I’m on a flight or else I’d respond more thoroughly, and I have a lot of respect for Omid and have guest lectured in his class a number of times. But this is a pretty simplistic response to what is also meant to be a simplistic article for those just exploring the space. It’s certainly not inaccurate or misleading for the customers looking at using solutions like Rain. I expect if Omid could he’d take those words back because that’s clearly untrue and just weakens his other points. On interchange, it’s absolutely true that the existence of interchange increases credit capacity and the addressable customer base, expands geographies and affinity groups, and user perks. It is a shuffling of economic surplus from merchants to users and issuers. Stablecoin cards go even a step further, putting more economic surplus in the hands of users and companies and less to the issuers while still creating the other benefits. The existence of cards in markets with lower interchange isn’t a counter point, in fact when you look at credit capacity and user perks in Europe you see it’s proving the point. On the point about a cost of funding problem, Omid states this is untrue because…. Large global banks don’t have this problem. Again, that’s exactly the point. We are creating a market where cost of capital is reduced for everyone - not just global GSIBs but program managers and fintechs who want to expand globally and do see more cheaply and with better economics. The fact that JPM can settle through an RTP more often than other issuers and program managers is why we need these cards. Because we need competition, modular tech stacks, and global usage of stablecoins. For almost all of the market participants this is undoubtedly a capital uplift - and we are opening up markets and business models for global tech and fintech companies that was not economical or available otherwise. Lastly, the idle balance problem he talks about is true, but actually helps the consumer because the idle balance goes from funding JPM prime to returning capital to consumers holding balances. And his third point about FX fees is sometimes true and sometimes not, but programmable money also means that we can now do smart settlement across FX in lowest cost currency and compress those fees. That’s exactly what we’ve started to see in some cases. Innovation in this area is increasing quickly and stablecoin settlement is at the core of it, while people are expanding globally quicker than ever. You can ideologically want direct peer to peer settlement, but as this post shows you may miss the forest through the trees when we are talking about new financial rails that are clearly making great strides at improving user experiences, shifting economic surplus, and democratizing monopoly markets.
I hate to burst everyone's bubble, but this explainer of how credit cards work by Rain is inaccurate, almost misleading. For the record, I like that team and think stablecoin-backed cards are a great product, but if we are going to be disruptive as an industry we need to get key facts right. So let's get to it: First, the claim that without interchange "no business would take on the risk and costs associated with issuing your card" is absurd. Interchange is capped in many places to a fraction of the US (most notable the EU) and cards there work just fine. Nobody has exited the market. The credit/debit blend might be different, and there are less rewards, but cards persist. Similar story in the US with debit cards where the fee is capped by the Durbin amendment. If you don't believe me, as your favorite LLM how much profit the largest issuers take home from interchange. It's definitely not "recouping operating costs." Second, the claim that delays in settlement lead to a very high cost of capital ("idle capital") for issuers is mostly wrong. The largest issuers all have access to real-time payment systems like same-day ACH, RTP, and FedNow (hell they own the private-sector solutions like TCH that offer some of these). If they don't settle cards in real-time, it's because they choose to, not because they can't. First, delayed settlement = netting = lower cost of capital. The longer the delay, the more capital efficient the netting. Also, in the weekend example, there is almost no money actually sitting idle earning nothing waiting for Monday settlement. The largest issuers settle out of their Fed reserve balances which earn IORB (currently 3.6%). And the funds tied up in credit card settlement are relatively tiny compared to their massive balance sheets, which suffer from excess reserves. There probably is no other place they'd want to park this money anyway. Even if non-weekend settlement did impose some cost, it is small compared to what is recouped via interchange (for credit and Durbin-exempt debit) or the insane interest rate charged on revolving balances (on credit). Lastly, stablecoin-backed cards also have an idle balance problem. It's just transferred from an issuer (like JPM) to the user (like you). If you don't believe me, ask your favorite LLM to cross-reference the largest card issuers with a list of the banks most aggressively trying to kill stablecoins in DC. Why would the likes of JPM and BoA be so opposed to something that supposedly reduces their costs? Third, the cross-border example is both oversimplified and convoluted. As a general rule of thumb, cross-border card swipes are more profitable than domestic ones for issuers. They are exempt from domestic caps and also earn the F/X conversion fee (at least 1%, if not higher). This is one reason why so many American credit cards give such great travel perks. They want you to go to Europe and use your card there - they'll make more oney. Now, this doesn't apply in the example given (a Colombia-issued card being used for a Claud subscription) but I am confident LatAm card issuers make money off the F/X leg - it's not a burden. As a general rule of thumb, any argument or explainer that acts like credit card issuers or networks are doing us some kind of favor by existing should not be taken seriously. Issuing a card and running a card network are among the most profitable businesses out there. The gross-margins are fat, the sector is growing, and the network effects are strong. So why do I care enough to issue this correction? The fact that Rain—an otherwise succesful and even admirable company—would issue this tortured account of how cards work is a great teaching moment as to why cards and their related fees persist, despite being a regressive tax on small business. Rain's business model is primarily interchange. They can't exactly come out and say "stablecoins on public blockchains will kill swipe fees" because then they'd have to go find a new business model. Something similar has happened to every pre-crypto attempt to disrupt cards. Those in the position to change it all got coopted to benefit from it. My favorite example are the largest merchants (like Amazon) who used to be the largest victims of swipe fees, until they realized they can negotiate much lower fees for them, then issue a branded card that sticks it to smaller competitors. My own view is that stablecoins will ultimately disrupt this model and collapse swipe fees. First, because the card industry's margins (including Rain's) are their opportunity. Second, because unlike the credit card networks, public blockchains are censorship-resistant. They allow far more competition, particularly from startups. The process will take decades to play out, but ironically stablecoin-backed cards like the ones issued by Rain will help us get there. To break down network effects, you need to target one side of the market first. Get millions of people comfortable with paying with stablecoins (by way of a card), then go to the merchants and convince them to accept stables directly. I'm sure a savvy startup like Rain will be able to evolve. The big banks who are the biggest issuers will struggle.
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