Why low margin retail is ideal for stablecoins

Why low margin retail is ideal for stablecoins

How do you feel about stablecoins as compared to major cryptocurrencies like Bitcoin and Litecoin? To some cryptocurrency purists, stablecoins are not true cryptos because they are backed by some other kind of asset. Yet at the same time, stablecoins are slowly proving they have a place at the table. They seem to be ideal for sectors like low-margin retail.

We already know that there is not just one, single cryptocurrency. There are literally thousands of them. Likewise, a pure crypto like Bitcoin does not represent the only means of utilizing digital currency. Stablecoins represent another option. Whether you are for or against them, one thing is for certain: stablecoins are gradually making their way into the mainstream even as crypto experts continue to debate next week's BTC price.

A case in point is a South Korean convenience store chain that just announced it will be accepting cryptocurrency via a stablecoin backed by South Korea's fiat. The story may not make the headlines anywhere else, but it is extremely important in South Korea. It sets the stage for how that country will approach cryptocurrencies moving forward.

All set for the Terra

South Korea's introduction into stablecoin commerce comes on the back of a project known as Terra. This project, launched in 2018, is a joint venture between a number of well-known cryptocurrency exchanges including Binance and OKEx. The exchanges have pooled their resources to attract investment from outsiders in order to launch their coin.

Surprisingly, they have managed to garner investment support from Polychain Capital, FBG Capital and Arrington XRP, just to name a few. All of this investment - to the tune of some $32 million - is going into a stablecoin its backers hope will eventually stand on its own.

If it is to succeed where no other stablecoin has managed to, Terra needs to be different. It is. Rather than just being a stablecoin alone, it is also a purpose designed payment platform - named Chai - specifically aimed at the retail sector. It is a payment platform that can be utilized for e-commerce payments completely separate from major credit card networks.

All indications suggest that South Korean businesses are all set for Terra. A number of strong e-commerce concerns have already signed on with the Chai platform, and now South Korea's largest convenience store chain is getting on board. CU just announced plans to integrate the Chai payment system. They will be accepting Terra at all their stores.

This is no small victory for either Chai or Terra. Indeed, it is a big deal when you consider how many other stablecoins have offered plenty of promise but very little by way of practical, day-to-day use. Every new retailer or e-commerce enterprise that signs on with Chai and Terra only makes it stronger.

Crypto without the instability

Thinking through the implications of Chai and Terra makes it clear that stablecoins and retail seem to have been made for one another. Even if Terra doesn't ever explode as a high value stablecoin, the concept behind it makes a lot of sense for the retail sector.

Retail is a business that seems to have no in between. Either your margins are extremely high or they are extremely low. It is the latter scenario that makes stablecoins and blockchain payments so attractive to merchants.

An organization like CU might be willing to give cryptocurrency payments a look due to their security and lower cost. Yet embracing Bitcoin and some of its stronger competitors may not be doable. Why? Retailers cannot afford to expose themselves to cryptocurrency's instability. They cannot afford for their bank accounts to be worth so much today and drastically less tomorrow.

As such, online and brick-and-mortar merchants willing to accept cryptocurrencies usually have done so only after entering agreements that have payment processors converting tokens into fiat on-the-fly. That way, the merchants do not end risking their own financial health due to cryptocurrency instability.

A stablecoin eases merchant concerns by taking instability out of the equation. By linking a stablecoin to some other asset, much of the volatility caused by the skittishness of crypto investors goes away. For all intents and purposes, stablecoins are to digital currencies what government bonds are to securities.

Less expensive payments

Less expensive payments make cryptocurrencies attractive to retailers for obvious reasons. When you run a retail enterprise and you accept major credit cards like Visa and MasterCard, you have to be prepared to pay significant fees to cover your transactions. Every retail purchase is charged a fee. But then merchants also pay their payment processors for service and, in most cases, rental charges on their credit card machines.

Merchants can pay the equivalent of anywhere between 5% and 10% per transaction just to accept credit and debit cards. They pay a lot less under the right kind of cryptocurrency arrangement. Of course, there are no fees whatsoever when merchants accept crypto payments directly - which is to say they do not go through any sort of payment processor first.

Fees tend to be lower even when payment processors are utilized. The main reason here is that only one intermediary is involved. The only fee being paid by the merchant is the transaction fee that goes to the payment processor. When you are working with credit and debit cards, there are multiple layers of fees because there are multiple organizations involved in completing a given transaction.

How money is made

CU stands to benefit financially from Terra by giving customers yet another option for paying for purchases. As long as fees remain reasonable, it is a win-win for both the 13,000-store chain and its loyal customers. But how does Chai actually make money? Why would so many investors be willing to put tens of millions of dollars into it?

Stablecoins like Terra do not have the advantage of a significant return on investment (ROI) brought on by increasing token value. By their nature, stablecoins do not increase in value all that quickly. An investor could never make a ton of money on Terra like he/she could on Bitcoin. So again, what is the incentive?

Investing in a platform like Chai is linked to long-term growth. In other words, investors are not putting their money into a stablecoin per se. They are investing in the payment platform in hopes that it will catch on throughout South Korea and beyond. Assuming it does, Chai would produce returns by growing revenues associated with electronic payments.

Every time a payment is processed on the Chai network it garners a fee. This is true whether the payment is made via Terra or some other token. Cumulatively, those fees constitute the revenue taken in by the network. That is where the profit lies.

In terms of Terra itself, South Korean consumers wishing to use it as a day-to-day payment system will have to buy their coins. The network will not be giving coins away for free. Selling coins infuses Chai with cash - valuable cash that can be put back into the platform in order to facilitate growth and expansion.

Why it's perfect for low margin businesses

With all of that behind us, we finally get to the point of understanding why stablecoins are perfect for low margin businesses. In a low margin business, like convenience store sales, is a business whose profit potential is limited on a per item basis. Fierce competition within guarantees that.

Imagine you run a convenience store selling everything from candy bars to light bulbs. You might prefer to have a margin of 40%, but you know that the other convenience stores in the area sell at prices so low that such a margin is impossible. You have to price your items accordingly if you hope to compete. The best you can hope for is a 10% margin.

Margin is a measurement of the total amount of revenue that constitutes profit. If you have an item that costs you $9 to sell (including buying the item, paying employees, and covering overhead) and you sell that item for $10, your margin is 10%.

The thing to remember about margins is that they determine whether or not doing business is worth it. A low margin means you are making a profit, but the amount of profit you're making might not be enough to warrant staying in business. This is why low margin businesses, like convenience stores, are so difficult to maintain.

A low margin business needs to find every means possible of increasing margins. Stablecoin payments represent one such means. They reduce the total cost of electronic payments. They give customers more choices, which theoretically should bring more customers in the door. And because a stablecoin's value is linked to some other asset, volatility is not an issue.

Time will tell how Chai and Terra manage in South Korea. So far, things look promising. But Chai investors are going to need a lot of merchants to get on board with their payment system for it to survive long-term. No stablecoin, or payment system backed by it, has done so thus far.

Byline: This article was published by Henry.
About: I'm a bitcoin advocate and admin of Coinbet.com.