Visa stock (NYSE: V) and Mastercard stock (NYSE:MA) experienced a drop of approximately 5% each on Wednesday, June 18th, as investors responded to increasing fears that stablecoins could disrupt traditional payment networks following the U.S. Senate’s approval of significant stablecoin legislation. Was this an exaggerated response, or do stablecoins indeed represent a genuine threat to the future expansion of Visa and Mastercard?
Stablecoins Threat to Payment Networks
Stablecoins represent a segment of cryptocurrencies aimed at maintaining a stable value in comparison to fiat currencies, such as the U.S. dollar. Essentially, stablecoins integrate the U.S. dollar within the blockchain — merging the reliability and stability of fiat with the rapidity, transparency, and programmability associated with crypto. Increasingly, stablecoins are viewed as a method of payment and not merely as a repository for digital cash. The new stablecoin legislation marks a significant victory for the crypto sector, as it lays down a structure to regulate digital tokens linked to the dollar, with stipulations including complete reserve backing for issuers, monthly audits, and compliance with anti-money laundering laws. Such initiatives could aid in establishing greater legitimacy for cryptocurrencies and increase mainstream acceptance. This may also allow non-financial entities, such as large retailers, to create their own dollar-pegged stablecoins under federal regulation.
The consequences of this development are considerable. Merchants are likely to be drawn to the capacity of stablecoins to lower processing expenses by sidestepping traditional payment networks like Visa and Mastercard. Unlike credit card transactions, which incur interchange fees and experience multi-day settlement delays, stablecoin payments can finalize almost instantly. See: Can Stablecoin issuer Circle stock reach $300?
This threat became increasingly concrete this week with the introduction of major crypto exchange Coinbase’s Coinbase Payments platform. The platform enables merchants to easily accept USDC stablecoin payments. Similar to credit cards, the system alleviates much of the cost and complexity involved in traditional processing. Coinbase is focusing on e-commerce giants such as Shopify and eBay for its deployment since this gives it access to thousands of small and medium-sized enterprises that are likely to be more price sensitive. The Wall Street Journal disclosed that Walmart and Amazon have been investigating the possibility of issuing their own stablecoins in the U.S. These high-volume retailers would benefit even more from stablecoins. In addition to the cost benefits that stablecoin transactions could provide, these retailers might possess greater leverage to negotiate lower interchange fees with Visa and Mastercard. This could result in savings of potentially billions in fees and enhance profitability. The revenue stream that is most vulnerable for Visa and Mastercard is likely cross-border payments, where fees are elevated and settlement is slower. Stablecoins can handle these transactions significantly more quickly and economically, posing a threat to a primary source of profit for the card networks.
Not An Immediate Shift
Nonetheless, the transition will not be instant, and we do not believe stablecoins will replace card networks in the near future. Credit cards have become integral to consumers’ lives and are deeply rooted in consumer behavior, offering not just convenience and familiarity but also access to credit and loyalty rewards, which stablecoins currently do not provide. Regulatory ambiguity, user confidence, and wallet infrastructure issues present additional barriers to the widespread adoption of stablecoins at this time. Furthermore, Visa and Mastercard are exploring innovations in the stablecoin arena. Visa has already tested settling transactions in USDC, and both networks are seeking ways to modernize cross-border payments using blockchain-based systems. These initiatives could assist them in remaining relevant, even as the industry progresses towards crypto.
Visa and Mastercard stock may experience fluctuations as stablecoins gain momentum. Conversely, the Trefis Reinforced Value (RV) Portfolio has outperformed its all-cap stocks benchmark (a combination of the S&P 500, S&P mid-cap, and Russell 2000 benchmark indices), delivering robust returns for investors. What accounts for this? The quarterly rebalanced mix of large-, mid-, and small-cap RV Portfolio stocks has offered a responsive strategy to capitalize on positive market conditions while minimizing losses during downturns, as detailed in RV Portfolio performance metrics.