With the advent of technology and changes in consumer behavior, the banking and finance industry is undergoing a radical transformation. Three significant ‘banking’ has significantly disrupted the traditional banking and financial industry: Banking-as-a-Service (BaaS), embedded Finance, and Open Banking.
They [BaaS, Embedded Finance, and Open Banking] are interrelated concepts reshaping how banks, financial institutions, non-banks and non-financial institutions, FinTechs, businesses, and consumers interact and interconnect with financial data, products, and services. Because of their interconnectedness, business leaders and partners must know their distinct features to incorporate them into their strategic roadmaps.
What is Banking-as-a-Service (BaaS)?
Banking-as-a-Service (BaaS) is a model that allows non-bank and non-financial companies to offer banking services to their customers by partnering with a licensed bank or financial institution. The bank or financial institution provides the [financial] infrastructure, regulatory compliance, and expertise required to offer banking and financial services and products and handles the customer experience, branding, and distribution.
BaaS enables companies to offer banking and financial products and services without going through the Byzantine operational and regulatory complexities of obtaining a banking license. BaaS provides various products and services, including account management, lending, and payments.
What is Embedded Finance?
Embedded Finance is a model that integrates banking and financial products and services, meaning that banking and financial products and services are proffered as an everyday experience rather than as a separate entity.
For example, a retailer could offer a buy-now-pay-later (BNPL) option at the checkout. Alternatively, a ride-hailing company could provide insurance as a part of its service. Embedded Finance enables companies to create a seamless customer experience while increasing revenue streams by offering financial products and services.
What is Open Banking?
Open Banking is a model that enables customers to share their financial data with third-party providers through application programming interfaces (APIs). This data-sharing information allows third-party providers to offer services that use a customer’s financial data, such as budgeting tools or lending services.
The design and intention of Open Banking are to promote competition and innovation by enabling customers to choose from a range of banking and financial products and services from different providers. Regulators often mandate Open Banking and require banks and financial institutions to provide access to customer data through secure APIs.
The Differences Between BaaS, Embedded Finance, and Open Banking.
While BaaS, Embedded Finance, and Open Banking all involve the integration of banking and financial products and services into non-banking and non-financial products and services, there are several key differences between the models.
BaaS involves a partnership between a licensed bank and a non-financial company, with the bank providing the infrastructure and regulatory compliance required to offer banking and financial services.
In contrast, Embedded Finance involves the integration of banking and financial products and services into non-banking and non-financial products and services, with the non-banking and non-financial company handling the customer experience and distribution.
Open Banking is focused on data sharing and enabling third-party providers to offer products and services that use a customer’s banking and financial information. Regulators often mandate this data sharing and require banks to provide access to customer data through secure APIs.
In Conclusion … with Youtap.
BaaS, Embedded Finance, and Open Banking are all disrupting the traditional banking model and offering new and innovative opportunities for advancement, competition, and origination in banking and financial services.
BaaS allows non-bank and non-financial companies to provide banking and financial services without the operational and regulatory complexities intertwined with the difficulties of obtaining a banking license.
Embedded Finance enables companies to offer banking and financial products and services as part of a seamless customer experience.
Open Banking allows customers to share their financial data with third-party providers, promoting competition and innovation.
Understanding the differences between these models is crucial and integral for companies looking to enter the banking or financial services space and for consumers looking for new, creative, and innovative banking and financial products and services.
As an established FinTech, Youtap has created an interconnected active archive, a sandbox of tools, where third-party providers can use BaaS, Embedded Finance, and Open Banking partners. Youtaps sandbox allows BaaS, Embedded Finance, and Open Banking to integrate into their platform. Youtap continues to add tools to its sandbox that initiate competition and innovation. In doing this, they continue to advance and develop software, producing a seamless integration of BaaS, Embedded Finance, and Open Banking. This enables their differences to be coordinated and integrated into the FinTech ecosystem efficiently and effectively.
The interconnectedness of BaaS, Embedded Finance, and Open Banking will only continue. The connectedness to FinTechs will continue to advance and develop software that integrates each traditional banking and financial institution model into their respective sandboxes, sustaining and maintaining the connections while progressing in the maturation of the 4th Industrial Revolution.