From bits to banks: Making the business case for crypto cards

From Crypto.com to Coinbase and now MetaMask, some of crypto’s most prominent players have issued crypto cards. But what explains this proliferation? 

The answer lies in crypto wallet software, or rather, its shortcomings. Whether it be apps or extensions, crypto wallets are difficult to monetize. Crypto assets are in the end user’s custody, so there can be no hidden fees. Software wallets are a dime-a-dozen—there is no product stickiness, and users can easily switch between different wallets.

In their current state, good and secure wallet apps are not sophisticated enough to justify a subscription for the end user.

Unpacking self-custody

There is an inherent image problem with self-custody in crypto. The concept of self-custody was sold with the dream that because the crypto is akin to cash, users can hold it without spending any money. They pay their banks to hold their money, but the users pay nothing when holding cash.

However, this view is wrong on multiple levels. First, self-custody is not like holding cash; it is more similar to holding gold in a vault. Users have to buy the vault and pay for its maintenance. Second, while holding crypto might be free, there is still management (of assets) overhead. With real gold, depending on its value, holders need a secure location, coupled with surveillance, insurance, and other security measures such as high-energy lasers. For crypto, the overhead costs are much lower, but users still need a good wallet at the very least.

On the psychological level, people are more willing to pay for physical goods. When a wallet is hardware, it is a tangible item with an obvious production value. However, once the user pays the initial purchase price, we are confronted with the same problem again: How to charge a recurring fee to the user? The answer lies in value-added services.

Value-added services as a revenue generator

These are the services that go above and beyond the core set of services provided by a company. For a wallet, these are things that users can do without leaving the wallet app, such as buying crypto, exchanging crypto for other crypto, bridging crypto assets from one blockchain to another, or staking crypto.

These are legitimate features. The alternative is a cumbersome user experience that exposes users to security holes that hackers can easily exploit. By using these value-added services or features, the end user gets a secure user experience that is easy to use and somewhat private.

But how do service providers put a price on this? Wallet providers typically generate revenue from slippage or FX fees or, in some cases, by farming MEV. This is a fair exchange as the wallet provider is doing the extra work: keeping users safe and giving them a simple way to quickly perform their desired operation.

However, charging fees for value-added services is insufficient to drive the growth that wallet providers require to make a return for their investors. The best way to grow this revenue-generating segment is to make it easy for people to get their hands on a product that is easy to use and can continually make money for the issuing company.

And this is where crypto cards come in handy.

Crypto cards as a revenue driver

Crypto cards allow users to spend their crypto assets in local stores, and they serve two functions: loading and spending crypto. Across these two functions, crypto cards generate revenue for the issuer. Even if the issuer foregoes this opportunity, they will still benefit from interchange fees.

The adoption of crypto cards is skyrocketing. Visa customers made $2.5 billion in payments with its crypto-linked cards in the first fiscal quarter of 2022.

This adoption is not because crypto cards are compliant with the core principles of crypto. Rather, this is because crypto cards are compliant with the core principles of a financial product—compliant with existing regulations, easy to understand, and most importantly, easy to use.

While there are many barriers to realizing the reality of transacting day-to-day with raw crypto, crypto cards are a decent step toward this vision. Spends do not execute transactions on the blockchain, and currency conversion does not happen on-chain either. 

However, crypto cards allow users to spend their crypto in the same way that they might spend their fiat currencies. They also follow all the right practices enforced by regulators to protect against money laundering and terrorist financing.

Crypto cards are not the perfect solution, but they are practical. And that is more than sufficient for all stakeholders involved at this stage.