Last week, following the GENIUS Act regulating stablecoins, major retailers like Amazon and Walmart announced plans to explore issuing their own digital currencies. This challenges the dominance and profitability of Visa and Mastercard; shares in both sold off sharply. While this risk is real, we contend their long-standing duopoly might prove surprisingly resilient.

A Visa or Mastercard payment might seem simple and instantaneous, but behind the scenes there's a complex process involving multiple parties and the transaction can take days to fully settle. When you tap or click to pay, four key players are involved: the merchant, the acquirer (also known as the merchant bank), the card network (Visa or Mastercard), and your issuing bank.

Regarding fees, if you buy an item for $100, you pay $100, but the merchant typically receives around $97.70. Of the approximate $2.30 in fees, the largest portion - about $1.80 - is the interchange fee paid to your bank. Another $0.40 goes to the payment processor, while the remaining $0.10 is received by Visa or Mastercard.

The amount Visa and Mastercard keep per transaction may look small, but their business is incredibly profitable. This is because they provide the technology and network that makes the transactions possible, but they don't lend money or handle merchants’ accounts. This means they carry no direct credit exposure or default risk; they're not on the hook if a customer can't pay their bill. Take Mastercard, for example: it consistently reports a strong organic revenue growth and operating margin of c.50%.

 So, payment networks like Visa and Mastercard have been long-term "compounding machines" – businesses that continually reinvest their earnings to generate even more growth. But their outsized profits attract fintech disruptors (companies that try to find new ways to disintermediate payment networks and capture some of those profits) as well as regulatory scrutiny (the US Department of Justice's recent lawsuit concerning debit card market dominance). 

Mastercard and Visa’s business relies on merchant fees. So, investors are concerned that stablecoins could challenge the networks’ long-standing dominance by offering a faster and cheaper alternative.

Major retailers like Walmart, Amazon, Expedia, as well as some major airlines, have all said they are exploring their own US dollar-backed stablecoins to reduce interchange fees. If successful, stablecoins could enable direct-to-consumer payments, cutting out card networks altogether.

The idea that merchants could bypass traditional payment networks by issuing their own stablecoins – or accepting direct wallet payments – is appealing in theory but may prove difficult in practice. Disrupting these established systems requires more than just efficient technology – entrenched consumer habits, loyalty to rewards programs, and regulatory constraints remain significant barriers. As a result, many analysts argue that concerns over stablecoins as a competitive threat to Visa and Mastercard are overstated.

Widespread consumer adoption would demand a fundamental shift in payment behavior – something that has historically been slow and costly to achieve. Consumers are accustomed to the convenience, familiarity, and benefits of card payments, and have little incentive to change. While stablecoins may offer advantages to merchants – lower fees – and financial intermediaries – faster settlement and improved efficiencies – they offer few compelling benefits to the average consumer.

While stablecoins are a relatively new area of concern for card networks, investors should remain attentive to several other important factors.

Visa and Mastercard have long been investor favorites, thanks to their track records as reliable compounders. Until recently, they have faced few serious threats - whether from disruptive technologies or regulatory action. That may be changing as the threat of stablecoins introduces a new source of risk.

The worst-case scenario, i.e. wide adoption by consumers and elimination of traditional card networks – is probably unlikely. But large merchants such as Amazon or Walmart may leverage stablecoins to negotiate lower fees. While less disruptive, this would still compress margins.