We take for granted that the global digital payment system has been built on top of credit companies Visa (V 0.96%), Mastercard (MA 0.98%), American Express (AXP 2.00%), and even Discover (DFS 4.62%). When we shop online, at the grocery store, or go to a restaurant, it's just taken for granted that they'll accept credit cards and even take a tap from a mobile phone.
However, when we swipe those cards, credit card transactions cost merchants nearly 3% just to be completed. And even then, it can take days for the money to be deposited into their bank accounts. This is a direct cost that comes out of their bottom line, and most merchants have little choice in the matter. In just the last month, there's been an advance on the Solana (SOL 2.66%) blockchain that could almost eliminate most of those credit card fees and replace them with blockchain transactions.
Solana Pay changes the game
Cryptocurrencies have long been discussed as a new way to make financial transactions, but most cryptocurrencies have high costs that make little sense for traditional transactions. Solana's blockchain is different because it enables transactions that can be completed in just a few seconds for a fraction of a penny. No more days of waiting -- merchants can be paid almost instantly.
On Feb. 1, 2022, Solana Pay was introduced to the public, and it could revolutionize financial transactions as we know them. Buyers and sellers can make transactions with a few clicks. They don't have to use a cryptocurrency like Solana but can instead use a stable coin like USDC, just like using dollars on a credit card transaction. In time, other tokens from the Solana ecosystem could likely be used as well.
For merchants, this could save 2% or more on transaction fees. A point of sale/infrastructure company like Toast or Square would likely charge fees for their services, but much of the money that goes to credit card companies and banks could be eliminated from the transaction.
Why credit cards are in trouble
This may seem like a far-off disruption, but it's not. Today, there are merchants in Silicon Valley who already accept Solana Pay. And millions of users already have Phantom wallets, a common crypto wallet that can hold Solana or USDC. All users need to do is scan a QR code, and the transaction is completed in seconds.
I think this is extremely disruptive because it happens behind the scenes for most users. I could see the Cash App or PayPal adding Solana Pay to their infrastructure, and the funds in someone's account could be turned into USDC and sent to a merchant on the Solana blockchain, entirely behind the scenes. A crypto wallet may not even be needed as the system improves.
Why I'm out of credit card stocks
I recently sold all of my credit card stocks because I think Solana Pay, and other cryptocurrency payment systems, will be so disruptive to the business. Remember that credit card companies have extremely high margins and profitability because they have pricing power. The market has grown as more people around the world have adopted credit cards.
An advance like Solana Pay could be a double threat, hurting growth and margins as credit cards try to compete.
Think about this from a merchant's perspective. Most merchants and restaurants are relatively low-margin businesses, and moving entirely to Solana Pay would increase their net margin by 2% to 3% in an instant. That's compelling for any business, and if net margins are low single digits to begin with, Solana Pay sounds like a no-brainer.