When stablecoins set their sights on the payment market, can traditional payment giants still hold on to their throne?

The "secret war" of traditional payment is escalating.

Original text: Are Stablecoin Payments a Threat to Banks and Card Networks?

Author: 100y

Compiled by Saoirse, Foresight News

Translator's Note: Stablecoins are now no longer limited to the cryptocurrency trading world. With the potential to transform the backend of the financial system, they are quietly knocking on the door of the payments market. You might be curious about how this emerging player will disrupt the traditional payments landscape. The answer lies in this article: some are trying to collaborate with card schemes like Visa and Mastercard to embed stablecoin functionality within existing networks; others are seeking to bypass card schemes and banks and forge new paths to build a new payment system. PayPal's PYUSD and Shopify's USDC payment system are both vivid examples of this transformation. Will stablecoins pose a threat to traditional payment giants, or will they spawn a new ecosystem? This article will explore the context and direction of this revolution in the payments sector.

Although the current applications of stablecoins are mostly concentrated in the field of cryptocurrency trading, blockchain and stablecoins are expected to change the traditionally complex and large financial system such as the securities market and payment system.

In recent years, the application of stablecoins in payment systems has become increasingly powerful. This trend is mainly advancing in two directions: 1) integrating stablecoin functions with card organizations as the core; 2) trying to completely bypass card organizations and issuing banks.

Regarding the latter, PayPal's PYUSD and the USDC payment system jointly launched by Shopify, Coinbase, and Stripe are prime examples. As the stablecoin industry develops, it is expected that more companies with large user and merchant bases will build proprietary payment systems, potentially posing a threat to banks and card schemes.

The use of stablecoins is still dominated by exchanges

Stablecoins are attracting significant attention both in the United States and globally. Discussions are raging about their innovative potential in remittances, payments, real-world assets (RWAs), and interbank settlements. However, according to a report by the Boston Consulting Group (BCG), cryptocurrencies will account for 88% of stablecoin transactions in 2024. This data reflects the current limitations of stablecoins and their potential to achieve the widespread real-world adoption we all hope for.

Stablecoins can fundamentally change the financial system

While advances in fintech have significantly improved the user experience of the financial system, the back-end systems that process actual transactions remain inefficient and technologically outdated. This is where blockchain and stablecoins have the potential to revolutionize the back-end of the financial system. This isn't just a supplement to existing infrastructure; rather, like historical financial system transformations, it could offer a technology that can completely replace the existing model.

securities market

The complexity of the securities market's back-end system stems from the paperwork crisis that erupted in the US securities market in the 1960s and 1970s, and the series of policy measures implemented to address it. At the time, securities trading relied entirely on paper documents, and as trading volume surged, the entire system nearly collapsed. In response, the US Congress passed the Securities Investor Protection Act (SIPA) and amended the Securities Act, establishing a centralized clearing and settlement mechanism and an indirect securities holding system.

Initially, this system digitized securities ownership and improved settlement efficiency. However, it also necessitated numerous intermediaries, including brokers, clearing houses, and custodians, leading to structural complexity and cost. Today's securities market is essentially the product of policy compromises and incremental improvements to overcome technological limitations. This system existed for decades, before the emergence of more advanced technologies like blockchain.

Cross-border remittances

The Society for Worldwide Interbank Financial Telecommunication (SWIFT) is currently the most widely used system for cross-border remittances. It is a global messaging network established in Brussels in 1973 by 239 banks. It was intended to replace the existing telex-based international interbank communication system, which was slow and prone to errors. Furthermore, each bank used its own communication standards, resulting in poor compatibility, low efficiency, and security risks. SWIFT was created to address these issues, providing a common set of communication standards and a secure network.

However, SWIFT itself is solely responsible for transmitting information; the actual flow of funds must be completed through accounts at correspondent banks or central banks, and settlements between accounts are handled separately. The entire process involves multiple intermediary banks, each of which introduces delays due to factors such as fees, KYC/AML checks, currency conversion, time zone differences, and holidays. This ultimately leads to high costs and low transparency in cross-border remittances. If blockchain and stablecoins had been available at the time, information transmission and funds transfer could be completed on a unified platform, significantly improving the efficiency of cross-border payment infrastructure.

Can stablecoins revolutionize the payment market?

While there's a lot of buzz about the innovative potential of stablecoins in various fields, including securities markets and cross-border remittances, the most anticipated next application scenario beyond exchange trading is undoubtedly the payment system. In fact, in the payment sector, not only Web3 companies but also mainstream 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 need to first understand how the current payment system operates, the root causes of inefficiencies, and whether stablecoins can solve these problems.

How existing payment systems work

Let's first understand how the payment system works. When a customer pays a merchant, the process is as follows:

Authorization

1. The customer attempts to complete payment using a bank card.
2. The POS terminal or online payment gateway sends an authorization request containing the payment information to the acquirer.
3. The acquirer forwards the request to the card association (e.g. VisaNet, MasterCard Bank Network).
4. The card scheme passes the request to the issuing bank.

Verification

1. The issuing bank verifies the validity of the bank card, account balance, credit limit, and whether the transaction poses any suspicious risks.
2. Once verification is complete, the approval or rejection result will be returned to the acquiring institution through the card association.
3. If the transaction is approved, the corresponding amount will be temporarily frozen in the customer's account.
4. If a transaction is declined, the merchant will receive feedback including the reason for the decline.

Capture

• In some industries, such as gas stations, hotels, and online shopping, the final amount is not confirmed until initial authorization is received. Therefore, the transaction is actually completed when the merchant sends a "debit confirmation request," which is then sent to the acquiring institution.

Batching

• Authorized transactions throughout the day will be aggregated into a batch and sent to the acquiring institution at the end of business hours.

Clearing and Interchange

• The acquirer sends the batch transaction data to the card scheme.
• The card associations send each transaction to the corresponding issuing bank, calculating an interchange fee in the process.

Settlement

• Funds are transferred from the issuing bank's settlement account to the acquiring bank's settlement account. Card schemes aggregate daily transactions and generate settlement documents to coordinate settlements between the two parties, but the actual transfer of funds is completed through the interbank payment network.

Funding

• The acquirer deposits the payment amount, minus any applicable fees, into the merchant's account, typically via an automated clearing house (ACH) or wire transfer.

Reconciliation

• Finally, the merchant checks whether the received funds are consistent with his own records and checks whether there are any discrepancies in amounts, missed transactions or duplicate charges.

What problems exist in the existing payment system?

Two common criticisms of traditional bank card systems are high fees and slow settlement times. Are these flaws inevitable, or can they be addressed?

Payment fees

Let's first look at the composition of bank card payment fees. From the merchant's perspective, bank card transactions involve three main types of fees:

• Interchange fee: This is the largest fee and is charged by the issuing bank.
• Card scheme service fee: the fee charged by the card scheme for transaction processing.
• Acquirer Markup: A service fee charged by the acquiring bank.

Could blockchain and stablecoins reduce these costs? The first potential cost savings lie in global transactions. When merchants and cardholders are located in different countries, settlements must go through the SWIFT system. Replacing this process with blockchain or stablecoins could significantly reduce costs.

The second cost-saving aspect is bypassing the card schemes and issuing banks. Card schemes essentially serve as a communication network connecting the customer's bank account with the merchant's receiving bank. However, if stablecoins were fully adopted for payments, customers could transfer funds directly from their self-hosted stablecoin wallets to the merchant's Web3 account via the blockchain.

Settlement time

Next, let's look at settlement times. Transaction authorization for bank card payments is completed almost instantly, and in this regard, the scalability of public blockchain networks may be far inferior to that of centralized card schemes. However, with traditional bank card payments, clearing typically takes an additional 1-2 days, and settlement takes 1-5 days.

There are many reasons why settlements take time, some of which are solvable and some of which are unavoidable:

• Settlement cycle: Bank card payments typically aggregate daily transactions into batches and settle only once a day. Systems based entirely on blockchain or stablecoins, however, do not adhere to this single-day settlement cycle.
• Disputes, suspicious transactions, cancellations, and chargebacks: Even with stablecoins, these issues persist. Because these issues are unavoidable during the payment process, settlement delays are inevitable.
• Cross-border payments: When conducting cross-border transactions, funds must be settled through the SWIFT system, which further increases delays. Blockchain clearly offers a solution in this area.

Stablecoin-based payment systems

Recently, various financial institutions and businesses have been turning to stablecoin-based payment systems. I believe this major shift is being driven by two main strategies: the first is led by card schemes such as Visa and Mastercard; the second is an attempt to completely bypass the card schemes and issuing banks.

Stable currency payment with card organizations as the core

As I described in “ 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 pay using stablecoins stored in Web3 wallets or exchange accounts. Specifically, there are two ways to process a customer's stablecoins: first, the issuing bank converts them into fiat currency and processes them through existing payment systems; second, the card organization directly receives the stablecoins through its funding account, completing the transaction using traditional bank card payment procedures.
• Stablecoin settlement: As mentioned above, card organizations can receive stablecoins through their funding accounts, and can also use stablecoins to complete settlements with acquiring institutions.

Essentially, stablecoin payments, centered around card schemes, simply add stablecoin payment and settlement support to the traditional system, with no changes to the participants or infrastructure. Therefore, this model offers no significant cost or time advantages. However, for customers and businesses that natively use stablecoins, this model can eliminate the need for funds to be transferred in and out, reducing transaction friction. Furthermore, if the entire payment process is settled in stablecoins, cross-border transactions will benefit significantly.

Attempts to bypass card associations and issuing banks

At the same time, some payment service providers (PSPs) have begun to bypass card associations such as Visa and Mastercard and directly use stablecoins to process payments. Typical examples include PayPal's PYUSD payment solution and the USDC payment solution jointly launched by Shopify, Coinbase, and Stripe.

PYUSD Payment Solution

PayPal users can use their PYUSD balances to make payments within the app. These PYUSD are not stored in users' personal wallets but are held on their behalf by Paxos, the issuer of PYUSD. When a PYUSD payment is made, there's no actual on-chain transfer; instead, the ownership of PYUSD is transferred internally from the customer to the merchant within PayPal's backend systems. If the merchant wishes to settle in fiat currency, PayPal will convert the PYUSD into US dollars at a 1:1 ratio and transfer the funds to the merchant's account via banking networks like ACH (Automated Clearing House).

If a customer's PYUSD balance is insufficient, they can top it up through their bank account or bank card (fees may apply). Similarly, if the merchant requires fiat currency settlement, processing through the bank network will also incur additional fees and time costs. However, if the entire payment cycle is completed in PYUSD, there is no need to go through the card scheme or issuing bank, significantly reducing time and costs.

Shopify launches payment solution in partnership with Coinbase and Stripe

Unlike PayPal, which uses stablecoins in the payment process but does not directly involve the blockchain network, Shopify's USDC payment solution goes a step further.

In June 2025, Shopify announced a partnership with Coinbase and Stripe to integrate USDC payments into Shopify Payments. Customers can now choose USDC as their payment method when checking out at Shopify stores and complete payments by connecting to a crypto wallet holding USDC on the Base network.

During this process, the smart contract "Commercial Payment Agreement" on the Base Network uses a traditional "authorize first, deduct later" model to complete payment authorization in advance, while the actual funds transfer is deferred. Shopify and Coinbase will aggregate the day's USDC transaction data and complete the settlement on the Base Network.

The default settlement method is that Shopify converts USDC into the merchant's local fiat currency through Stripe's infrastructure, and then deposits the funds into the merchant's account via bank payment networks such as ACH or SEPA. Merchants can also choose to receive settlement funds directly in USDC, which allows them to receive their payments faster.

Summary and Thoughts

A frequently asked question about stablecoin-based payment systems is, "Since blockchain transactions are inherently irreversible, how are cancellations or refunds handled?" While a fully peer-to-peer payment system between customers and merchants may eventually emerge, issues such as fraud detection, chargebacks, and refunds will persist, necessitating the continued existence of intermediaries in the payment process. This suggests that the card associations and issuing banks, who traditionally handle these functions, will not completely disappear.

However, in the aforementioned PayPal and Shopify stablecoin payment cases, intermediaries like PayPal and Stripe acted as payment service providers (PSPs), responsible for handling fraud detection, transaction cancellations, refunds, and other issues. Specifically, PYUSD transactions are not processed on-chain but rather within PayPal's backend systems, leaving room for dispute resolution. In Shopify's case, the "Business Payment Agreement" smart contract on the Base network did not immediately approve payments, but instead introduced a buffer period to handle potential disputes. Furthermore, Circle, the issuer of USDC, has also launched a "Refund Protocol" for non-custodial dispute resolution in stablecoin payments.

Stablecoin-based payments are an inevitable trend in the future. While issuance is crucial, the circulation phase is equally crucial. As Dragonfly's Robbie Petersen points out, businesses with established merchant and user bases will increasingly adopt stablecoin payments, bypassing card schemes and issuing banks. Stablecoins may even enable interoperability between these closed-loop payment systems. Given these trends, stablecoins may pose a real threat to card schemes and issuing banks, who need to explore new opportunities in this unstoppable stablecoin wave.

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