The 'shadow war' in traditional payments escalates.
Written by: 100y
Compiled by: Saoirse, Foresight News
Translator's note: Today, the presence of stablecoins is no longer limited to the realm of cryptocurrency trading. With the potential to change the backend of financial systems, they are quietly knocking on the door of the payment market. You might wonder how this emerging role will disrupt the traditional payment landscape? The article holds the answer: on one hand, attempts are being made to partner with card organizations like Visa and Mastercard to embed stablecoin functionalities within existing networks; on the other hand, there are attempts to bypass card organizations and banks, paving the way for new payment systems. PayPal's PYUSD and the USDC payment system jointly launched by Shopify are vivid examples of this transformation. Will stablecoins pose a threat to traditional payment giants, or will they give rise to a new industry ecosystem? This article will explore the context and direction of this payment sector transformation with you.
Although the current applications of stablecoins are mostly concentrated in the cryptocurrency trading field, blockchain and stablecoins are expected to change traditional financial systems, such as securities markets and payment systems, which are complex and large.
In recent years, the application of stablecoins in payment systems has gained significant momentum, primarily advancing along two directions: 1) integrating stablecoin functionalities centered around card organizations; 2) attempting to completely bypass card organizations and issuing banks.
In terms of the latter direction, PayPal's PYUSD and the USDC payment system jointly launched by Shopify and Coinbase, Stripe are typical cases. As the stablecoin industry develops, it is expected that more companies with large user and merchant bases will build dedicated payment systems, which may pose a threat to banks and card organizations.
The use of stablecoins is still dominated by exchanges.
Source: BCG
Stablecoins are gaining significant attention both in the US and globally. Discussions are heated around their innovative potential in remittances, payments, real-world assets (RWAs), and interbank settlements. However, according to a report by Boston Consulting Group (BCG), 88% of the stablecoin transaction volume in 2024 will come from cryptocurrency trading. This data reflects the current limitations in the use of stablecoins, which have not yet achieved the widespread application in the real world that we expect.
Stablecoins can fundamentally change the financial system
Although advancements in fintech have significantly optimized user experience in the financial system, the backend systems handling actual transactions still suffer from inefficiency and outdated technology. In this regard, blockchain and stablecoins are expected to bring innovations to the backend of the financial system. This is not just a supplement to existing infrastructure; it can provide technology that completely replaces existing models, much like historical transformations in financial systems.
Securities market
The complexity of the backend system in the securities market stems from the documentation crisis that erupted in the U.S. securities market in the 1960s-70s and a series of policy measures introduced to address it. At that time, securities transactions relied entirely on paper documents, and with the surge in transaction volume, the entire system nearly collapsed. In response, the U.S. Congress passed the Securities Investor Protection Act (SIPA) and amended the Securities Act to establish a centralized clearing and settlement mechanism and an indirect securities holding system.
Initially, this system digitized securities ownership and improved settlement efficiency. However, at the same time, it also made many intermediaries such as brokers, clearing houses, and custodians indispensable, thus bringing structural complexity and cost issues. Today's securities market is essentially a product of policy compromise and gradual improvements made to overcome technological limitations. This system has been in use 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 in the field of cross-border remittances. It was established in 1973 by 239 banks in Brussels as a global messaging network. Its inception aimed to replace the then-existing telegraphic international banking communication system, which was slow and error-prone, coupled with banks adopting their own communication standards, leading to poor compatibility, inefficiency, and security risks. SWIFT was born to solve these problems by providing a universal communication standard and secure network.
However, SWIFT itself is only responsible for transmitting information, and the actual flow of funds must be completed through intermediary banks or central bank accounts, with the settlement between accounts being handled separately. The entire process involves multiple intermediary banks, each of which experiences delays due to factors such as fees, KYC/AML reviews, currency conversions, time zone differences, holidays, and more, ultimately resulting in high costs and low transparency for cross-border remittances. Had blockchain and stablecoins existed at that time, information transmission and fund transfers could have been completed on the same unified platform, leading to a qualitative leap in the efficiency of cross-border payment infrastructure.
Can stablecoins revolutionize the payment market?
Despite the heated discussions around the innovative potential of stablecoins in securities markets, cross-border remittances, and other areas, the next most anticipated application scenario beyond exchange trading is undoubtedly payment systems. 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 the operational mechanisms of current payment systems, the root causes of inefficiencies, and whether stablecoins can address these issues.
How current payment systems operate
First, let's understand the operational process of payment systems. When a customer pays a merchant, the process is as follows:
Authorization
The customer attempts to complete payment using a debit card.
The POS terminal or online payment gateway sends an authorization request containing payment information to the acquirer.
The acquirer forwards the request to the card organization (such as VisaNet or Mastercard's banking network).
The card organization passes the request to the issuing bank.
Verification
The issuing bank verifies the validity of the debit card, account balance, credit limit, and whether the transaction poses any suspicious risks.
Once verification is complete, the approval or denial result will be returned to the acquirer via the card organization.
If the transaction is approved, the corresponding amount will be temporarily frozen in the customer's account.
If the transaction is denied, the merchant will receive feedback containing the reason for the denial.
Capture confirmation
In some industries like gas stations, hotels, and online shopping, the final amount is only confirmed after the initial authorization. Therefore, the moment the merchant sends the 'capture confirmation request' is the actual completion point of the transaction, and that request will be sent to the acquirer.
Batching
Transactions authorized throughout the day will be aggregated into a batch and sent to the acquirer at the end of the business day.
Clearing and interchange
The acquirer sends the batch transaction data to the card organization.
The card organization sends each transaction to the corresponding issuing bank and calculates the interchange fee in the process.
Settlement
Funds are transferred from the issuing bank's settlement account to the acquirer's settlement account. The card organization will aggregate daily transactions and generate settlement files to coordinate the settlement between both parties, but the actual transfer of funds must be completed through interbank payment networks.
Funding
The acquirer deposits the payment amount into the merchant's account after deducting relevant fees, usually completed through Automated Clearing House (ACH) or wire transfer.
Reconciliation
Finally, the merchant verifies whether the received funds match their records, checking for discrepancies, transaction omissions, or duplicate charges.
What problems exist in current payment systems?
Two commonly criticized issues in traditional debit card systems are high fees and slow settlement speeds. Are these defects inevitable, or can they be resolved?
Source: a16zcrypto
Regarding payment transaction fees
First, let's look at the composition of debit card payment fees from the merchant's perspective, which involve three main types of charges:
Interchange fee: The largest portion, collected by the issuing bank.
Card organization service fee: The fee charged by the card organization for processing the transaction.
Acquirer markup fee: The service fee charged by the acquiring bank.
Can blockchain and stablecoins lower these costs? The first potential cost-saving point lies in global transactions. When merchants and cardholders are located in different countries, settlements must go through the SWIFT system; however, replacing this process with blockchain or stablecoins could significantly reduce costs.
The second potential cost-saving point is bypassing card organizations and issuing banks. The essence of card organizations is to connect the communication network between the customer's bank and the merchant's receiving bank; if stablecoin payments are fully adopted, customers can transfer directly from their self-custodied stablecoin wallets to the merchant's Web3 account via blockchain networks.
Regarding settlement time
Next, let's look at settlement time. The transaction authorization for card payments is completed almost in real-time; in this regard, the scalability of public blockchain networks may be far inferior to centralized card organizations. However, in traditional card payments, clearing usually requires an additional 1-2 days, and settlement takes 1-5 days.
There are many reasons for the time-consuming settlement process, some of which can be resolved while others are difficult to avoid.
Clearing cycle: Debit card payments usually batch daily transactions once a day. A system fully based on blockchain or stablecoins does not need to follow this single-day clearing cycle.
Disputes, suspicious transactions, cancellations, and refunds: Even with stablecoin payments, these issues cannot be eliminated. Since such situations are difficult to avoid during the payment process, settlement delays remain necessary.
Cross-border payments: In cross-border transactions, funds must be settled through the SWIFT system, which further exacerbates delays. Clearly, blockchain can provide solutions in this area.
Stablecoin-based payment systems
Recently, various financial institutions and companies have turned to adopt stablecoin-based payment systems. I believe this significant shift is primarily driven by two strategies: the first led by card organizations like Visa and Mastercard; the second is an attempt to completely bypass card organizations and issuing banks.
Stablecoin payments centered around card organizations
As I mentioned in the article (Visa and Mastercard: Designing the Next Generation Payment System), Visa and Mastercard are actively exploring paths to integrate stablecoin functionalities into their infrastructure.
Crypto debit cards: These cards allow customers to use stablecoins stored in Web3 wallets or exchange accounts for payments. Specifically, customers' stablecoins can be processed in two ways: either exchanged for fiat currency by the issuing bank and processed through existing payment systems, or received directly by the card organization through a funding account, completing the transaction according to the traditional debit card payment process.
Stablecoin settlement: As mentioned earlier, card organizations can receive stablecoins through funding accounts or use stablecoins for settlements with acquirers.
Essentially, stablecoin payments centered around card organizations only add stablecoin payment and settlement support to traditional systems, with participants and infrastructure remaining unchanged. Therefore, this model does not have significant advantages in terms of cost and efficiency. However, for customers and businesses that natively use stablecoins, this model can eliminate the funding entry and exit links, reducing transaction friction; additionally, if the entire payment process is settled in stablecoins, cross-border transactions will benefit significantly.
Attempts to bypass card organizations and issuing banks
Meanwhile, some payment service providers (PSPs) have begun to bypass card organizations like Visa and Mastercard, directly using stablecoins to process payments. Typical cases include PayPal's PYUSD payment and the USDC payment solution jointly launched by Shopify and Coinbase, Stripe.
PYUSD payment solution
PayPal users can use their PYUSD balance to make payments within the app. These PYUSD are not stored in the user's personal wallet but held on behalf of the issuer Paxos. When a PYUSD payment occurs, there is no actual on-chain transfer operation; instead, the ownership of PYUSD is transferred internally within PayPal's backend systems from the customer to the merchant. If the merchant wishes to settle in fiat currency, PayPal will exchange PYUSD for USD at a 1:1 ratio and transfer the funds to the merchant's account via banking networks such as ACH.
If a customer's PYUSD balance is insufficient, they can recharge via bank account or debit card (which may incur fees); similarly, if a merchant requests fiat settlement, processing through the banking network will also incur additional fees and time costs. But if the entire payment cycle is completed in PYUSD, it can significantly shorten time and reduce costs without going through card organizations or issuing banks.
Payment solution jointly launched by Shopify and Coinbase, Stripe
Unlike PayPal, which uses stablecoins in the payment process without directly involving blockchain networks, Shopify's USDC payment solution goes 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 when settling at Shopify stores and complete the payment through a crypto wallet holding USDC connected to the Base network.
In this process, the smart contract 'Commercial Payment Protocol' on the Base network adopts the traditional 'authorize first, then capture' model to complete payment authorization in advance, while the actual funds transfer is delayed. Shopify and Coinbase will aggregate the day's USDC transaction data and complete the settlement on the Base network.
The default method for the settlement process is: Shopify exchanges USDC for the local fiat currency of the merchant through Stripe's infrastructure and deposits the funds into the merchant's account via banking payment networks like ACH or SEPA. Merchants can also choose to receive settlement funds directly in USDC, allowing them to access funds more quickly.
Summary and reflections
Regarding stablecoin-based payment systems, the most frequently asked question is: 'Since blockchain transactions are inherently irreversible, how do we handle cancellations or refunds?' Although a fully peer-to-peer payment system may eventually emerge between customers and merchants, issues such as fraud detection, chargebacks, and refunds will always exist, so intermediaries in the payment process remain necessary. Thus, the roles traditionally played by card organizations and issuing banks will not completely disappear.
However, in the aforementioned stablecoin payment cases involving PayPal and Shopify, intermediaries like PayPal and Stripe play the role of payment service providers (PSPs), responsible for handling fraud detection, transaction cancellations, refunds, and other issues. Specifically, PYUSD transactions are not processed on-chain but completed in PayPal's backend system, allowing for operational flexibility in dispute resolution; in Shopify's case, the 'Commercial Payment Protocol' smart contract on the Base network does not immediately approve payments but introduces a buffer time to address potential disputes. Additionally, USDC's issuer Circle has launched a 'Refund Protocol' for non-custodial dispute resolution in stablecoin payments.
Source: X (@robbiepetersen_)
Stablecoin-based payments are an inevitable trend for the future. The issuance aspect is crucial, and the circulation aspect cannot be ignored. As pointed out by Robbie Petersen from Dragonfly, companies with large merchant and user bases will increasingly adopt stablecoin payments, thereby bypassing card organizations and issuing banks. Stablecoins may even achieve interoperability between such closed-loop payment systems. Given these trends, stablecoins may pose a real threat to card organizations and issuing banks, which need to explore new opportunities in this unstoppable wave of stablecoins.
