As crypto becomes more and more real as a form of money, people are beginning to analyze, more extensively, how its adoption would impact businesses and consumers.
There is a general or say “common” consensus that the use of cryptocurrencies in payments would lead to cost savings. One thing about this sentiment is that it also insinuates that profit margins for businesses will increase as a result.
The understanding here is that if a cost is saved, that should = higher profits.
But is this true? That is what I'll briefly explore in this article.
I imagine that I've probably talked about this in the past as I know for certainty that I've discussed, to great length, how blockchain opens up businesses to new markets through the reduction of frictions associated with traditional payment systems and essentially leads to increased profits.
Yesterday, I came across a post on X that, for a swift second, challenged my stance on businesses benefiting from embracing cryptocurrencies until I spotted a flaw in what was being communicated.
This post in mention quoted another post talking about Walmart’s profitability potentially increasing by 60% following an adoption of stablecoin payments.
The quote post disagrees with this, citing that profitability will be, in his words “competed away.”
This is a classic example of VCs not understanding industry structure or how business actually works.
Walmart operates in highly competitive markets. A new technology that improves its cost structure increases margins only to the extent that it is available exclusively to the company. Otherwise, it just gets competed away.
In other words, Walmart only benefits from stablecoins if Target, Kroger, and Amazon don’t have access to them. But that type of exclusivity doesn’t work for stablecoins (or fintech in general), since consumer adoption depends on widespread merchant adoption.
The stablecoin network will capture a small amount of the margin. The rest will go to consumers. But none of it will flow to Walmart’s earnings. - Source Post on X
It is actually quite a flawed assessment but so perfectly delivered that you might actually think it's accurate. I mean, I did for a moment there.
First off, exclusivity means nothing here. We are not discussing revenue increase, this is about profit margins.
You think about all the companies he's mentioned, and every other one out there in the same category as Walmart and one thing is true for all of them and that's the fact that they all probably use similar payment solutions right now.
As such, they all spend relative amounts in cost when it comes to payment processor fees to their revenue and none of that has anything to do with what their competitors are doing.
If I make x revenue and pay x amount in fees to my payment processors, how does my competitors get to be blamed for that?
If they aren't to be blamed here, they certainly cannot compete away my net income when the cost goes away because I've already realized x amount of revenue and the absence of the cost = increased profitability for me. Every one of these companies will make more money — in profits — when they adopt crypto payments.
Cost savings are directly proportional to profits because profits = revenue - costs, so if costs lowers but revenue stays the same, then profit increases. Yet, there's also the fun fact that even if revenue reduces, so long as cost is reduced, the net profit margin will still be up.
The argument on profits being competed away is totally flawed because it ignores that the profit margin increase being discussed is “net profit margin” which is simply based off “current revenue - cost”, and not a speculation of higher revenue due to adopting crypto payments.
His mind appears to be set on higher revenue when the argument is actually for “higher profits” — two completely different things.
What can be competed away is higher revenue because that comes down to what future incentives these business deliver to the markets.
When cost of spending reduces and at the same time, ease is built into the process, consumers tend to spend even more.
This effects of transacting through cryptocurrencies opens up a new market opportunity that businesses globally will try to capitalize on. The success of each business will rely completely on what strategies they individually deploy.
In conclusion, consumers earn flexibility and low costs for spending and businesses achieve higher profit margins due to the elimination of intermediaries with high payment processing fees.
Adopting crypto payments isn't going to fix any company's revenue problems, it just improves its profits due to the elimination of traditional intermediary fees and eases up consumer patronage. It is also important to note that net profit margin is expressed in percentage so the revenue value in $ is not really what is being discussed(essentially not important), but simply what % of revenue is profits for the company.