Stablecoins Disrupt Banking, Face Profitability Challenges
2min read Stablecoins are increasingly being recognized for their potential to disrupt traditional banking by unbundling its services. This concept is not new; the internet revolution has shown how unbundling can transform industries. For instance, the internet caused newspapers to be unbundled into various services like Craigslist, search engines, and blog posts. Similarly, fiber optics led to the unbundling of cable TV into streaming services. Netscape, under the leadership of Jim Barksdale, unbundled the internet by allowing users to bypass bundled services like AOL and CompuServe, which included email, news, chat, and curated web access.
Stablecoins, often described as tokenized dollars or money market funds issued by a crypto version of narrow banks, are now seen as a potential disruptor in the banking sector. Traditional banks bundle a variety of financial services, including deposits, custody, payments, credit cards, lending, asset management, and investment banking. However, stablecoins offer only the essential services of storing and transferring money, making them a more focused and potentially disruptive technology. This simplicity could attract users who are only interested in these core functions, leaving behind the complexities and costs associated with traditional banking services.
However, the path to profitability for stablecoin issuers is fraught with challenges. The risk disclosure section of Circle’s recent S-1 filing highlights intense competition, dependence on interest rates, the potential threat from Central Bank Digital Currencies (CBDCs), and regulatory uncertainty. Additionally, the costs associated with issuing stablecoins are significant, with Circle incurring $482 million in operating expenses in 2024 and over $1 billion in distribution, transaction, and other costs. The narrow margin between the interest rates offered on stablecoin balances and the fed funds rate further complicates the profitability equation. If stablecoins are to become a loss leader, issuers may need to offer additional services to attract and retain customers, potentially leading to a rebundling of banking services.
This rebundling is not unprecedented. Startups that disrupt incumbents by unbundling their services often end up reforming themselves into a version of the company they initially disrupted. For example, Robinhood, which started as a brokerage platform, is now expanding into checking and savings accounts, payments, and cash withdrawals. It is likely that Robinhood will eventually offer a stablecoin, treating it as a loss leader and potentially threatening the margins of existing stablecoin issuers. To stay competitive, stablecoin issuers may need to rebundle some of the banking services they initially left behind, potentially even being required to do so by legislation.
Despite these challenges, the potential for stablecoins to disrupt and eventually rebundle banking services presents an intriguing opportunity. As Barksdale’s dictum suggests, bundling is one of the two primary ways to make money in business. If stablecoin issuers can navigate the regulatory and competitive landscape, they may find themselves in a position to offer a comprehensive suite of financial services, potentially transforming the banking industry in the process.
