The Largest Bank Margins Are Under Attack

Editor’s Note: Today, you’ll hear from Brownstone Research’s senior crypto analyst, Ben Lilly.

Longtime readers will remember Ben. We’ve featured him here at The Bleeding Edge for insight on topics like the Agentic Economy, Washington’s recent sentiment shift regarding cryptocurrencies, and why 2025 is gearing up to be a huge year for crypto.

He’s also part of the team that helped bring the Perceptron back to life. That’s the artificial intelligence powering our Neural Net Profits trading service that finds short-term trading opportunities based on real-time market activity in cryptocurrencies.

And with the current state of cryptocurrency in the wake of supporting executive orders, a radical shift in regulatory support (positive), and the flood of institutional support… it’s created a perfect environment for opportunistic trades.

These breakthroughs are fueling confidence and a vibrant market for digital assets, which is an ideal environment for the Perceptron.

You can go here to learn more about the Perceptron and how this major shift in crypto sentiment has it primed and ready for action.

And read on for more from Ben about how the Decentralized Finance sector is about to make a move to eat away at the margins of Wall Street…

“Crypto lacks a real-world use case.”

This comment is white noise to my ears. I’ve heard it so often that it gets tuned out automatically.

And to be honest, the criticism is fair.

Here’s what I mean…

Let’s take decentralized finance (DeFi) for example.

The DeFi sector exists on public blockchains where you can store smart contracts. The nature of the DeFi sector enables anybody to conduct finance without permission… And without a middleman.

That’s because smart contracts operate like mini-applications. When we interact with them, they are coded to execute specific tasks in a specific manner.

In the case of lending and borrowing, the contract takes in collateral (i.e. digital assets), creates terms for the loan such as rate and duration, and then monitors the loan in real time.

The lending contract unfolds without a loan application, credit check, or driver’s license to be scanned, bypassing many of the norms we’ve grown accustomed to in traditional finance. And the whole process is transparent and easily auditable by anyone.

It’s incredible when we step back and think of this.

But the hard-to-swallow truth here is that current DeFi tools require a higher degree of comfort that only comes once we obtain enough knowledge on how and why it works the way it does.

This means that even getting started requires what feels like a college education on public blockchains, smart contracts, and nuanced financial designs.

For instance, what is a digital wallet? How do we connect a digital wallet to a blockchain application? What are public/private keys and signatures? How do we know our funds will go to where we intend for them to go?

Or when it comes to the financial aspect… What are collateralization ratios? Collateralized debt positions? How can a stablecoin suddenly be minted and worth what it’s supposed to be worth? And that’s just scraping the surface. That’s just laying the groundwork for a comprehensive understanding of the decentralized finance sector.

It can be overwhelming. How can we expect someone with a family and a full-time job or somebody who isn’t technically savvy to even consider interacting with this new blockchain-based financial technology?

This is why there hasn’t yet been mass adoption of this new technology.

But here’s the thing…

These barriers are months, if not weeks, away from being torn down for good.

It’s not years into the future… It’s happening right now.

The Incumbents

Mastercard and Visa control 90% of all payment processing.

The cards are accepted in nearly every location where credit cards are accepted, creating one of the strongest network effects in the payment industry.

And this network effect is something the banks handling the cards’ credit tap into. And it’s a lucrative business.

Banks that offer credit cards generate revenue on interest, cardholder fees, and a portion of the “swipe fee.”

This is significant considering more than $5 trillion is processed each year in the United States alone. Globally, this figure swells to nearly $20 trillion when we layer in other types of cards as well.

This volume has led to major revenue streams. In fact, banks that issue credit cards with Visa and Mastercard have the highest profit margins of any industry in the United States.

Their margins in this line of business are higher than oil companies, pharmaceutical companies, and investment banks.

So if a competitor can eat into these margins, it’s an industry ripe for disruption. And to successfully do so would be a massive win.

The Crypto Card Evolution

The crypto industry has made various forays into offering cards.

A card solution would ideally work more or less in the same way your credit and debit cards do, only they would allow you to transact in cryptocurrencies.

The goal is to make crypto holdings spendable in everyday locations like gas stations, coffee shops, or restaurants. After all, sending a token like ETH to your local barista just doesn’t make a whole lot of sense.

However, existing solutions brought to market have more resembled a crypto-backed gift card rather than a credit or debit card…

A user sends their assets to a custodian like PayPal, Coinbase, Nexo, or Crypto.com. The assets are then converted into fiat at the time of deposit or at the time of payment.

This means a cardholder must “top off” their card when needed, creating a product that requires constant attention.

It’s not an ideal consumer experience.

The success has been underwhelming since the major entities issuing these cards tend not to report their user amounts or transaction figures. And as Nerd Wallet has commented, many cards disappeared from the market since 2022.

Of the six cards Nerd Wallet recommended in prior years, only two remain on the market… It’s a sign that this first iteration of cards lacks real-world utility. And it’s sort of easy to see why with the constant user management required.

But this experience is realizing a major upgrade.

We are just seeing solutions such as Gnosis Pay, MetaMask Card, and Ethereum’s Ether.Fi Cash coming to market.

These cards offer features that distinguish them from the previous crypto-backed gift cards.

To start, they are self-custody. This means you’re not sending assets to an exchange or custodian ahead of time before making a transaction.

Considering the bankruptcies of many major exchanges in 2022 and 2023 – FTX, BlockFi, Celsius, Voyager, etc. – this is a welcome upgrade.

Gnosis Pay, for instance, operates like a debit card attached to a checking account at the bank. The difference here is the card is attached to a blockchain-based wallet address.

Source: Gnosis Pay

This eliminates the need to top off a card and/or trust a custodian.

But what’s better is the card gives a user an International Bank Account Number (IBAN) number. It’s a numeric code that makes it so banks all over the world can identify the account tied to the IBAN. This will allow users to make rent or other bill payments using the card anywhere. It’s not limiting where they spend.

And the recipient has no idea that the payment is being sent using cryptocurrency or from a digital wallet. It’s a seamless integration with the legacy payment system.

Then there’s MetaMask – the company behind the most popular wallet in crypto with more than 100 million users worldwide and 30 million active per month.

Similar to Gnosis Pay, the card is linked directly to your blockchain wallet address. The main difference is the user can interact with DeFi protocols such as lending or swap solutions from the same wallet.

This is unheard of in the first iteration of crypto-based card solutions.

It might not seem like a big deal, but it gives a user greater freedom. More importantly, it enables platforms to offer experiences that more closely resemble what you would see from a bank.

This means users can earn a yield on their assets, track their spending, or take out a loan with a few clicks.

It’s putting bank tools literally at your fingertips, without a bank in the mix.

Then finally, there’s the latest iteration – Ether.Fi’s card solution. It is similar to Gnosis Pay and MetaMask Card but adds a credit line using blockchain-based technology.

This is massive.

Source: Ether.fi

With Ether.fi’s system, users can spend like they do a traditional credit card – by borrowing.

It’s a major step forward, and even better, it’s a solution that can pair up with Google Pay and Apple Pay.

More importantly, it’s using existing blockchain-based technology to facilitate the lending and even the interest rate. Meaning cardholders won’t need to have an in-depth understanding of the DeFi industry or blockchain technology to utilize it, much in the same way many people don’t know in great detail what’s happening behind the scenes when they tap their credit card to buy a coffee at their local shop.

This new ease of use will open up this technology to people who don’t necessarily want to have to learn an entire new financial infrastructure just to be able to get a loan without the hassle of going through the bank.

It’s abstracting away the blockchain while paving the way to disrupt legacy credit card solutions…

Eating The Margins

The latest iteration of crypto cards is just starting to leverage one of the most revolutionary aspects of public and permissionless blockchains…

No middlemen.

Removing middlemen taking fees, reducing staff, and reducing compliance costs… These are the immediate benefits.

Regulatory compliance, paperwork, and even losses on loans tend to be some of the largest costs incurred by issuers.

Many of these issues are minimized or even eliminated with smart contract solutions.

And with less overhead, it means blockchain-based credit cards can compete with incumbents in ways nobody else can.

The upcoming consumer-friendly, blockchain-based solutions represent an inflection point for retail. They strip away the complexities of transacting on a blockchain while simultaneously reducing costs.

And they even give the added bonus of new incentive structures. Solutions like Gnosis Pay and Ether.Fi offer rewards in their native asset. It’s cash back, but in a whole new asset, and an asset that has the potential to increase in value. This would be like Apple rewarding you with their stock for each purchase you make.

It’s a business model banks cannot compete in.

And this is just one small area and one example within DeFi where we see this sort of trend happening. We are starting to see prompt-based wallet tooling, AI agents reducing steps, and even infrastructure developments that all lessen the massive knowledge barrier that has existed up until now.

It’s a story we will touch on more as 2025 is a year where financial incumbents will have a target on their backs as this newest form of financial technology experiences increased adoption as normal consumers realize they, too, can just as easily use it.

Your Pulse on Crypto,

Ben Lilly