The Future of Global Payments? Analyzing the Web3 Payment Track

Payments are a key scenario in the cryptocurrency ecosystem, with tens of thousands of cryptocurrency payments occurring on and off the chain every day. A new cryptocurrency typically appreciates in value due to its actual payment use, and payments have become an important bridge connecting the Web2 world and the Web3 world.

In the business of Web3 payments, some people make a fortune by providing payment channels, while others focus on developing safer wallet technologies. So, how exactly is money transferred in the Web3 world? This article will take you deep into various business scenarios and projects within the Web3 payment industry.

In August last year, PayPal announced the launch of the stablecoin "PayPal USD" pegged to the US dollar, for transfer, payment, and other services; in April this year, financial infrastructure platform Stripe stated that stablecoin payments would be integrated into its payment suite within weeks and would support USDC payments starting this summer; in June, Mastercard announced the first launch of its peer-to-peer transaction infrastructure feature Mastercard Crypto Credential, allowing users in Latin America and Europe to achieve cross-border payments across currencies on the blockchain. Why have traditional payment industry giants made high-profile entries into the Web3 payment sector in the past two years?

Before uncovering the reasons, let's first understand what payment is. The essence of payment is the flow and transfer of funds. In the traditional payment industry, users complete the flow of funds through cash payments, card/bank transfers, and third-party payments. The completion of a cross-border payment usually requires the support of multiple participants. Taking the card payment link as an example, we will provide a brief introduction to the participants and the cross-border payment process.

• Cardholder ( User/Buyer ): The user selects goods/services at the merchant and initiates payment.
• Merchant: Merchants need to connect to the payment gateway of the payment service provider to receive and process payments through the integrated payment gateway.
• Payment service provider: Provides services such as payment gateways and payment processing. The payment information entered by the user is sent through the payment gateway to initiate the payment request. Some payment service providers also offer acquiring services.
• Acquiring Institution: The bank or financial institution that partners with the merchant. The acquiring institution receives the payment request and forwards it to the card organization, and is also responsible for processing the clearing and settlement after transaction authorization.
• Card organizations ( such as MasterCard, VISA ): a global network for processing payment card transactions. Card organizations receive payment requests from acquiring institutions, send authorization requests to issuing banks, and forward the authorization response back to the acquiring institutions, ensuring that the transaction request is approved by the issuing bank.
• Issuing Bank: The issuing bank receives authorization and payment requests from the card organization, first verifies the user's identity and account status, authorizes or declines the transaction, and disburses funds after successful authorization.
• Settlement: The final stage of the payment process, involving the transfer of funds from the user's account to the merchant's account. Settlement is typically coordinated by the acquiring institution and the issuing bank, and the actual transfer of funds may occur through interbank clearing networks.

The above payment process demonstrates the clear authority and high maturity of traditional cross-border payments, with higher acceptance, relative security, and advantages for large-scale transactions. However, traditional cross-border payments also have some limitations:

• Longer payment processing time: Due to the involvement of multiple parties, cross-border payments processed through international card organizations typically take at least T+1 days to complete, meaning it takes at least T+1 days for the funds to reach the merchant's account, resulting in relatively weaker immediacy of delivery.
• Multi-layered fee structure: Due to the many parties involved in a transaction, there is a multi-layered fee structure. For example, a credit card payment may incur different fees from the acquiring institution, the bank, and the card organization.
• Limited transparency and time-consuming traceability: If a bank card fraud occurs, it usually takes several working days to trace and inquire about the transaction.
• Dependence on traditional banks: Slow technological development, traditional banking systems are inadequate in addressing emerging payment demands.

It is precisely these limitations that drive technological innovation, leading us into a new era of Web3 payment links.

Main Reasons for the Development of Web3 Payments

1. High profit margin

Mastercard's net profit for 2023 was $11.2 billion ( with around 33,400 employees ), while in the cryptocurrency industry, the stablecoin issuer Tether had a net profit of $6.2 billion for 2023, and the company had only about 100 employees as of last year. In comparison, the wealth created per employee is significantly higher than that of the traditional payment industry, and the returns are likewise.

We can see from the chart that from 2018 to 2023, the compound annual growth rate of cryptocurrency adoption reached 99%, far exceeding the growth rate of traditional payment methods at 8%. During the same period, the growth rate of cryptocurrency adoption surpassed that of several major payment giants in the United States.

In 2022, PayPal faced intense industry competition and relatively high operating costs, with operating costs accounting for 70.8% of gross profit in 2022. It also began to focus on cryptocurrency business. The importance of the cryptocurrency business is gradually increasing in PayPal's overall revenue.

In one year, the operating costs related to cryptocurrencies increased from $800 million to $1.2 billion, a rise of 50%. The net profit related to cryptocurrencies grew from $700 million to $1.1 billion, an increase of 57%. The increase in operating costs for new cryptocurrency-related businesses reflects PayPal's ongoing investment and confidence in this area, including technology upgrades, security measures, and market expansion.

Its significant net profit growth not only demonstrates the profitability of cryptocurrencies but also proves PayPal's effective operational strategy in the cryptocurrency market, as well as its optimistic outlook on the future growth potential of cryptocurrencies. Therefore, PayPal has the motivation to continue exploring new industry opportunities.

2. Industry development brings more recognition and payment demand

The Bitcoin halving and the compliance of BTC ETFs have brought more recognition and payment demand to the crypto industry. The Bitcoin halving event has attracted widespread market attention by reducing the generation rate of new Bitcoins, thereby increasing its scarcity and expected value growth. The launch of Bitcoin exchange-traded funds has provided traditional investors with a low-threshold and convenient investment channel, enhancing market confidence. The anticipated rollout of Ethereum exchange-traded funds has further sparked interest in the Ethereum ecosystem and innovative applications. These factors collectively drive more people to understand and participate in Web3 payments.

In addition, the increasing demand for deposits and withdrawals has also driven the demand for conversion services between fiat currencies and cryptocurrencies (. Deposits and withdrawals are the conversions between fiat currencies and cryptocurrencies ). The means of providing these services include centralized exchanges, independent deposit and withdrawal payment institutions, cryptocurrency ATMs, and POS machines that support cryptocurrency payments. Through these means, users can conveniently convert between fiat currencies and cryptocurrencies, thereby promoting the widespread application and popularization of cryptocurrencies.

3. Mainstream companies are beginning to adopt cryptocurrencies

Microsoft began accepting Bitcoin as payment for its online Xbox store in 2014; Twitch, a leading game streaming platform owned by Amazon, accepts Bitcoin and Bitcoin Cash as payment for its services; Shopify, as a leading e-commerce platform overseas, supports Bitcoin payments through integration with payment processors like BitPay. The support of cryptocurrency payments by leading companies in different industries illustrates that Web3 payments are bringing more possibilities.

4. Reduce exchange rate risk

Cross-border e-commerce often involves transactions between multiple currencies, which carries a certain risk of exchange rate fluctuations. Shopping using cryptocurrency as a unit can reduce this risk, as cryptocurrencies do not involve the exchange losses associated with converting between different currencies.

5. Reduce transaction costs

Traditional cross-border payments are often accompanied by high transaction fees and the involvement of multiple institutions. In contrast, cryptocurrency transaction fees are usually cheaper, as they eliminate the intermediary roles of banks or other financial institutions. If it is an on-chain payment, only a network fee is required, which is typically lower. If the transaction is obtained through a payment service provider ( like Coinbase or BitPay), there will be a fee. Compared to the layered markup of traditional payment institutions, this means that for cross-border e-commerce with high transaction volumes, it can effectively reduce fees. For example, cross-border payments made using traditional methods may incur fees of 3-5%, while with cryptocurrency payments, this percentage can drop below 1%. Due to the high transaction fees on the Ethereum mainnet, it has also spurred more public chains to achieve cheaper network costs through technological innovation.

6. Strengthen payment security

The decentralized and distributed ledger characteristics of blockchain technology make every transaction public and transparent, and once recorded, it cannot be changed. This reduces the possibility of fraud and hacking. Due to the transparency of blockchain, the trust level of merchants and consumers in transactions increases. Consumers know that their payment information is secure, while merchants reduce the likelihood of fraud and chargebacks.

7. Connecting Global Markets

Using cryptocurrency for payments is not restricted by international banking systems, allowing transactions to be completed quickly; at the same time, cryptocurrency transactions (7*24) are not affected by holidays and working hours. Consumers in many countries and regions may not be able to use traditional payment methods from cross-border e-commerce platforms, but they can use cryptocurrency as a substitute.

8. Tax incentives

Both enterprises and individual investors in the cryptocurrency industry are attracted by tax incentives. For example, Portugal does not tax individual cryptocurrency gains; Singapore does not impose capital gains tax on cryptocurrencies; Bermuda, with its secure and transparent regulatory environment and the Digital Assets Business Act, has attracted token issuance companies, cryptocurrency custody service providers, and blockchain R&D companies, becoming an important hub for digital assets and innovative technologies.

Since 2019, the Bermuda government has announced that it can accept tax payments, utility bills, and other administrative service fees in the form of USDC. In addition, based on decentralized network systems, Web3 transactions will bypass many centralized institutions and banks, avoiding conventional tax processes. Therefore, some internal bonuses within digital asset companies will also be distributed in the form of stablecoins.

9. Demand for hard currency in high inflation areas

For decades, Argentina has faced economic difficulties, with extreme currency devaluation periodically damaging residents' savings capacity and making everyday financial activities difficult. As a result, Argentina is also one of the most active places for cryptocurrency in Latin America. In 2023, Argentina's inflation rate reached 211.4%. According to Chainalysis data, about 10.9% of Argentina's population, approximately 5 million out of a total population of 45.8 million, use cryptocurrency for everyday payments.

To prevent the depreciation of the peso, Argentinians will immediately exchange their salary denominated in pesos for USDT or USDC, and almost everyone knows the exchange rate between the dollar and the peso. Similarly, Turkey is also one of the places where cryptocurrency is developing rapidly. Therefore, where there is a demand for depreciation, cryptocurrencies are likely to become "hard currency" in places where legal regulations permit, making it easier to engage in cryptocurrency-related payment business.

10. Political and Social Impact

For the United States, cryptocurrency is a powerful tool for election campaigning. Trump has publicly promoted a friendly attitude towards cryptocurrency in this U.S. election and criticized the Biden administration's hostile stance on it. Trump encouraged his supporters to make cryptocurrency donations through Coinbase Commerce, and a series of meme coins related to the Trump concept became incredibly popular. Before the election debate at the end of June, there were also significant movements in related meme coins.

For Venezuela, cryptocurrency is a weapon against dictatorship. During the COVID-19 pandemic in 2020, the interim government led by Guaidó decided to use cryptocurrency to pay the country's doctors and nurses.