Why Is It Difficult for Crypto Debit Cards to Replace Visa?

The advantage of stablecoins does not lie in domestic payments.

Written by: Vaidik Mandloi

Compiled by: Luffy, Foresight News

Did you know? In July, cryptocurrency credit card spending exceeded $759 million, with 9 million transactions. This is nearly two and a half times the amount from the same period last year. Moreover, over 90% of the transaction volume was still paid using Visa cards.

Almost all crypto debit card projects tell the same story: relying on stablecoin payment channels to bypass card organization fees, returning the saved costs to merchants. We previously discussed this logic when analyzing Stripe's construction of a cross-border payment link based on stablecoins.

To this end, I delved into a core question: what would happen in reality if we tried to bypass traditional card organizations? Would breaking free from Visa and Mastercard really save costs for merchants? Which layer of the payment architecture can stablecoins truly replace?

The conclusion I reached was completely unexpected.

How the Payment System Operates

To find the answer, we first need to clarify where the fees go when consumers swipe their cards for payment. I initially realized a common misconception: many in the crypto industry believe that card organizations like Visa take the largest cut of the fees.

This is not the case. When a merchant processes a $100 reward credit card transaction, they need to pay about a 2.2% merchant discount fee rate, totaling $2.20. The key point is that this $2.20 does not go into Visa's pocket but is distributed among three parties, and the distribution is not equal.

• The largest share, about $1.75, goes to the issuing bank, which is the institution that issues the credit card to the consumer. This fee is called the interchange fee and accounts for 70%-80% of the total merchant fees.
• Next is the merchant-side payment processor (acquiring institution), which takes a service fee of $0.30 to $0.70.
• Finally, there are the card organizations Visa and Mastercard, which only charge an assessment fee of $0.13 to $0.18, accounting for about 7%-9% of the total merchant expenditure.

In other words, simply removing Visa would only eliminate the smallest fee in the entire chain. The reason Visa charges such a small fee is also rooted in its underlying business model.

Visa does not extend credit to anyone, so it does not bear credit risk, chargeback disputes, or fraud losses. In fact, Visa does not even participate in the transfer of funds. It is merely an information transmission network that only activates when a user swipes their card at a merchant terminal. Visa's job is to relay authorization information between the merchant terminal and the issuing bank and to establish the operational rules for the entire system. The issuing institution bears the most significant responsibilities.

The issuing institution provides credit to consumers and assumes the risk of bad debts; it also bears the cost of funds occupied between the consumer's purchase and the bill payment date, and relies on interchange fees to subsidize card reward programs to attract users to use the card.

This creates a highly attractive business model for Visa. By 2025, Visa is projected to process $14.2 trillion in payment transactions, with 257.5 billion transactions, generating $40 billion in net income and a net profit margin close to 50%. On average, Visa earns only about $0.13 per transaction, which is its entire profit source. Visa's position among the highest-valued companies globally is not due to high fees per transaction but rather because it processes hundreds of billions of transactions annually, with marginal costs approaching zero, and it does not bear credit risk at all.

Next, we enter the most challenging reality for stablecoin debit cards.

All stablecoin debit cards on the market are debit card products. Before consumption occurs, funds are already stored in the user's wallet in the form of USDC or USDT. There is no period of fund occupation, nor is there any revolving credit that generates interest income. This places these cards in a completely different economic model.

Additionally, the U.S. Congress enacted the Durbin Amendment in 2010, which caps the interchange fee for debit cards issued by banks with assets exceeding $10 billion at $0.21 per transaction plus 0.05%. Most stablecoin debit card solutions choose to collaborate with small partner banks (digital banks) with assets below the $10 billion threshold, which are not subject to the Durbin Amendment. This is also a common practice in the fintech industry.

The unrestricted dual-information network debit card interchange fee currently averages about $0.62 per transaction. A clear comparison shows that for a $100 transaction, a reward credit card can generate $2.20 in total revenue, while a stablecoin debit card, even with a higher exempt fee rate, generates only $0.62 in total revenue. The project parties still need to pay card organization fees, processing fees, partner bank costs from this $0.62, while also covering fraud losses and operational expenses. Only the remaining margin can be considered for merchant discounts.

What Can Stablecoins Truly Replace?

As seen above, the fees saved by eliminating Visa are minimal, and the profit margin for operating stablecoin debit cards relying on interchange fees is extremely narrow. However, the value of stablecoin payments may not lie in saving trivial card organization fees but rather in the potential to replace more core aspects of the payment architecture.

To this end, I revisited a previous article titled "Stripe Builds Its Own Public Chain," which broke down a cross-border payment into seven fee components: acceptance, process scheduling, licensing compliance, custody, foreign exchange conversion, issuing, and clearing and settlement. I compared domestic card transactions against these seven layers to analyze which aspects would undergo substantial changes.

From the merchant's perspective, the transaction acceptance layer has not changed at all. The process remains the same: merchants are equipped with terminals, users swipe their cards, and they still need to pay the merchant discount fee rate to the acquiring institution. Merchants cannot even perceive that the source of funds behind the card is USDC. In the merchant's billing, this transaction is indistinguishable from a regular Visa transaction. Similarly, the process scheduling layer still goes through Visa or Mastercard, and the issuing stage still relies on partner banks and card organization BIN numbers. Financial technology companies have been using this model long before stablecoins were born, and no fundamental innovation has occurred.

The real change occurs in the backend, which is also the most easily overlooked area.

The clearing and settlement layer is the only aspect where stablecoins can bring about fundamental change. In the traditional model, the transaction clearing between issuing banks and card organizations follows a T+2 cycle, compounded by weekends and batch processing. To optimize this pain point, service providers like Rain support stablecoin end-of-day settlements with Visa; Mastercard has also begun accepting stablecoins like USDC, PYUSD, and RLUSD for intraday settlements. This significantly compresses the traditional T+2 settlement cycle, approaching real-time clearing and releasing the operating funds that were previously occupied by issuing banks.

However, the benefits of optimizing operating funds all accrue to the issuing institutions. The merchant discount fee rate will not decrease due to faster settlements, and consumers will not experience any difference in checkout.

The only beneficiary of stablecoin T+0 settlements is the card operator, which no longer needs to advance funds for a two-day cycle. The innovation brought by stablecoins essentially helps issuing institutions optimize fund management. While the benefits can be substantial as the scale grows, they do not provide additional advantages to merchants or consumers. At the same time, Visa has no incentive to lower fees—settlement fund occupation costs have never been borne by Visa; the pressure has always been on the issuing banks. Even if stablecoin settlements reduce the funding costs for issuing banks, Visa's own costs remain unchanged, and thus merchant rates naturally stay the same.

It is worth noting that Visa and Mastercard have not resisted stablecoin settlements; rather, they have actively integrated them into their networks. Since 2021, Visa has supported USDC settlements on the Ethereum and Solana networks, with current annual settlement volumes reaching $7 billion. A few months ago, Mastercard acquired BVNK to expand its stablecoin infrastructure. Both card organizations have even stated: "Stablecoins will not disrupt the existing payment landscape; instead, they will reinforce this system."

Major card organizations have not been disrupted or replaced by stablecoins; on the contrary, they have absorbed stablecoins as an upgrade solution for their settlement layers. Every stablecoin debit card operating on Visa claims to disrupt Visa while contributing transaction volumes and continuously paying fees to it.

Additionally, it is worth mentioning that in related articles about Stripe, we noted that stablecoins can indeed lower cross-border payment costs by eliminating multiple layers of intermediary banks; this argument holds true. However, it is essential to differentiate the scenarios: the core pain points of cross-border payments are foreign exchange conversions and multiple intermediaries, which are entirely different from the fee structures of domestic consumption. The industry directly applies the validated logic of cross-border payments to domestic consumption scenarios, which does not align with the actual cost structure.

The logic of stablecoins empowering cross-border payments is solid, but once applied to domestic consumption, analyzing the flow of fees reveals that this narrative is difficult to sustain.

What can stablecoins ultimately replace? Objectively speaking, the answer is the clearing and settlement processes and cross-border foreign exchange conversions. They transform the underlying funding channels behind transactions. However, the largest source of costs in domestic card transactions has never been based on settlement infrastructure.

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