Branded Stablecoins May Disrupt Co-Branded Credit Card Economics

According to a recent study, branded stablecoins could potentially replace co-branded credit cards. It appears that both retail platforms and businesses are interested in new relationship management approaches. This cannot go unnoticed by lenders since co-branded cards have been contributing to growth and branding for a very long time.

Stablecoin settlement is instant and less expensive. It also puts pressure on lenders because it creates challenges for interchange income, rewards pricing, and competitiveness for digital wallets. These are already difficult for issuers.

Prime issuers rely on stable transaction flows. They want predictable spending patterns. Branded tokens may pull transactions off traditional rails, and lenders could see slower portfolio growth.

There may be fewer behavioral signals that help modeling share of wallet, attrition, and spending patterns. Issuers could lose their footing if branded tokens become common inside digital wallets.

Branded stablecoins have gained attention. They let retailers and digital platforms operate as their own payment ecosystems. They would no longer have to rely on traditional bank partnerships. In addition, they could bypass the interchange structure which determines so much of today’s card economics.

The introduction of stablecoins could help solve current retailer challenges regarding transactions and settlements.

These tokens settle quickly which gives merchants faster access to funds and reduces the delays that come with card rails. Lower processing costs sweeten the deal — they create room for retailers to build new rewards without sharing margins with issuers.

Stablecoins also have direct lines to customers. They help retailers control transactions as well as loyalty programs.

In addition, they can create new incentives and gather more payment data. This control may reduce the role of traditional credit cards. The cards help determine how major retailers manage customer engagement. That’s why more merchants may reconsider co-branded cards.

This model puts pressure on lenders in several ways. Rewards become harder to fund when interchange margins fall. Issuers rely on the spread between rewards and earned revenue. Portfolios may slow down if branded tokens reduce card spending.

Co-brand deals will likely see stricter terms. There may also be more competition in digital wallets. Spending in closed systems could increase.

Inevitably, lenders will have to confront several important options:

• supporting stablecoin payments
• working with brands to develop tokenized products
• enhancing their current card services.

Lenders will also review how they manage risk when transactions fall outside traditional rails. Underwriting models may need new variables. Scorecards may need updates if card activity declines. Lenders may want new signals should they see less data through card systems.

Regulators will also take an interest. Tokenized payments raise questions about consumer protection and custody. Lenders may need new validation steps prior to linking stablecoin wallets.

They may also need updated monitoring rules for token-based transactions.

Branded stablecoins could revolutionize the way merchants and issuers compete. They could decrease the number of transactions that go through traditional cards. Indeed, they may move them into closed loop systems.