Will stablecoin payments pose a threat to banks and credit card networks?

Article authors: Heechang Kang, Jinsol Bok Article compilation: Block unicorn

Key Points

• Although the current use of stablecoins mainly stems from cryptocurrency trading, blockchain and stablecoins have the potential to transform traditional complex and burdensome financial systems, such as securities markets and payment systems.
• Recently, the momentum of using stablecoins as a payment system has been increasing, mainly in two directions: 1) integrating stablecoin functionality around credit card networks; 2) completely bypassing the credit card networks and issuing banks.
• In the latter direction, PayPal's PYUSD and the USDC payment systems developed in collaboration with Shopify, Coinbase, and Stripe are typical examples. With the development of the stablecoin industry, it is expected that more companies with large user and merchant bases will build their own payment systems. This could pose a threat to banks and credit card networks.

1. The Potential of Stablecoins

1.1 The use of stablecoins is still primarily based on exchanges

Stablecoins have garnered significant attention not only in the United States but globally. Discussions are actively unfolding regarding their innovative potential in areas such as remittances, payments, real-world assets (RWA), and interbank settlements. However, according to a report by the Boston Consulting Group (BCG), 88% of stablecoin trading volume in 2024 will come from crypto trading. This reflects the current limitations of stablecoin usage, indicating that their application in the real world has yet to meet expectations.

Stablecoins can fundamentally change the financial system.

Although advancements in financial technology have significantly improved the user-friendliness of financial systems, the backend systems that handle actual transactions remain inefficient and outdated. In this regard, blockchain and stablecoins have the potential to revolutionize the backend of financial systems. This is not just about supplementing existing infrastructure, but rather providing a technology that can completely replace current systems, similar to historical transformations in financial systems.

1.2.1 Securities Market

The root of the complexity in the securities market backend lies in the paperwork crisis of the American securities market in the 1960s and 1970s and the policy responses taken to address this issue. At that time, securities transactions were processed on paper. With the surge in trading volume, the system nearly came to a standstill. To resolve this issue, the U.S. Congress passed the Securities Investor Protection Act (SIPA) and amendments to the Securities Act, establishing a centralized clearing and settlement structure as well as an indirect securities holding system.

Initially, this system achieved the digitization of securities ownership and improved settlement efficiency. However, it also made numerous intermediaries, such as brokers, clearinghouses, and custodians, indispensable, leading to structural complexity and cost issues. Today's securities market is the result of policy compromises and incremental improvements constrained by technological limitations. In the absence of better technologies like blockchain, this system has persisted for decades.

1.2.2 Cross-border Remittance

SWIFT is the most widely used system for cross-border remittances, established in 1973 by 239 banks in Brussels, aimed at replacing the slow and error-prone telex-based international interbank communication system. At that time, banks used their own communication standards, resulting in low compatibility, slow speed, and security issues. To address these problems, SWIFT developed a universal language and secure network.

However, SWIFT only transmits messages. Actual fund transfers are conducted through correspondent banks or central bank accounts, with settlements between accounts processed separately. The involvement of multiple intermediary banks increases delays caused by fees, KYC/AML checks, currency conversions, time zone differences, holidays, and more. This leads to high costs and low transparency. If blockchain and stablecoins existed at that time, message transmission and fund transfers could be handled on a single unified platform, resulting in a more efficient cross-border payment infrastructure.

2. Can stablecoins change the payment market?

Although potential use cases such as the securities market and cross-border remittances are considered systems where stablecoins can innovate, the next most anticipated use case after exchange trading is payment systems. In fact, in the payment field, not only Web3 companies, but also major Web2 companies like Visa, Mastercard, Stripe, and PayPal are actively exploring new business opportunities.

To determine whether stablecoins can truly change the existing payment system, we must first understand how the current payment system operates, the reasons for its inefficiencies, and whether stablecoins can address these issues.

2.1 The operation of existing payment systems

2.1.1 How the Payment System Works

When customers make a payment to the merchant, the process is as follows:

Authorization

1. The customer attempts to make a payment using a credit card.
2. The POS terminal or online payment gateway sends an authorization request containing payment information to the acquirer.
3. The acquiring institution forwards this request to the credit card network (e.g., VisaNet, Mastercard Banknet).
4. The credit card network passes the request to the issuing bank.

Verify

1. The issuing bank verifies the validity of the card, account balance, credit limit, and whether the transaction is suspicious.
2. After verification is complete, send the approved or denied response back to the acquiring institution via the credit card network.
3. If approved, the corresponding amount will be temporarily withheld from the customer account.
4. If rejected, the merchant will receive a response with the reason for the rejection.

Capture

1. In industries such as gas stations, hotels, and online shopping, the final amount is confirmed after the initial authorization. Therefore, the timing of the merchant's capture request is when the transaction is actually completed, and this request is sent to the acquirer.

Batch Processing

All authorized transactions throughout the day are grouped into a batch and sent to the acquiring institution in one go after the business closes.

Clearing and Exchange Fees

1. The acquirer sends the batch processing data to the credit card network.
2. Credit card networks route each transaction to the relevant issuing bank and calculate interchange fees in the process.

Settlement

1. Funds are transferred from the settlement account of the issuing bank to the settlement account of the acquiring bank. Credit card networks aggregate daily transactions and generate settlement files to coordinate both parties, but the actual fund transfer is conducted through the interbank payment network.

Fund Allocation

1. The acquiring institution deposits the payment amount (after deducting relevant fees) into the merchant's account and sends the funds to the merchant via ACH or wire transfer.

Reconciliation

1. Finally, the merchant checks whether the received funds match their records and reviews for any discrepancies, omissions, or duplicate charges.

What is the problem? What is not a problem?

The biggest issue often pointed out with traditional credit card systems is the high fees and slow settlement times. Are these drawbacks unavoidable, or can they be resolved?

2.2.1 About Payment Fees

First, let's look at the fees associated with credit card payments. From the merchant's perspective, there are three main fees involved in card transactions:

1. Exchange fee: Mostly charged by the issuing bank.
2. Scheme Fees: Fees charged by the card network for processing transactions.
3. Acquiring institution markup fees: Fees charged by the acquiring bank.

Can blockchain and stablecoins reduce these costs? The first potential area for savings is global transactions. When merchants and cardholders are located in different countries, settlements must go through SWIFT. If this process is replaced with blockchain or stablecoins, costs can be significantly reduced.

The second area is to bypass credit card networks and issuing banks to reduce costs. What is the nature of credit card networks? It is a communication network connecting the bank that holds the customer's funds with the bank that receives funds for the merchant. If stablecoin payments are fully adopted, customers can pay directly from their self-custodied stablecoin wallets to the merchant's Web3 account via the blockchain network.

2.2.2 About Settlement Time

Next, let's look at the settlement time. In credit card payments, transaction authorization is almost real-time. In this regard, the scalability of public blockchain networks may be far inferior to that of centralized credit card networks. However, in traditional credit card payments, settlement typically takes an additional 1 to 2 days, and clearing may take another 1 to 5 days.

There are several reasons for settlement delays, some of which can be resolved while others cannot:

• Settlement Time: Credit card payments typically batch all daily transactions and settle once a day. Systems fully based on blockchain or stablecoins do not need to follow this daily settlement cycle.
• Disputes, suspicious transactions, cancellations, refunds: even with stablecoin-based payments, these issues cannot be resolved. Since such situations are inevitably encountered in payments, settlement delays are still necessary.
• Cross-border payments: When conducting cross-border transactions, funds must be settled through SWIFT, resulting in further delays. This is an obvious area where blockchain can provide solutions.

3. Stablecoin-based Payment Systems

Recently, we have seen various financial institutions and companies begin to shift towards adopting payment systems based on stablecoins. I believe this significant transformation is achieved through two strategies. The first is a strategy dominated by card networks such as Visa and Mastercard. The second strategy attempts to completely bypass card networks and issuing banks.

3.1 Card Network-Centric Stablecoin Payments

As I discussed in the article "Visa and Mastercard: Designing the Next Generation Payment System," Visa and Mastercard are actively exploring ways to integrate stablecoin functionality into their infrastructure.

• Crypto debit cards: These cards allow customers to make payments using stablecoins stored in Web3 wallets or exchange accounts. In this case, the customer's stablecoins are either converted by the issuing bank into fiat currency and processed through existing payment systems, or directly received as stablecoins by the card network through its funding account, and then processed according to traditional card payment procedures.
• Stablecoin Settlement: As mentioned above, the card network can accept stablecoins through funding accounts and settle with acquiring institutions using stablecoins.

Essentially, stablecoin payments centered around card networks only add support for stablecoin payments and settlements on traditional systems. The participants and infrastructure remain unchanged. Therefore, this system does not offer significant advantages in terms of cost or time. However, for customers and companies that naturally use stablecoins, this system can reduce transaction friction by skipping the conversion process between fiat currency and cryptocurrency. Additionally, if the entire payment process is settled in stablecoins, there will be significant benefits for cross-border transactions.

3.2 Measures to Bypass Card Networks and Issuing Banks

At the same time, some payment service providers (PSPs) are processing payments by bypassing card networks like Visa and Mastercard using stablecoins. These cases include PayPal's PYUSD payments and the USDC payment program in collaboration with Shopify, Coinbase, and Stripe.

3.2.1 PYUSD Payment

PayPal users can use their PYUSD balance for payments within the PayPal app. These PYUSD holdings are not stored in the user's own wallet but exist in the account of the PYUSD issuer Paxos. When a PYUSD payment occurs, there is no actual movement of PYUSD on the blockchain. Instead, the ownership of PYUSD is transferred from the customer to the merchant in the backend of PayPal. If the merchant wishes to settle in fiat currency, PayPal will convert PYUSD to USD at a 1:1 ratio and settle the payment to the merchant through bank networks such as ACH.

If the customer has insufficient PYUSD balance, they can top up through a bank account or card, which may incur fees. Similarly, if the merchant requests settlement in fiat currency, using the banking network may lead to additional fees and time. However, if the entire payment cycle is completed in PYUSD, there is no need to go through the card network or issuing bank, which can significantly reduce time and costs.

3.2.2 Shopify x Coinbase x Stripe Payment

PayPal's stablecoin payments do not directly involve blockchain networks, while Shopify's USDC payments go further.

In June 2025, Shopify announced a partnership with Coinbase and Stripe to integrate USDC payments into Shopify Payments. Customers can choose USDC as a payment method in Shopify stores and connect a crypto wallet holding USDC on the Base network to make payments.

Here, the smart contract "Commerce Payments Protocol" on the Base network adopts the traditional "authorize first, capture later" process to authorize payments in advance, with the actual transfer of funds occurring later. Shopify and Coinbase will aggregate USDC transaction data from the day and settle on the Base network.

For settlement, the default method is for Shopify to convert USDC into the merchant's local currency and deposit it into the merchant's bank account via bank payment networks such as ACH or SEPA. This conversion is handled by Stripe's infrastructure. Merchants can also choose to settle directly in USDC, allowing them to receive funds more quickly.

4. Final Thoughts

The most frequently asked question about stablecoin-based payment systems is: "How do we handle cancellations or refunds, given that blockchain transactions are inherently irreversible?" While a fully peer-to-peer payment system between customers and merchants may eventually emerge, issues such as fraud detection, cancellations, and refunds will always persist, making intermediaries in the payment process essential. Therefore, the roles of card networks and issuing banks that traditionally perform these functions will not completely disappear.

However, in the aforementioned cases of stablecoin payments by PayPal and Shopify, intermediaries such as PayPal and Stripe acted as Payment Service Providers (PSP), handling issues like fraud detection, cancellations, and refunds. In the case of PYUSD, transactions are not processed on-chain but rather in the backend of PayPal, leaving room for dispute resolution. In the case of Shopify, the Commerce Payments Protocol smart contract on the Base network introduces a buffer time instead of immediately approving payments, allowing for dispute processing. Additionally, USDC issuer Circle has released a refund protocol for non-custodial dispute resolution.

Payments based on stablecoins are the inevitable future. Just as issuance is important, distribution is equally important. As Robbie Petersen of Dragonfly pointed out, companies with a large base of merchants and customers will increasingly adopt stablecoin payments, bypassing card networks and issuing banks. Stablecoins may even enable interoperability between these closed-loop payment systems. Given these trends, stablecoins could pose a real threat to card networks and issuing banks, which need to explore new opportunities in this unstoppable wave of the stablecoin industry.