Could Stablecoins Threaten Visa and Mastercard?

Visa (NYSE: V) and Mastercard (NYSE: MA), the world's two largest card payment companies, have both delivered multibagger gains since their IPOs. Visa, which went public at a split-adjusted price of $11 in 2008, trades at nearly $370 per share. Mastercard, which went public at a split-adjusted price of $3.90 in 2006, has surged to more than $560 per share.

Visa and Mastercard don't issue any cards of their own. Instead, they partner with financial institutions to issue co-branded cards that are tethered to their card-processing networks. Those partners handle the accounts and take on the debt, while Visa and Mastercard charge a "swipe fee" (usually 1%-3%) for every transaction processed on their networks. Most of those fees are paid back to the card-issuing banks, while Visa and Mastercard keep a single-digit cut.

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That asset-light business model is well-insulated from credit crunches and recessions. Visa and Mastercard's near-duopoly in the card processing market also drives most merchants to accept their branded cards, even if they don't like to pay those swipe fees.

That stable growth and wide moat made Visa and Mastercard incredible long-term investments. From fiscal 2015 to fiscal 2025 (which ended last September), Visa's EPS (adjusted for stock splits) grew at a 15% CAGR. Mastercard's EPS rose at a 16% CAGR from 2015 to 2025. However, could the rise of stablecoins threaten their evergreen business models?

Why could stablecoins threaten Visa and Mastercard?

Stablecoins are cryptocurrencies pegged to a major fiat currency, such as the U.S. dollar or the euro, that can be bought, held, and spent without a bank account. Their issuers usually back those coins with reserves held in cash, Treasuries, and short-term investments.

Since stablecoins are traded on public blockchains rather than a traditional card payment network, their transactions can be settled nearly instantly at much lower fees. They can also be settled 24/7, 365 days a year, and deposited into third-party lending markets, automated market makers, and liquidity pools to earn higher yields than conventional savings accounts.

In theory, merchants can bypass Visa and Mastercard's "tollbooths" with cheaper, faster, and more flexible stablecoin payments. Stablecoin payments are also immediate and irreversible, eliminating the possibility of fraudulent chargebacks.

To counter this growing threat, Visa and Mastercard are integrating stablecoins directly into their payment processing networks to accelerate card-based transactions. By proactively adopting stablecoins to upgrade their backend software, which still mainly runs on legacy wire networks, Visa and Mastercard will prevent their platforms from becoming obsolete.

Why shouldn't Visa and Mastercard investors panic?

If Visa and Mastercard fully replace their legacy wire networks with stablecoin settlements, they would cannibalize their core profit engines. To offset that pressure (and the demands for lower swipe fees from regulators and merchants), both companies have been diversifying their businesses with more fraud-prevention, anti-money-laundering, and cybersecurity tools.

By embracing stablecoins, Visa and Mastercard would expand their total addressable markets by unlocking new payment volumes from businesses that previously avoided credit cards. It would generate lower revenue from those stablecoin-driven customers, but that higher volume of lower-margin transactions could offset its decline in higher-margin swipe fees.

The shift from wire networks to blockchain-based payments will likely squeeze Visa and Mastercard's near-term margins, but sitting still as stablecoin issuers like Circle (NYSE: CRCL) transform the payments market would be far more dangerous. That's why they've both been working with Circle -- instead of competing against it -- as the market evolves.

Visa and Mastercard have both underperformed the S&P 500 (SNPINDEX: ^GSPC) this year, as investors fretted over inflationary headwinds on consumer spending, regulatory demands to lower swipe fees, and future competition from stablecoin-driven platforms.

However, investors shouldn't consider stablecoins to be an existential threat to Visa and Mastercard just yet. Instead, they should see whether their stablecoin strategies attract new customers and widen their moats against newer, faster-growing fintech companies.

Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Mastercard and Visa. The Motley Fool has a disclosure policy.