APIs are what drive Fintech, not Blockchain

Of Stoyan Kenderov, COO, Plastiq

Blockchain has been all the rage for the last couple of years in the fintech world. Proponents tout its superiority for countless use cases – payments, lending, trade finance, foreign exchange settlement, shared 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 holds great promise, but it is largely inaccessible due to its nascent and complicated state today – and it may take a while, perhaps decades, for it to be ready for mainstream adoption.

We have made great strides in democratizing Fintech. Is this the time to switch to a new technology?

Undoubtedly, the lure 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 the technology adoption cycle. The mainstream institutions that currently serve as our digital store of value, such as the banks that hold our money, are in no rush to hand everything over overnight to a relatively new technology that may prove brittle or vulnerable to hacker exploitation. For example, it is known that quantum computers, which are in early stages of development, will be able to break the current encryption systems that blockhains use in linear time. That can immediately make blockchains unsuitable for applications that require universal trust. Although such development takes 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 its potential vulnerabilities. There is simply no substitute for time and experimentation when it comes to building blockchain applications that can meet the highest expectations we all have for financial institutions. Fraud is still widespread. Most notably, distributed blockchains will require some level of global regulation, and when the technology reaches that point, some of its features may be restricted to protect users.

At the same time, enormous progress has already been made since the revolution that started with PayPal. Payment apps today have replaced the lost art of writing a check, or printing an invoice and sending it. We all know how to request or send money and have our transactions settled instantly. Credit for this convenience goes not to blockchain, but instead to APIs, the 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 is APIs that have gotten the job done. It may not be glamorous, but the ever-growing network of extensible APIs that different actors make available and use sustains the current ecosystem and its increasing openness to third-party providers.

I often get asked the question: isn’t blockchain going to wipe out banks? Maybe so, but not soon. Blockchains will not become the common plumbing of financial services until they have been adequately regulated. No government would consider completely delegating the responsibility of determining the identity of participants to a potentially rogue player. Moreover, there is no way around the necessary experimentation, validation and development of infrastructure, all of which take years. Look at how long it took fintech 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 payment settlement, and may allow other banks to access it. But these are strictly controlled applications of the blockchain technology with selected trusted parties under strict contracts.

APIs: the glue that binds Fintech

APIs, largely unknown yet widely adopted, underpin the global system today. They act as both conduits and translators between third-party providers and financial institutions. Lift the hood of financial activity to see what’s there and you’ll find a myriad of APIs in use. Like the connective tissue that allows one fintech player (like your bank) to talk to another (like Plaid), APIs underpin the fintech ecosystem we’ve come to trust.

When someone talks about Stripe, PayPal, Venmo, Plastiq, Square and Plaid, they are by definition also talking about APIs. APIs bring security, reliability, speed and increasing transparency to today’s financial ecosystem.

Payments. APIs act as intermediaries between banks, credit unions and brokers that hold consumers’ private financial data (and their assets) and entities that want to access that information, such as PayPal and TurboTax. The entire services are built around APIs. For example, Plastiq allows users to easily make payments in forms and currencies that their provider does not accept, such as credit cards. Businesses benefit from Plastiq opening all doors for money to move around, and that alone significantly improves cash flow. Western Union is somehow a fast cross-currency programming interface available both online and through thousands of retail locations.

Lending. APIs allow players to verify borrowers’ identities, assets, income and employment, and their bank accounts. For thousands of years, lending operated on the principle of “I know you, we live in the same neighborhood, and I trust you enough to lend you money.” Today, lending may be impersonal, but the likelihood of a borrower repaying the loans is determined by behavioral data. APIs make the borrower’s financial footprint visible to lenders; Credit verifications are almost instant.

Again, Plastiq enables payment (of bills) in any form convenient, making it easier for payers to avoid late fees or extend payment terms without talking to the supplier, and for suppliers to collect their receivables faster and keep their portfolios out of maturity. status.

Trade and supply chain. Previously, to complete a material purchase, a manufacturer might have to ask their bank for a letter of credit. Tap into API-enabled TPPs and platforms like TradeShift, already used by millions of businesses. TradeShift offers e-invoicing and payment flow, enabling faster 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 catastrophic crashes, but it also keeps getting better. Bottom line: it’s a huge potential boon to humanity while also posing a yet-to-be-solved puzzle for regulators.

In comparison, APIs are well-known technologies that have already scaled worldwide. They drive the trusted foundation that our current financial ecosystem needs today and enable open banking to evolve very quickly. They are and will continue to be the preferred contacts and gatekeepers for years to come, because the maturation and regulation of blockchain will not happen suddenly. APIs are integrated into innovative, valuable third-party services that consumers and businesses need today. The best course for financial organizations is to continue to innovate on this solid foundation while experimenting with blockchains.