4 min read

The real reason crypto payments will win.

Analyzing the dynamics of traditional payment rails and how crypto-enabled payments will outperform them.
The real reason crypto payments will win.
"an animated picture of a boy paying at the register at a coffee shop, using his phone" created by MidJourney

When it comes to making a payment, there are two key factors to consider:

  1. Fees: the total cost of a transaction
  2. Compatibility: whether the sender and receiver can successfully complete the payment

Traditional payment systems often have high fees and limited compatibility, particularly for international transactions. It is helpful to examine the three main steps of a payment's lifecycle to understand the issue:

  1. Onboarding: getting capital into the system (e.g., depositing money into a payment app)
  2. Transferring: moving the capital from one account to another (e.g., sending a payment to another user)
  3. Offboarding: withdrawing capital from the system (e.g., transferring money from a payment app to a bank account).

The problem

In traditional payment systems, a single organization typically handles all three steps. This can lead to high fees and limited options for users, as the organization has a monopoly on the entire process.

Transaction monopoly leads to poor compatibility.

Consider a user in the United States who wants to send a payment to their family in India. Users might deposit money into their Cash App account in the United States, incurring whatever fees Cash App has. Then, they realize Cash App is not supported in India. They then want to send the payment to the freelancer's Paypal account in India but cannot because PayPal and Cash App are incompatible. To complete the payment, the user would need to withdraw the money from Cash App and deposit it into a different payment app like Paypal, incurring offboarding fees and potentially additional onboarding fees. This scenario illustrates how traditional payment systems can have limited compatibility, leading to a subpar user experience.

Monopolizing a transaction leads to higher fees.

One way monopolizing the transaction life cycle can lead to higher fees is by reducing competition. When a single organization controls all three steps of the payment process, it has a monopoly on the entire process. This lack of competition allows the organization to charge higher fees, as users have no other options. For example, if PayPal were the only payment app available, users would have no choice but to pay PayPal's fees when depositing money into their account, transferring money to another user, or withdrawing money to their bank account.

The Solution

Crypto offers a solution to these problems by unbundling the traditional payment stack. With crypto, specialized companies for each payment process step are connected by stablecoins that provide interoperability. This competition drives fees down and increases options for users.

Market fees on each step of the transaction's journey.

One way that unbundling the traditional payment stack and using cryptocurrency can drive fees down is by increasing competition. With crypto, there are specialized companies for each payment process step, rather than a single organization controlling the entire process. This increased competition can drive fees down as companies strive to offer competitive prices to attract users. For example, if a user in India wants to send a payment to a freelancer in the United States, they might use a crypto onboarding service like Moonpay to deposit money into a stablecoin. Moonpay might offer lower fees than a traditional payment app to attract users. The user could then use a crypto transfer service like Ethereum to send the stablecoin to the freelancer's wallet in the US, again incurring lower fees due to competition between transfer services. This competition between specialized companies can lead to lower fees for users.

The actual escape of vendor lock-in.  

Another way that unbundling the traditional payment stack and using cryptocurrency can increase options for users is by increasing interoperability. With stablecoins serving as a bridge between different payment services, users can send and receive payments across a broader range of platforms. For example, if a user in India has money deposited in a payment app incompatible with the freelancer's payment app in the US, they can use a stablecoin to complete the payment. The user can deposit their local currency into a stablecoin, send the stablecoin to the freelancer, and the freelancer can then withdraw the stablecoin and convert it into their local currency. This increased interoperability gives users more options for sending and receiving payments, improving the overall experience.

Payment providers like Paypal have immense network effects and moats. This breaks a lot of that thinking. Payment rails looking to create a moat will be forced to be more creative. They will look to things like address books and user experience to secure their audience. Or moving their value accrual down the stack to instruments like stablecoins.

Better fees and support are great. But there's also a lot more.

I think that better fees and better support will define the rise of crypto payments. That said, there are a variety of other reasons to get excited about crypto payments, such as:

  • True ownership: Users  own their assets instead of having outside custodians
  • Programmability: not limited by a central organization, enabling micropayments or new types of monetization
  • Risk-on payments: Enable otherwise high-risk payments like Onlyfans (charges creators like 20%)
  • AI-resistant payments: blockchains and crypto payments provide the rails to develop AI-resistant payments.

Links that explore these topics more are linked below.

In summary, crypto forces an unbundling of traditional payment systems, likely leading to substantial fee compression and increased interoperability. It may also lay the foundation to explore many other interesting applications of stablecoins.

Further reading

Multicoin: Unlocking Payments Over Crypto Rails

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