As the world of finance evolves, new models and technologies are emerging to meet the changing needs of businesses and consumers. Two such models are Embedded Finance and Banking as a Service (BaaS). Both of these concepts offer new opportunities for financial institutions to better serve their customers and expand their offerings, but what exactly is the difference between the two?

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This blog post will explore the key differences between Embedded Finance and Banking as a Service, as well as their advantages, use cases, and potential future growth.

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Embedded Finance vs Banking As A Service

Embedded Finance is the integration of financial services into non-financial applications, platforms, or ecosystems. Imagine you're taking a ride-sharing service and you notice that you can now pay for your ride directly through the app. This is an example of Embedded Finance - financial services integrated into a non-financial product.

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This model allows businesses to provide financial services to their customers without having to become licensed financial institutions themselves. According to a report from financial firm, Bain, the transaction value of embedded finance will double to $7trn by 2026.

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Banking as a Service (BaaS), on the other hand, is a model in which a financial institution provides its infrastructure and banking services to non-bank entities, allowing entities like FinTech startups, digital banks and non-banks to offer these banking services to their customers.

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This model allows companies to offer banking services without having to build their own banking infrastructure or obtain a banking license. BaaS is also experiencing strong growth. According to Juniper Research, total BaaS platform revenue will exceed $38bn by 2027.

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If you've ever used a financial app that isn't from your bank, but it still connects to your bank account and allows you to manage your finances, that's possible because of Banking as a Service.

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Examples of Embedded Finance

Embedded Finance offers several advantages for both financial institutions and their customers. By integrating financial services into non-financial products, companies can offer a more seamless and convenient experience for their customers.  Additionally, embedded finance can help companies create new revenue streams and reach new customers by offering financial services that complement their existing products.

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Some examples of embedded finance in practice include:

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• Uber, which allows users to pay for their rides through the app using their credit card or PayPal account.
• Shopify, offers a range of financial services to its merchant customers, including loans and payment processing.
• Square, offers a range of financial services to small businesses, including point-of-sale hardware, payment processing, and loans.

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Advantages of Banking as a Service (BaaS)

Banking as a Service allows companies to offer banking services to their customers without having to build their own infrastructure or obtain regulatory licenses. Instead, they can simply partner with a bank or FinTech company that provides the necessary infrastructure and regulatory compliance.

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This allows companies to focus on their core business offerings while still providing a range of financial services to their customers.

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Some advantages of BaaS include:

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• Speed and efficiency: By partnering with a bank or fintech company, companies can quickly and easily offer financial services to their customers without having to build their own infrastructure.
• Cost savings: Building and maintaining a financial infrastructure can be expensive, especially for smaller companies. By using BaaS, companies can save on these costs and focus on their core business offerings.
• Flexibility: BaaS allows companies to offer a range of financial services to their customers without having to obtain regulatory licenses or build complex infrastructure.

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Examples of Banking as a Service

• Stripe, which offers a range of financial services to its customers, including payment processing and loans.
• Solarisbank, provides a banking infrastructure that can be used by other companies to offer financial services to their customers.
• BBVA Open Platform, which allows other companies to access its banking infrastructure and offer financial services to their customers.

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Differences between Embedded Finance and BaaS

The main difference between Embedded Finance and BaaS is in their focus. Embedded finance focuses on the customer experience and providing financial solutions in conjunction with buying other goods or services that are usually non-financial products. Whereas BaaS is primarily aimed at enabling FinTech startups, digital banks and other non-bank entities to offer banking services to their customers.

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Another key difference is in regulatory requirements. BaaS requires regulatory compliance and licensing for the organization providing the infrastructure and banking services. However, in the case of embedded finance, the non-financial entity may be subject to regulatory oversight depending on the nature of the financial services they offer.

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Which is Right for Your Business?

Ultimately, the choice between Embedded Finance and BaaS will depend on several factors including your business model, the nature of your customer relationships, and specific business needs and goals. Both models offer unique advantages and can help you provide valuable services to your customers.

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By understanding the differences between these models and evaluating your own business needs, you can make an informed decision that will help you achieve your strategic goals.

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Future of Embedded Finance and BaaS

In conclusion, Embedded Finance and Banking as a Service are both exciting concepts that have already shown significant potential for growth and development and offer new opportunities for financial institutions to better serve their customers and expand their offerings.

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While there are some key differences between the two, like ownership, regulatory requirements, scope of services, and target customers both have their own unique advantages and use cases. As the financial industry continues to evolve, and more companies look to offer financial services to their customers, we can expect to see an increase in the use of both embedded finance and BaaS and innovative use cases for both concepts.

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If you're interested in learning more about Embedded Finance or BaaS, visit our website or contact us here.

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