By Stoyan Kenderov, COO, Plastiq
Blockchain has been all the rage the last couple of years in the world of fintech. Proponents tout its superiority for myriad use cases—payments, lending, trade finance, foreign exchange transaction settlement, fractional real estate investment and more.
But should one go all in on blockchain-based financial services as the new highway for financial activity? The simple answer: No.
Blockchain bears great promise, but it’s largely inaccessible due to its nascent and complicated state today—and it could be quite a while, maybe decades, before it’s ready for mainstream adoption.
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Undoubtedly, the allure of an immutable, tamper-proof, universally verifiable, worldwide ledger is exciting. So why isn’t blockchain already powering mainstream financial services? The fact is, it’s still very early in its technology adoption cycle. The mainstream institutions that currently act as our digital store of value, such as the banks that hold our money, are in no rush to entrust it all overnight to a relatively recent technology that may prove brittle or prone to hacker exploits. It is known for example that quantum computers, which are in early stages of development, will be able to break the current encryption schemes that blockhains use in linear time. That could instantly render blockchains unfit for applications that require universal trust. Even if such developments take decades, the mainstream financial ecosystem has centuries of trust to protect and preserve. It simply takes time to bring maturity to a new technology and understand all of its potential vulnerabilities. There is simply no substitute for time and experimentation when it comes to building blockchain applications that can meet the highest of expectations we all have of financial institutions. Fraud is still rampant. Most notably, distributed blockchains will require some degree of global regulation and when the technology reaches that point, some of its capabilities may be restricted in order to protect users.
At the same time, enormous progress has taken place already since the revolution that began with PayPal. Payment apps today have replaced the lost art of writing a check, or printing an invoice and mailing it. We all know how to request or send money and have our transactions settle instantly. The thanks for that convenience goes not to blockchain, but instead to APIs, those ubiquitous software interfaces that allow access between systems while facilitating open banking and valuable third-party services.
In every aspect of financial activity where blockchain has promised to deliver decentralized finance (DeFi), it’s APIs that have gotten the job done. It may not be glamorous, but the ever-growing mesh of extensible APIs that different players make available and use sustains the current ecosystem and its increasing openness to third-party providers.
I often get the question: isn’t blockchain going to sweep away banks? Perhaps so, but not any time soon. Blockchains won’t become the mainstream plumbing of financial services until they have been adequately regulated. No government contemplates completely delegating the responsibility of adequately ascertaining participants’ identities to a potentially rogue player. Moreover, there’s no way around essential experimentation, validation, and infrastructure buildout, all of which takes years. Look how long it took financial technology in general to get to where it is today.
To be clear, there has been some progress on the blockchain front. In 2018, Santander became the first major bank to announce a blockchain-based money transfer system. In 2021, Wells Fargo and HSBC announced a bilateral “private” blockchain for payments settlement, and may admit other banks onto it. But these are tightly controlled applications of the blockchain technology with select trusted parties under strict contracts.
APIs: The Glue that Binds Fintech
APIs, largely uncelebrated yet widely adopted, underpin the global system today. They act as both conduits and translators between third-party providers and financial institutions. Lift up the hood of financial activity to see what’s there and you find a myriad of APIs in use. As the connective tissue that allows one fintech player (like your bank) to talk to another (such as Plaid), APIs underpin the fintech ecosystem we’ve come to rely on.
When anyone speaks about Stripe, PayPal, Venmo, Plastiq, Square, and Plaid, by definition they’re also talking about APIs. APIs bring safety, reliability, speed and increasing openness to the financial ecosystem today.
Payments. APIs act as intermediaries between banks, credit unions, and brokerages that hold consumer’s private financial data (and their assets) and entities that want to access that information, like PayPal and TurboTax. Entire services are built around APIs. For example, Plastiq allows users to make payments easily in forms and currencies that their supplier doesn’t accept, such as credit cards. Businesses benefit because Plastiq opens all doors to money moving around, and that alone improves cash flow significantly. Western Union, in some sense, is a fast cross-currency API accessed both online and through many thousands of retail locations.
Lending. APIs let players verify borrower identities, assets, income and employment, and their banking accounts. For thousands of years, lending ran on the principle of “I know you, we live in the same neighborhood, and I trust you enough to lend you money.” Today lending can be impersonal, but the likelihood that a borrower will pay back the loans is determined by behavioral data. APIs make the borrower’s financial footprints visible to lenders; credit verifications are nearly instantaneous.
Again, Plastiq enables payment (of bills) in whatever form is convenient, making it easier for payers to avoid late fees or extend payment terms without ever talking to the supplier, and for vendors to collect their receivables faster and keep their portfolios out of delinquent status.
Trading and supply chain. In the past, to execute a materials purchase, a manufacturer might need to ask its bank for a Letter of Credit. Enter API-enabled TPPs and platforms like TradeShift, used already by millions of businesses. TradeShift offers e-invoicing and payment flow, and speeds up transactions with fast credit approval and settlement. By having credit decisions, orders, invoices and payments take place within its platform, friction and delays are removed from supply chain activity.
The Future: More, Better, Faster APIs
Today, blockchain is like the promise of a self-driving electric vehicle; it’s experimental, exciting, promises to be better than anything you’ve seen before, and it’s capable of disastrous crashes but also constantly improving. Bottom line: it’s a huge potential boon to humanity while posing a yet to be solved puzzle for regulators.
APIs, by comparison, are well understood technology that has already scaled worldwide. They power the reliable foundation that our current financial ecosystem needs today, and enable open banking services to evolve very quickly. They are and will continue to be the connectors and gatekeepers of choice for years to come, because the maturation and regulation of blockchain won’t happen suddenly. APIs are integral to innovative, valuable third-party services that consumers and businesses need today. The best course for financial organizations is to continue innovating on this solid foundation while experimenting with blockchains.