How Stablecoins Will Eat Payments

Transcript

So, I'm Sam Broner. I'm an investor on the A16Z crypto team. I've spent a lot of my time focusing on infrastructure, but more recently, I've spent a lot of my time thinking about stable coins and payments. Today, we're going to be talking about stable coins. Stable coins are a new way for people to pay each other, people to pay businesses, or for businesses to pay businesses. Stable coins are much cheaper, much faster, and they're much more programmable. These three benefits are going to change how the payments landscape looks going forward. [music] We're going to talk about that today. We like stable coins because they're stable. It's very [music] inconvenient to be transacting in a currency that's

volatile of any type. Stable coins are designed to stay at a dollar. We'll talk about the mechanisms that enable that. There's three main constructions of stable coins. 99% of stable coins today are fiat reserve. Fiat reserve stable coins make up the majority of stable coins out today and they actually mimic a historical bank note. Before the Federal Reserve started issuing all of the US bank notes, banks could issue their own notes that were redeemable for some asset, often gold or something else. And fiat reserve stable coins mimic that model. It's a bearer note, which means that if you take a stable coin, no matter who is the person who got it from the bank, you bring that stable coin to the bank, you'll get some

money back. That's the relationship that fiat reserve stable coins have with with Circle or Tether. It's a little wrinkle here because not everyone has a direct relationship with with Circle or Tether. But because they're so widely known and so widely used, you trust that you can always find someone to trade with that actually can redeem a stable coin. And it creates a network of trust that allows everyone to treat these well- audited, well-made fiat reserve stable coins as having a stable value at a dollar. Going forward to the assetbacked stable coins, these are probably most similar to mortgages or other types of lending that's fully collateralized. So when you buy a million dollar house, you get an $800,000 loan. That's new money supply. And D, which is a stable coin

issued by Makerdo, works pretty similarly to that. You give them some Ethereum or Bitcoin and they say, "We'll give you some percentage of that in this currency die and anyone can use that die as if it's worth a dollar." Strategybacked synthetic dollars are a new token that's generally worth a dollar. These are most similar to dollar denominated hedge fund shares. So the SBDs are running a strategy often to create yield. It may be fully backed, it may not be, but their offer is we'll give you some money on top of the dollar to make it worth your time. We don't generally think of them as being the safest way to transact, but for investors, it could be a useful tool in

the the tool chest. We're going to spend most of our time on fiat reserve stable coins just because again, they make up 99% of of the market. And we're going to look at how you can use a fiat reserve stable coin, although this applies to all these stable coins to transact in in the world today. and how we think it'll improve margins and profitability of businesses. So, we're going to look at two scenarios where I think stable coins are really exciting and then we're going to look at how stable coins can affect large public businesses. So, we're going to start with that with my favorite scenario, an in-person transaction at a neighborhood business. If you are a coffee shop today, you might be spending 30 or 40 cents just to receive payment

for a $2 coffee. That's an extraordinary amount of money to be spending to get to give someone a coffee. And it's a scenario where you and the consumer, so the the coffee shop and the coffee drinker, you have a relationship. You should just be handing them money and they should be handing you coffee. There's it shouldn't cost 30 cents to do that transaction. So, let's look at the let's break down what a transaction looks like today and see how stable coins can help improve the situation. It's a painful situation today. So, you walk into a coffee shop and you want to buy a coffee. You are ready to spend $2, but what happens next? Uh, unfortunately, today there's a bunch of intermediaries that are all going to get their cut of this transaction. So, you swipe your credit card. There's a point

of sale system there. They're going to take about 5 cents. Uh, it's not so much, but we'd rather go to the coffee shop owner. Next, it hits the the payment rails. So, it's going to go to the the card network, Visa, Mastercard. They're also going to take about 5 cents. And finally, the acquiring bank is going to get their cut. So that's uh Chase, it's Bank of America, and they're going to take about 20 cents of this transaction. When all said and done, the coffee shop is only getting about a $1.70 of your original $2 transaction. And that's because all of these players are taking their cut. They do have roles, but we have a better technology now. Stable coins could allow you to make a transaction directly

to the merchant and allow them to keep the entire $2 that you spent on the coffee. We think this is going to really increase profits for for these kind of businesses or they can choose to buy better coffee, pay their employees more. All our options when we get rid of this tax on local businesses. Looking at these intermediaries, you are probably curious like what are they actually doing? What are they saying they're doing? And I don't want to pretend that they're doing nothing. It's pretty incredible that you can take a piece of plastic to a store and buy something.

But my sense is that we are in a local maximum where we don't need all these providers anymore because we have better technology. Here's what these providers are doing today and here's how we can remove them. So, the point of sale provider, they do give you a device and they're handling vertical integration into your accounting software and maybe they help you handle your inventory. And I actually think there's room for that guy to stay in approximately the same spot. Um, although their job should get a lot easier and I expect to see more competition because stable coins are so much easier to program against that a lot of the complicated logic could go away. we'll see new entrance who offer

cheaper price price points and maybe even more innovative software there. The second is the card networks. This really can go away today. The card networks came about because they were a coordinating mechanism to allow banks to interact with each other and they handled some of the core technical infrastructure that's been replaced by blockchains now. And there's a whole industry of people in web 3 who are helping improve the price point of doing this kind of coordination. The 20 cents the acquiring bank has to do mostly with handling fraud. There's some consumer support pieces in there, but an in-person transaction like buy a coffee is a very low fraud risk. You get the coffee, you hand them the money. I think in this situation, the 20 cents the

acquiring bank is getting, they're not doing very much work for that. We don't need to be paying them. We can cut them out. They're not an intermediary we need to have. and we can help this coffee shop keep more of the $2 that that they earn by giving you a coffee. So, now let's take a look at how this same payment scenario affects a national grocery chain like Kroger's. So, we looked at Kroger's financial year 23 results. Um, they made about $150 billion in revenue, but they only took back 2.15 billion in profit. It's about a 1.5% profit margin. Really a small margin. We did some back of the envelope net math and if you look at average costs of accepting a credit card, it's

about 2 to 3% plus a 30 cent fee per transaction. We think they might be spending as much as 2.25 billion in transaction fees a year. That's more than the amount they take home in profit. And that's money that could go to better produce, paying your employees, or money back to shareholders. Any would be good options. But what we don't want is for these intermediaries to be attacks on you getting your groceries. The transition to Kroger's switching to stable coins. It can't happen immediately. But we're already seeing providers like Stripe begin to help large companies with this transition. So today,

Stripe is still taking a decent margin, one and a half%. But stable coins are so programmable and the fundamental technology is so inexpensive that we expect to see these numbers get competed down very quickly. There's three factors that we think are going to cause uh stable coin transaction fees to continue to go down to their technical limit. So first is the increased competition. a lot of providers are beginning to get in the game and they're competing with each other causing them to all take a lower margin. The second is that we see on and off ramp providers, these are the people that allow you to get access to stable coins um also competing and we're seeing large providers offer free

on and off ramping already and we expect that trend uh to grow. And the third thing is that the software that works against stable coins is much simpler. you as an entrepreneur can build up something that helps facilitate payments against stable coins today and we encourage you to do so. But also, we think this new wave of software is going to really improve the ability of the um payment processors and the point of sale systems to fit your use case and be much cheaper. In summary, if Kroger was able to keep the $2.25 $25 billion they might currently be spending on payment processing, they'd be taking home $4.4 billion

in profit. That's more than a doubling of their current profitability. Their market cap can go from 45 billion to 90 billion. So, we just looked at Kroger's, but uh we also looked at Walmart and Chipotle. Walmart makes $650 billion a year in revenue, but they're only taking home 15.6. It's a ton of profit, but they might be spending as much as $10 billion on transaction fees every year. It where else are you going to get $10 billion of profit and be able to put it into the pockets of your customers and your shareholders? And Chipotle is in a similar situation. It's a smaller business. They make about $10 billion a year in revenue, but they might be spending as much as $150 million a year on transaction fees. If

they go from their current $1.23 billion in in net profit to $1.38 billion net profit, that's a that's a 12% improvement. That's a lot of money that goes back to either Chipotle's consumers or Chipotle shareholders. And both are are good thing. Next, we're going to talk about a B2B scenario where a garment manufacturer in Mexico has to pay a cloth provider in Vietnam. This is a really challenging situation today because the clothing manufacturer has to send money through a local bank to a correspondent bank to another correspondent bank to another local bank before it ultimately reaches their

business partner. today. That can cost to send $1,000 anywhere from $40 to $150. And it'll take 3 to 7 days. I want to take a moment to look at the other ways people make payments and move money today. So, there's really six. I've got seven on here. There's credit cards, there's debit cards, there's a transfers, international wire transfers, and peer-to-peer payment apps. Of course, we're also missing checks and cash. But for all of these, you're paying really high fees or it takes a really long time or you can only do it within a specific network. And stable coins offer a solution that we think is

better on at least one access than all of these options. We spent most of our time thinking about credit card payments, which cost 2 to 3% of a transaction plus a 30 cent transaction fee. They can be quite fast, but they're really very expensive. There's also debit card payments, which the regulated version is fairly inexpensive, but they can have limitations around who's banked, how they're programmed, and and things like that. For the big transfer options, these are expensive and often take one to five business days. That's a lot of time to not have money in your pocket if you are a business. And the peer-to-peer payment apps only work if both participants are on the same network. So, I can't Venmo to your

PayPal account or I can't uh sell to your Cash App. Stable coins are nearly free, less than 1 cent, and they take about 12 seconds to go from my account to your account. And most importantly, they're globally available and readily programmable. So, for all the entrepreneurs that think, I don't think stable coins are really there yet. They're missing so many features. Each of those features represents an opportunity for you to build something on stable coins that make it by far the best way to transact or save money. One way to look at payments is that they exist somewhere on an efficient frontier where you can make trade-offs between cost and time, but there's a limit or there used to be a limit to how efficient you could make a payment. Not

all payments are at the efficient frontier. So something like a wire which is taking 3 to 7 days and costs a pretty good amount of money is really inside the efficient frontier even though it's well integrated into the system today. So people are still using wires even though it's not even close to the best payment mechanism we can come up with. There's other things like like credit cards are actually pretty close to the efficient frontier at least until we get to things like like uh stable coins. So, credit cards might fit right in here where it's pretty fast, but it's somewhat expensive. It's like 2 to 3% per transaction. That's actually a lot. That's a big tax on on merchants.

Um, there's other solutions that are cheap, but take a lot of time. Um, you could be anywhere on this efficient frontier, but the best thing that you could have happen is when a technology pushes the efficient frontier out, where you can make new choices that generally lead to improved consumer welfare. and make everyone better off. So, stable coins really push out the efficient frontier where you can now offer things that are simultaneously cheaper and faster. Now, this is a simplified efficient frontier because we're not considering things like is there an open network? How programmable are they? We looked at wires and credit cards. Um, traditionally the way people got to the

efficient frontier was by making trade-offs elsewhere in the design space. So if you look at something like Venmo, which really was cheap and really was instant, it might sit somewhere at the efficient frontier making trade-offs that were generally comfortable with in terms of time and cost, but it comes with other downsides. It's not programmable. You can't send money outside of the network. This is where stable coins really shine. They're both faster and cheaper while still allowing you to program them, use them in an open way, self-custody them in a way that other payment solutions that were sitting on the on the efficient frontier were not allowing you to do. So pushes the whole frontier forward and

opens up the design space for new new solutions. What are the opportunities that are native to a world with very cheap, very fast payments? So far in the history of payments, they haven't really been a platform the way we think of platforms. For instance, cloud computing enables all of these businesses like Pinterest and social networks and Uber and Netflix. Payments today is really a feature that everyone integrates into their product. It almost sits on the side of products allowing you to exchange goods and services for for payment. We see in the future we we believe there's going to be a future where there are businesses that are integrating payments in a much more

cohesive way. Whether that's pay as you go to AI agents, it's social networks that allow money to acrew to creators live um or it's more financial products like allowing electricity companies to get payment as they send electricity to to your home. There's a lot of ways that we could be transforming payments into very innovative products that just haven't been possible until today. Because of the network effects of payments, you and the merchant you work with or the friend you're working with, they have to be part of the same network and be on the same standards. These extractive networks have held us back from the efficient frontier for for a long time. We believe that stable coins

can help us break out of that partially because they're permissionlessly programmable and partially because they've already seen a lot of adoption. The network is beginning to grow. Anyone can make a wallet and attach themselves to a network where stable coins exist. And so the total spend in stable coins last year was double what happened on the Visa network. We're beginning to see a network effect happen around stable coins, which will unlock our ability to go from one frontier to another, generating a lot of consumer surplus in the process. You know, one thing people don't realize is just how much stable coins have already been adopted. But stable coins have continued to gain adoption even as interest in crypto in

general has changed. What that means to us is that everyday people are already using stable coins to spend and save money. The adoption has already begun and we think that this is going to allow stable coins to move past the prior existing frontier which is being held back by extractive networks and move to a new frontier where transactions are much faster and much cheaper but still have the benefits of a permissionlessly programmable network. So if stable coins are so great and can improve profitability by so much, why hasn't everyone adopted them yet? businesses don't yet feel comfortable with stable coins. They don't really know how to use them yet, but they can begin to benefit

from stable coins without having to touch them directly. So, one of the things we're most excited about is continued innovation and experimentation at the payment processor level. at the point of sale. We're already seeing that point of sale providers like Stripe, Square, Toast are considering offering merchants like a coffee shop alternative payment rails. And so we see a world where it's actually the point of sale providers that begin to offer stable coins as an alternative method of payment. And then the merchant doesn't actually have to know about stable coins, but they can

begin to integrate them into their accounting software and uh inventory software um through the point of sale system. And that can allow them to realize $1.95 of revenue instead of $1.70. It's not the full benefit of stable coins, but it's going to happen a hell of a lot sooner and it's a lot more money in their pocket.