Did A16Z get it wrong about stablecoins?

> Now, with only my consumer brain, does what they say actually make sense? Do merchants actually want to get rid of the 2-3% transaction fees?

Except that you are now at the mercy of MasterCard/Visa. Sure it might not be a problem now, but things can change quickly. 14 years ago they turned off Wikileaks donations because it violated their "moral standard" while still allowing donations on the Klu Klux Klan home site. They often impose arbitrary rules on adult sites to the point where many small vendors can't keep up, and that is ignoring the 20% fee that they charge for being at high risk of chargebacks.

> who is going to pay the rewards (and loyalty program) modern CC carry?

These loyalty programs are simply offsetting some of the existing costs. If you remove the transaction fees entirely, more money would be saved than leaving them in combination with a rewards program. Maybe that is a hard sell from a Product PoV, but it is not like the rewards are coming from nowhere.

> but isn't this just going back to the age when financial systems weren't developed enough to help merchants acquire and maintain customers ?

Like when the card companies used aggressive tactics and lobbying to prevent vendors from upcharging card payments to offset the costs of transaction fees?

It sounds like you are institutionalized in the sense that you are familiar with all the existing institutions and can't imagine any changes.

edit: Everything I said is more generally in line with cryptocurrencies however. The biggest advantage of stablecoins is for the minter / maintainers. It is a relatively low cost product that can generate a boat load of interest if you can garner enough interest like USDT and USDC have. The only advantage to users is that the prices are (ideally) pegged and less impacted by wild speculation that has been rampant in the cryptocurrency space.

you are absolutely correct about the centralized risks about modern systems, but this is not really something you can use to convince consumers to change their behaviors at scale, besides, cryptos have its own risks.

I am all for changes but they can't take vigors out of markets!

What would convince you as a consumer? If everyday products were 3% cheaper, would that impact you at all? 5% cheaper? At what point do you think people would care? What about cash only businesses? As a consumer would you prefer if you could use your phone instead of pulling out and handling cash?

If adoptions ever takes hold, I think it is unlikely to start with the replacement of payment cards. It is more likely to take hold is specific niches that currently suffer under the MasterCard/Visa duopoly as well as in emerging markets. In the adult industry, I'm sure products being 20% cheaper would sway consumers. Also not to mention the omission of purchases from your credit history which may be judged harshly by others. Low margin businesses could support online and international sales while offering competitive prices. Some markets aren't serviced well by the duopoly. Some consumers value pseudonimity/anonymity in their financial transactions. These can develop into niches where crypto has potential to take hold, and then from there it might expand and compete with the larger markets (and their vigor) if it grows into a competitive product based on fees and usability.

If it ever hits critical mass, vendors will surely either drop card support or strongly encourage cryptocurrency usage. Albeit that is a big "if" that likely comes down to solving a lot of scalability and usability issues right now. There is also a need for regulatory clarity. I think we are a long way away, but I wouldn't write it off simply because I personally find Visa/MasterCard to be convenient in my own life.

They want to control payment rails. FedNow is live (offered by the federal reserve) and can move up to $1M with a 20 second SLA for ~5 cents. Walmart is implementing it for “pay by bank” to avoid ~$1B/year in interchange fees.

Stablecoins are useful when your use case calls for avoiding traditional, sanctioned financial infra, including the ability to move value between counterparties who may not be given access to traditional financial systems.

https://www.frbservices.org/financial-services/fednow

https://news.ycombinator.com/item?id=36801491

> FedNow is live (offered by the federal reserve) and can move up to $1M with a 20 second SLA for ~5 cents. Walmart is implementing it for “pay by bank” to avoid ~$1B/year in interchange fees.

Does FedNow operate outside of the US?

No, good callout, cross border fiat token transfers. Central banks are working on native cross border transactions through faster/instant payment system interoperability (Bank for International Settlements working group). Think plugging FedNow into Pix (Brazil), UPI (India), and SEPA (Europe) (just a few examples, there are ~80 instant payment systems in the world as of this comment [1]). You're just pushing XML messages over a bus (ISO 20022 [2]).

[1] https://www.volt.io/real-time-payments-world-map/

[2] https://en.wikipedia.org/wiki/ISO_20022

Isn't Volt trying to build the cross-border version of this? I was actually not familiar with "pay by bank" before, but it sounds like it makes stablecoins even less attractive for the low-margin business use case a16z (and I am sure there are others) is advocating for.

Not familiar with Volt, their content marketing instant payment map was simply convenient when I searched for one (as I haven’t had time to pay someone to make a Wikipedia page yet with the same content).

SLA? Do I get my 5c back if it takes more than 20s?

I don't see any value to unnecessary transaction fees. In particular:

> These fees enable consumers to potentially spend more than what they have.

Where's the money coming from? You can't spend out of thin air...

Let's say I offer to provide an automated payment system in exchange for 0.1% transaction fees, which is an equitable exchange. My inclination is to then raise the transaction fees, but when the fees become burdensome I jeopardize my business. So I both raise the fees to 2-3%, and introduce rewards cards to justify the raise. The problem is that not everyone is eligible, or willing, or able to qualify for rewards cards. So I've mollified the consumers that matter while managing to rip off the disadvantaged.

Rewards cards can be seen as loyalty programs for merchants, but only merchants who command dominant market positions. I think franchises are particularly bad because the link between owner and brand is hidden. A small franchise (ie print/ship stores) cannot differentiate itself. A large franchise (ie gas stations) is essentially a monopoly which does not benefit from loyalty. That's why you have so many small retailers offering discounts for cash payments.

Now as a merchant stuck covering transaction fees, my incentive is to increase loyalty. This means increased rewards through steeper discounts on higher prices, but this is a network effect that only benefits businesses with a large customer base. Just as with disadvantaged consumers, retailers with smaller customer bases simply cannot compete. Large businesses with higher prices can also negotiate better agreements with payment networks.

What we have here is are two rent-seeking trends and a hidden network of rewards agreements that obfuscate market signals for the consumer. If you are banking on rewards to buy something otherwise outside of your means, chances are that blood money was unwittingly liberated from someone less fortunate.

So yes, control of payment rails is crucial and is responsible so many large-scale social trends.

> Where's the money coming from? You can't spend out of thin air...

Of course you can - It is a credit card

I'm pretty sure this was in reference to transaction fees...

The article fails to make the case for why regular people would start using stablecoins for everyday transactions. It just assumes that they would. It's not clear to me what the advantage to the customers themselves would be.

Exactly, plus it's even harder if people have to deal with something they are unfamiliar with, i.e. stablecoins. This is why the stablecoin sandwich approach (with on/off ramps built in) are gaining popularity but those processes have their own costs, too.

Your general premise is valid, but the specific theory doesn’t fit the relationship between the merchants and the credit card companies. See the fight over the Durbin/Marshall swipe fees bill: http://merchantspaymentscoalition.com/merchants-support-sena...

But your point about support — eg reversibility and fraud prevention — is very valid. Credit cards aren’t merely transactions in databases, but a set of customers and services.

I don’t particularly buy the 2-3% reduction in fees, that seems a way to get merchants adoption now. In future I expect to see services built on top of stables, for example reversible transactions, and whoever will build these services will likely want to be paid a 2-3% fee (their pitch deck to a16z will say “merchant are used to pay this fee to credit card companies”…)

Where I think stables will surpass credit cards will be on users’ rewards. It should be possible to build a stable coin that “just grows” eg more than 4%/a saving account, so the final product may look like and integrated saving account + credit card.

But this is a marketplace, before getting user adoption you need to get merchant adoption, so definitely cutting the 2-3% fee looks like the right message to me.

Stablecoins are a huge business but the core use is money laundering, illegal transactions and facilitating crypto speculation. I don't think $2 coffees bought with stablecoins are ever going to be much of a thing.

Even excluding illegal stuff it's a great business though. USDC have issued $60bn worth and they get to invest that and keep all the interest.

And Tether have $144bn although they are sketchier and may end up in jail one day. There's quite an entertaining 2021 article on Tether https://www.bloomberg.com/news/features/2021-10-07/crypto-my...

It could be a big thing. If a trillion dollars is floating in stablecoins for shopping use then someone is getting billions in interest holding the real cash.

> Do merchants actually want to get rid of the 2-3% transaction fees?

Yes. Merchants want to get rid of the 2-3% tax. I've been going to Bangkok since 2014 and it usually had close to 100% adoption of credit card payments for pretty much all shops. In the last few years, more and more shops started charging 3-5% more if you paid with card.

In this last year (a few months ago), I was surprised by the number of shops that straight out rejected cards. They suggest you download their ewallet thing, and pay them through it (essentially paying the 2-3% tax through the ewallet) or going to the ATM and withdrawing cash.

The problem with stablecoins is not the market (the merchants will straight out accept them). The problem is the UX. With the ewallet, you just scan or get scanned and everything happens instantly. With stablecoins... oh it's a long story.

tl;dr: If stablecoins had a good UI/UX for P2P and B2C transactions, they'd have taken over.

so how is the ewallet getting rid of the fees for them? How do you add money into that ewallet, especially if you do not have a local bank account?

Could you explain how a double increase is calculated following a 3% reduction?

If you have a 6% profit margin (i.e. grocery store) and then you have to pay 3% of basically all revenue, you are now at 3% profit margin. This is why Costco only accepts VISA - they have 11% margins so 3% would be over 25% of their profit. So they go exclusive with one processor and have a very large transaction volume, so they are able to negotiate much lower fees and thus lose less profit.

good insight. I remember my mastercard being declined in store before, but I am not sure if this is still the case. They do accept mastercard online now.

a16z has been wrong about everything. Most VCs have been. The thing to understand is that how the first VCs invested in companies like Apple and Google, people still have an outdated model of this game.

Right now the VC game is closer to a giant ponzi scheme. The whole goal is to sell it to the next fool down the road and if not any then retail investors.

this is an important realization. most VCs are not smart - they got lucky and are wealthy to try influence things.

I dunno, when I listen to interviews with Marc Andreessen he sounds insanely smart.

> Do merchants actually want to get rid of the 2-3% transaction fees?

TL;DR: "stablecoins" are just adding another level of indirection with a different (not necessarily better) tradeoffs than other payment methods / mediums of exchange

So called "stablecoins" (Transferrable USD Depositary Receipts / Commerical Paper) are not cheaper than credit cards. They're just moving the fees to other places in the pipeline: converting fiat to a "stablecoins", and/or converting "stablecoins" back to fiat

The transactions themselves are much more expensive than CC transactions, unless u use a less secure L2 chains, which are just databases in disguise

Add to this issuance/underwriting fees, and insurance b/c of the possibility of losing the principal and/or your coins being blacklisted or stolen

For "stablecoins" to be cheaper the majority of economy should adopt them, and then part of the conversion to fiat fees will cancel each other

The main problem is that credit card companies sign up merchants to offer the same prices for CCs as for cash, in essence puninshing people who pay with cash. This trick is what subsidizes this entire industry. In the jurisdsictions were this is illegal - the cash is still the king

People definitely prefer instant savings vs. worrying/remembering how to use the different kinds of rewards they accumulated from CC.