Fintech is in crisis. Paypal’s share price has fallen over 65% in the past year, and plunged over 25% earlier in February when the company released its weak revenue and profit forecasts for 2022. Block’s shares remain down by nearly 75% this year as investors cycle out of unprofitable fintech space. Layoffs, there has been a lot recently. Stripe is laying off roughly 14% of its staff, and Chime is cutting 12% of its workforce to reduce operational costs.
Among the factors driving the industry’s woes include growing dissatisfaction among merchants. Thousands of businesses have, at some point, experienced issues with fintech payment processors, particularly with fraudulent chargebacks and accounts frozen without explanation. According to the Federal Trade Commission, 16.6% of the fraud reports made involved a payment app or service like Paypal in 2020.
But, these problems are not unique to PayPal. In 2020, 1,392 complaints were made against Monzo for freezing accounts without warning. Revolut withheld tens of thousands of dollars without explanation. Resolver froze more than 1,000 accounts, often without warning in 2021.
To make matters worse, some fintech payment processors are facing a growing backlash from accusations of financial censorship. In September, Paypal and Venmo were accused of shutting down the accounts of an LGBT organization.
More recently, Paypal updated its terms of service agreement to authorize a $2,500 deduction from a user’s account for engaging in what the company considers ‘misinformation’. This received a massive backlash on Twitter, which Paypal claimed to be an error, but only to add it back into its terms of service after the furore died down.
These incidents highlight growing concerns over fintechs’ ability to arbitrarily deny users access to their money and may have further triggered a growing shift in attitudes towards the once-lauded services.
“Business incentives that may drive these institutions to shutter or limit accounts don’t align with the concerns of a society trying to promote diverse perspectives in an online world … We need a better alternative which protects our freedom of speech, and more importantly, our right to be in full control of our assets”, explained the Electronic Frontier Foundation (EFF) in a statement.
A New Breed of Payment Fintechs
Following the news of Paypal’s fines, Google searches for ‘delete Paypal’ and cancel Paypal’ surged by 1,392%, with thousands of users closing their Paypal accounts in protest.
As many businesses reconsider, or even close their accounts with legacy fintech apps like PayPal, many are turning instead to a new breed of payment fintech: crypto payment apps.
Unlike with fintech or neobanks, businesses can have full control over their own private keys and cryptocurrencies. “Your money goes through these institutions, thus they have a lot of power. However, in DeFi, a smart contract takes the position of the financial institution in the transaction, which means these systems are un-censorable, transparent, and safe,” said Sumit Ghosh, the CEO and Co-Founder at Chingari, a Blockchain social media platform.
But, apart from censorship resistance, crypto payments are growing in popularity for cross-border payments. Unlike traditional payment processors like PayPal or credit card companies, cryptocurrency offers a direct peer-to-peer (P2P) payment system without any intermediary to process transactions, making it cheaper and faster. This has made crypto payments increasingly attractive to businesses, especially those operating globally.
Crypto payments are growing much faster than web2-based digital payments did in their time, despite arriving about nine years later. PayPal was launched in 1999 as the first widely-adopted digital payments platform. By 2014, it reported a total payment volume (TPV) of $235 billion, including payments made via its subsidiaries, Venmo and Braintree.
In roughly the same length of time since Bitcoin was introduced to the world as a “peer-to-peer version of electronic cash” in 2008, transaction volumes for stablecoins alone have blown past PayPal’s numbers. In just the last 24 hours, over $67 billion in various stablecoins changed hands, according to CoinMarketCap data.
Stablecoins are a key driver of the growing adoption of crypto payments. Designed to be blockchain-based representations of fiat currencies, they promise all the benefits of cryptocurrencies, with none of the volatility that has traditionally hampered their use as an alternative to money.
As Melissa Quinn, the Chief Operating Officer at UMA protocol, explains, “We steer away from payment in ETH and BTC… because the volatility makes it hard … we offer to pay in USDC, because it stabilizes and levels the playing field for all our employees internationally”. According to the enterprise crypto payments app, Request Finance, USD-denominated stablecoins accounted for about 61% of the crypto payments on its app in October 2022.
Stablecoin payments not only offer simpler cross-border payments, but also a hedge against the devaluation of local currencies. USD-denominated stablecoins are especially popular in the current macroeconomic climate as local currencies weaken relative to the greenback.
Chainalysis recently revealed that stablecoin transaction volume on Russian services has increased from 42% in January to 67% in March to hedge against rising inflation rates. There is now over $100bn in combined market capitalization of dollar stablecoins in Sub-Saharan Africa to safeguard against the value of devaluing local money.
Stablecoins also give businesses and their employees access to decentralized finance, or DeFi platforms like AAVE, which delivers much higher returns on their stablecoin holdings as compared to traditional bank deposits. “The objective of DeFi is for you to have complete custody of your own assets, complete control of your own assets, and to get more return on your money. By taking out the middleman, you get cheaper loans, and better deposit and insurance rates,” said Rajagopal Menon, the Vice President at the crypto exchange, WazirX in an interview.
Compared to high-yield savings accounts at traditional banks delivering between 2.5% and 3% by end of 2022, returns on USD-denominated stablecoins yield between 4% and 20% on DeFi protocols.
As a new generation of blockchain-powered applications offer cheaper, faster, fairer payments and better interest rates, the previous generation of fintech apps may find themselves struggling to remain relevant.
