduced options allowing their partners to offer cards whose payments can be funded by cryptocurrency, including stablecoins. Because of these new features, merchants and companies accepting credit cards for payment will now be able to collect payments in the way they want in any card transaction, without establishing a new setup.
Nironjanm Roy
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Regarding rewards and incentives associated with credit cards, stablecoins are also introducing similar incentives. Each coin has a reserve fund that aims to ensure it can be redeemed for its fixed fiat currency value. Again, this fund earns interest, which can be used to offer rewards to those who pay with stablecoin tokens, essentially providing a reward. Mentionable that reward, points, discount, cashback, etc., are very popular financial incentives. Most people become interested in holding a credit card and are encouraged to use it extensively for making payments. So, without reward, it is very difficult for stablecoins to succeed in marketing their card business. Taking this issue into consideration, stablecoins have introduced a sort of reward system, although there is a limitation in the process. Because income from interest on the reserve fund goes to the coin users, not merchants who accept the payment. Therefore, merchants will not be interested in accepting stablecoin cards unless there is an arrangement for paying a certain percentage of the reserve income. However, after negotiation and discussion among the stakeholders, this issue can be resolved.
Following the rapid growth of cryptocurrency and the legalization of this digital currency, it is apparent that stablecoins may have numerous uses in payment, particularly outside the U.S. market and especially in settling payments for undisclosed transactions. However, the majority of people will continue to use cards, either credit or debit. Therefore, it is clear that the card business will continue to be dominated by Visa and Mastercard for many years to come; however, a threat to break the monopoly of these two companies will also be posed by cryptocurrency, which is likely to substitute for credit cards to some extent.
Following the rapid growth of cryptocurrency and the legalization of this digital currency, it is apparent that stablecoins may have numerous uses in payment, particularly outside the U.S. market and especially in settling payments for undisclosed transactions. However, the majority of people will continue to use cards, either credit or debit. Therefore, it is clear that the card business will continue to be dominated by Visa and Mastercard for many years to come; however, a threat to break the monopoly of these two companies will also be posed by cryptocurrency, which is likely to substitute for credit cards to some extent.