BaaS vs Embedded Finance: Understanding the Differences

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The terms Banking-as-a-Service (BaaS) and embedded banking are often used interchangeably, but while these concepts are related, they have key distinctions – here are three things you need to understand.

1. The Tech Stack vs. Integration of Financial Institutions

The fundamental difference between BaaS and embedded banking is: BaaS involves enabling financial institutions to offer the technological and regulatory foundation that underpins a financial service to a third-party, while embedded banking refers to the deep integration of banking services directly into the platforms or applications of brands. 

BaaS providers provision banking services to clients via API-based platforms. This technology allows BaaS adopters to access the bank’s infrastructure in order to offer financial products to their end customers without needing to build the technology in-house or become a regulated entity. This enables brands across different sectors to integrate financial services directly into their ecosystems. 

2. Comprehensive Banking Solutions vs. Contextual Banking

BaaS providers with the necessary banking licence can provision a wide array of financial products and services, including payments, accounts, lending solutions, and more.  Embedded banking, on the other hand, focuses on providing contextual banking services. By integrating banking products at the point in the customer journey where they are most relevant, users can seamlessly make transactions without leaving the application. Apps like Uber are a good example of embedded banking in action, as customers can pay for their ride from directly within the platform, without needing to redirect to a banking or payment provider.

As your business grows, so do your regulatory obligations. Without a BaaS partner well-versed in compliance matters, you may find yourself underserved in this crucial area. This deficiency can translate into operational bottlenecks and hinder your ability to meet evolving regulatory requirements efficiently.

3. Embedded financial infrastructure and regulation

Paypers recent Embedded Finance and Banking-as-a-Service report explains: 

Picture this – a licensed financial institution shares its banking infrastructure and services with other businesses. This means businesses can provide their customers with banking goodies like checking accounts, savings accounts, and loans. But wait, they’re still in charge of managing the financial side and following regulations.

Embedded finance 

Now, imagine a non-financial institution that seamlessly incorporates financial services into its own products. That means they can offer financial perks to their customers without becoming a licensed FI. The best part? Embedded Finance providers handle all the nitty-gritty financial stuff, so businesses can focus on what they do best.

BaaS acts as the connective tissue, allowing different players in the financial world to seamlessly interact and share services…and embedded banking brings financial services directly to the end-users, blending seamlessly into the apps and platforms they already use.

The type of banking licence offered by the BaaS provider has implications on the types of products they can offer and determines if the products are fully compliant. When choosing a BaaS provider, consider one that takes a comprehensive approach to regulatory compliance. Adopters should actively seek out financial service providers that have a strong emphasis on compliance expertise, and those that incorporate advanced technologies to ensure adherence to all necessary regulations. 

BaaS and Embedded Banking are interconnected

With BaaS serving as the underlying infrastructure that enables the dynamic and innovative offerings of embedded banking, ultimately, both BaaS and embedded banking are interconnected in their goal of modernising the way people access and consume financial services. 

By understanding the needs of their customers and partnering with BaaS providers that can offer full end-to-end service, any business can unlock the true potential of embedded banking. 

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