Could Crypto ever come to its Credit Card moment?

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Patrick Tan

DataDrivenInvestor

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The year is 1949 and postwar America is experiencing an economic boom the likes of which have never been witnessed. While much of the world's industrialized economies lay in ruin, the United States of America's industrial prowess is just coming into stride.

All across America, factories once fitted to roll out B-29s are being retooled to build Buicks to ferry America's burgeoning middle class.

Wages across the U.S. are rising as companies seek out workers to build the growing number of gadgets and appliances that will come to define modern American living.

Against this backdrop of plenty, a businessman by the name of Frank McNamara found himself in a pecuniary pickle when after having enjoyed a sumptuous steak lunch with friends at Major's Cabin Grill in downtown Manhattan, he realized he had forgotten his wallet.

Not one for dishwashing, McNamara managed to leave Major's Cabin Grill that day by signing some form of rudimentary agreement he would return to pay his bill the next day — a promissory note for payment of a meal well eaten if you will.

Figuring he could not possibly be the only person to have ever forgotten his wallet before heading out, McNamara thought there had to be a better way and "Diner's Club" was born.

The "Diner's Club" had a cardboard membership card that select men could use at 27 participating restaurants — nothing to call home about, but certainly a start.

Kicking off with just 200 members, most of whom were friends or acquaintances of McNamara, Diner's Club quickly saw membership soar to 42,000 across the United States and became the first credit card usable internationally.

Just 10 years later, in 1959, American Express made the first plastic credit card.

And in 1969, when IBM engineer Forrest Parry asked his wife how he might adhere a magnetic strip to a plastic card — she suggested he iron it on — the magnetic strip credit card was born.

Fast forward four decades later, and in 2009, the first Bitcoin was transferred.

Yet Bitcoin specifically, and cryptocurrencies in general, have yet to usurp the role of other payment methods currently available.

Today, more people in industrialized economies use credit cards than at any time in the past and the global credit card business is worth some US$150 billion annually, a figure expected to double over the next decade.

To be sure, other payment methods have started to replace credit cards, including Stripe, WeChat Pay, Alipay and Grab Pay.

Today, there are a plethora of payment options and not all of them are tied to credit cards, some are prepaid credits and others act as a form of quasi-debit card system via stored value apps.

Unlike the birthing of Diner's Club, payment gateways are more likely to be driven by e-commerce and online shopping rather than dining, which has exploded in scale over the past two decades.

Smartphone penetration and the convenience of delivery apps has seen increasing comfort with QR code payments and in Southeast Asia alone, e-commerce gross merchandise value in 2022 was nearly four times the level in 2019.

Ironically, emerging markets are leading the charge when it's come to alternative digital payments which avoid credit cards altogether, the same way Africa skipped past copper phone lines and went straight to mobile.

Indonesia, a sprawling archipelago of 273 million people has about 10 million online merchants, many of whom have no ability to collect payments through credit cards.

Throughout the emerging markets of Asia and South America, entrepreneurs have found themselves kept out of credit card networks by cumbersome onboarding requirements and a lack of access to banking.

But it's not just in Asia and South America where merchants are shunning credit cards — in Australia, a backlash against the exorbitant fees of card companies has seen many merchants either refuse to accept credit cards altogether, or charge a fee of as high as 5% on the billable amount, to discourage use.

Closer to home in San Francisco, there are diners that even today only accept cash to avoid the high fees associated with maintaining a credit card terminal.

One method which has gained increasing popularity to somewhat circumvent the high fees associated with credit card transactions has been Stripe.

Rather than view high credit card fees as an economic problem, Irish brothers Patrick and John Collison approached payments as a software issue.

Devising an API (application programming interface) that contains the credit card number, the payment amount and other key transaction details, Stripe makes it possible for merchants lacking the facilities to accept credit cards to still receive monies in their bank accounts.

In 2022, Stripe processed a whopping US$800 billion worth of payments, but one of Stripe's limitations and that of other online payment gateways for that matter is merchants still need a bank account.

Enter cryptocurrencies.

As the pandemic raged, the inability to move cash across borders and to receive payments remotely was felt hardest in emerging markets, especially places like Indonesia, which consists of thousands of islands.

Cryptocurrencies, and in particular stablecoins, suddenly looked like a viable payment option, especially for the unbanked.

Freelance workers from Latin America to Southeast Asia became open to receiving stablecoins as payment for anything from designing websites, to performing call center services.

And while Bitcoin may not have been economically designed to engender widespread use, stablecoins had grown to run as a parallel currency system, supporting not just payments, but cross-border fund flows, circumventing capital controls and enabling self-banking for the unbanked.

In response to growing stablecoin use, a cottage industry of financial services such as lending and borrowing so that stablecoin holders could generate yields on their deposits rose up.

While the problems associated with this first iteration of decentralized and unregulated crypto-based financial services is well documented, their raison d’etre has not been extinguished with the spectacular collapse of many of these entities.

The failures of Celsius Network, Voyager and Terra Luna, have as much to do with the unreasonableness of depositors’ expectations as the fraud of their founders.

Although banking could possibly be solved by code, economic incentives defy a software solution.

That ain't workin’, that's the way you do it

Money for nothin’ and your chicks for free

Yet the demand for alternative payment and banking solutions could not be stronger, and financial institutions appear attuned to the disruptive potential of cryptocurrencies.

Despite an ongoing "Crypto Winter" and in the aftermath of billion-dollar collapses and widespread regulatory crackdowns, some of the finance industry's best-known names are building their own crypto trading capabilities.

The list of financial industry stalwarts continuing to put money behind cryptocurrency companies cast in their own image include Standard Chartered, Nomura and Charles Swab.

Rather than go the way of FTX.com, financial institutions are building their own trading venues which sensibly separate the exchange from the custodian.

Charles Swab, which has some US$7.13 trillion in assets under management, has teamed up with market making giants Citadel Securities and Virtu Financial to back cryptocurrency exchange EDX Markets.

British banking giant Standard Chartered has built the exchange Zodia Markets which has a separate custody solution in the form of Zodia Custody.

Although Wall Street's foray into cryptocurrencies may trade the same digital assets, the infrastructure and protections being laid down are significantly different from the likes of Coinbase and Binance.

Business units such as trading are separate from custody and conflicts of interest are managed to current institutional standards expected of Wall Street.

U.S. banking giant BNY Mellon and one of the world's largest asset managers Fidelity, already have their own digital asset custody arms, while the world's second largest stock exchange Nasdaq, is awaiting approval from U.S. regulators to launch its own service.

And while some may criticize Wall Steet's foray into cryptocurrencies as just a perpetuation of its penchant for speculation, at least some of the initiative is based on the belief cryptocurrencies may one day have their Diner's Club moment.

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