Stablecoins Challenge Visa, Mastercard Dominance as Legislation Looms

The recent surge in stablecoin popularity is challenging the dominance of Visa and Mastercard, the two giants in the payment industry. Executives from both companies, during their latest earnings calls, acknowledged the potential impact of new legislation that could accelerate the adoption of stablecoins. Despite this, both Visa and Mastercard reported strong financial performance, with Mastercard even raising its annual forecast, suggesting robust spending trends.

The rise of stablecoins, which are digital currencies pegged to the value of traditional assets like the US dollar, poses a significant threat to the traditional payment systems dominated by Visa and Mastercard. These stablecoins offer faster, cheaper, and more efficient transactions, which could erode the market share of the established payment giants. The new legislation, which aims to regulate stablecoins, could further accelerate their adoption by providing a clear legal framework for their use.

Both Visa and Mastercard have shown resilience in the face of this challenge. Visa's earnings report highlighted strong revenue growth, driven by increased transaction volumes and higher fees. Mastercard, on the other hand, reported a significant increase in its net income, thanks to higher transaction volumes and a rise in cross-border spending. The company also raised its annual forecast, indicating confidence in its future performance.

Despite their strong financial performance, the rise of stablecoins has exposed potential vulnerabilities in the moats of both companies. Visa and Mastercard have traditionally relied on their extensive networks of merchants and financial institutions to maintain their dominance. However, the decentralized nature of stablecoins and their ability to facilitate peer-to-peer transactions could undermine this advantage. Additionally, the potential for stablecoins to be integrated into existing payment systems could further erode the market share of Visa and Mastercard.

In response to this challenge, both companies have been exploring ways to integrate stablecoins into their existing payment systems. Visa, for example, has been testing a stablecoin-based payment system that allows users to make purchases using stablecoins. Mastercard, on the other hand, has been working on a platform that enables merchants to accept stablecoin payments. These initiatives could help both companies maintain their relevance in the face of the stablecoin revolution.

Historically, the credit card giants have demonstrated strong resilience. Visa's net profit grew by 8% to $5.3 billion in the second quarter, while Mastercard's net profit increased by 14% to $3.7 billion, both exceeding analyst expectations. With approximately 70% of US purchase transactions processed through their networks, their extensive reach and reliability have formed a robust barrier against emerging payment applications like Venmo.

Politically, the easing of fee pressures during the Trump administration, though intermittent, has not fundamentally altered the landscape. Over the past year, Visa and Mastercard's stock prices have risen by 31% and 24% respectively, reflecting market confidence in their earnings potential with forward price-to-earnings ratios of 28x and 32x respectively.

The core contradiction in this high-profit business lies in the continuous compression of the fee-sharing ratio. Over the past few fiscal years, the total swipe fees collected by the two companies from merchants amounted to approximately $95 billion. However, Visa's per-transaction fee has dropped to 6.6 cents, down from nearly 9 cents a decade ago. Mastercard, despite a slight increase in fees due to currency fluctuations, has seen its average fee drop to 7.3 cents, below the previous year's level of nearly 8 cents.

Although the current transaction volume of stablecoins is minuscule compared to the $1.5 trillion annual processing volume of credit card networks, and primarily used in emerging markets with volatile fiat currencies, the downward trend in per-transaction fees has exposed the fragility of traditional payment systems. Major retailers like Walmart are exploring token payment solutions, signaling accumulating pressure for change.

Currently, Visa and Mastercard have partially offset revenue losses through consulting and other value-added services, maintaining stable performance. However, Circle's valuation surge since its June listing reflects over-optimistic market expectations for stablecoin adoption, compounded by other institutions entering the field, potentially acting as a catalyst for disrupting the current landscape. If digital currencies truly break out of regions with unstable fiat currencies, the market positions of these once "unassailable" credit card giants could face fundamental challenges.