A lot has changed since I first started writing that stablecions would become a big deal and disrupt the booming payments and FinTech industries. On the crypto side, blockbuster projects like JPM Coin, the Utility Settlement Coin and Libra were announced. Dai proved resilient despite an ugly collateral winter and public coins like Tether grew even larger. Regulators and central bankers went from not knowing what stablecoins are to obsessing over them.
And yet, on the FinTech side, nothing has changed. Judging by the capital markets, investors now believe in siloed payment providers who own proprietary pipes more than ever. Visa has overtaken J.P. Morgan to become the world’s biggest financial company. PayPal’s stock is 20% higher from when I first wrote about its inevitable demise. Stripe’s valuation has jumped by 50% in less than a year.
Ironically, the ascent of the (soon to be) old guard happened despite all three companies giving stablecoins the ultimate stamp of approval by joining the Libra Association. Here is David Marcus going on about how Libra will change the world by drastically expanding access and lowering fees, and there are three of the world’s biggest payment companies — with business models based on limited access and higher fees — nodding along.
I like history, and analogies, and find an appropriate one in the transportation industry of the early 19th century. Moving money is a lot like moving goods. If either money or a physical item needs to get from point A to point B, and you happen to control the only route, then you get to charge a toll. If an unrelated secular trend leads to a lot more goods or payments needing to traverse that route, then you make a lot of money.
Today, the good is electronic payments, and the routes are cards rails and e-money schemes. As commerce grows increasingly digital, global and platform based, the few available pipes to send payments grow increasingly profitable. In the 1800s the good was industrial and agricultural supply, and the routes were rivers and lakes. As the world grew increasingly industrial and trade-oriented, the few available routes out of North America grew increasingly important. Contemporary companies like Stripe and PayPal are changing the payment landscape by building important bridges between legacy payment pathways. Back then, the same thing was accomplished by building canals.
If you aren’t familiar with the canal boom of the first industrial revolution you are missing out. So much of the map, economic layout, population distribution and culture of America can be attributed to a single piece of infrastructure: the Erie Canal. It connected two major shipping corridors in the form of the Great Lakes and the Atlantic Ocean via the Hudson River and literally redrew the map of North America. The Midwestern farm belt, Northeastern Industrial Belt and New York City all ascended because of it. And of course, it was highly profitable. So much so that its tolls paid for the massive cost of construction within 3 years, a repayment time unheard of in the modern era.
Canals are slow, expensive to build and difficult to maintain. But because they were the only game in town in the early industrial era, they were economically important. There was a time when the fastest way to ship goods across Pennsylvania was up to the Great Lakes and down through New York City. The success of the Erie as an economic gateway inspired many other canals to be built at great expense. They all did great, and made a ton of money, until the railroads did them in.
I like this analogy because it shows how in the absence of a proper network that connects two points directly, even the most cumbersome, indirect and expensive transportation options could do well. That’s the FinTech payment boom of 2019 for you. What makes companies like Stripe so successful is that they can abstract away all of the inefficiencies and messy underbelly of the siloed payment industry and give merchants and users a payment experience that looks seamless. This is a valuable contribution today, but not nearly as good as a grid that allows instant point to point transfers of money. That’s the stablecoin vision of tomorrow.
We can stretch this analogy as far as we like. Just as the biggest payment providers of today have joined Libra because they believe it only accentuates their business model, canal operators initially embraced railroads as a means of bringing more goods to their shores. Both stablecoins and railroads are in some ways limited in capacity compared to the infrastructure they hope to replace, but the efficiencies of shipping (or paying) point to point are worth the trade-off.
Some canals survived deep into the railroad boom and were even expanded as a result, which means some of today’s legacy payment gateways, particularly the wholesale ones that move huge sums of money, will be with us well into the stablecoin boom, and possibly benefit from it. We are already seeing this with Libra. In order for the overall mission to be successful, the project is going to need a lot of help from the legacy financial system, including certain payment gateways.
I expect the endgame for most of today’s payment players to be the same as those of 18th century canals. A network, be it a physical one for moving goods or a digital one for moving value, wants to be built. The efficiencies and growth economics are too tempting to ignore. The more money the Visas, PayPals and Stripes of the world make operating their canals, the more everyone else will be willing to invest in a network that bypasses them — despite challenges like this.
Libra is just the beginning. Whether it succeeds, or even launches, is a moot point. The idea of a decentralized payment network that only charges minimal fees to provide security (as opposed to seeking rent to reward shareholders) has now been validated, and there’s no turning back. If the statement “your profit margins are my opportunity” is to be believed, then there is no greater opportunity in all financial services than a secure global blockchain-based payment network.
The opinions expressed in this blog are strictly my own, and not that of any employer, client or associate.