Digitisation has influenced industries and consumer behaviour across the board; however, its impact on the financial services sector has been exceptional.
For example, Embedded finance and Banking as a Service (BaaS) are two digital trends contributing to technology-led transformation in the banking sector.
Often BaaS and embedded finance are mistaken to be the same as both present ways of integrating financial services into digital platforms, but subtle differences set them apart.
Therefore, financial service providers must understand the differences to decide which option is best for their business. Let’s explore this in this blog post.
What Is BaaS?
Banking as a Service is a blanket term that describes the technological foundation that enables banks and fintech firms to provide digital services via sites and apps.
The model allows virtual banks or non-banks to offer users access to standard banking products and services by linking to the bank system via APIs.
Utility of BaaS
- BaaS provides customers with tools and expertise that can help them simplify their operations and improve their products or services. Companies can offer financing through licensed access instead of setting up their banking operations or directing customers to a third-party financier.
- With BaaS technology, banks and fintech companies can create apps and websites that let consumers access banking options otherwise possible only through brick-and-mortar banking.
- Businesses can also use BaaS to provide lending services to consumers. An example of this model would be an airline offering a one-click financing option for a smooth digital experience for the user, ensuring no disruption of plans with the cost spread over time through the Buy Now Pay Later option.
What is Embedded Finance?
Embedded finance allows businesses to integrate financial services and products into existing platforms.
Companies can utilise the benefits of various financial products and services without a banking licence; it is the seamless integration of a third-party product or service into the receiving company’s offering. also, the receiving business has complete control over the offering and the customer experience.
To summarise, embedded finance simplifies customer experiences by removing extra steps to access products like loans, insurance, or investments.
Example of embedded finance
An example of the most familiar use of embedded finance in everyday life is paying for cab fares when one uses Uber or Ola. With the help of an app, a non-financial service provider connects with a financial institution, making the use of cash or a credit card unnecessary to make a payment.
Other embedded finance examples are various processes that manage money, like digital wallets, remittances, debit and credit cards and more.
Embedded Finance vs BaaS
Both embedded finance and BaaS are closely linked to the digital marketplace and streamline financial services for customers and companies. They empower almost any business across any industry to be a part of the fintech space.
Despite these similarities, they are not alike. Here are four differences that set apart BaaS and embedded finance:
1. BaaS is an Enabler for Embedded Finance
BaaS is a broader term that covers much more than embedded finance and is essential to deliver embedded finance. Every embedded finance solution is based on the latter.
Embedded finance utilises the end-to-end model of BaaS and transforms it into an integrated financing option for consumers of other products or services.
2. Front-end versus Back-end Focus
Embedded finance is the front-end part of the technology; the focus is on delivering financial solutions and improving customer experience in conjunction with buying other goods or services.
BaaS is the back-end process that lets non-banks and digital banks offer these products themselves.
Open Banking and API banking have contributed to the transformation of banks becoming BaaS providers by offering their technology and operations as a service bundle. It allows other businesses to provide financial services to their customers.
Embedded finance focuses on delivering the core value proposition to the consumer with the financial service in the background.
Embedded finance allows the service provider to weave the financial service into their platform without hassle. The users do not have to bother much about compliance as the provider has built-in everything all aspects required from a regulatory and compliance point of view.
However, BaaS is a different ball game; the onus of ensuring compliance with various regulations lies with the service provider. They have to deal with aspects like contracting with third parties, introducing processes to ensure customer data safety, etc.
In embedded finance, users know that integrated financing solutions are from an external bank. A shopper using the BNPL option on a retail website would know it comes from an external provider, as indicated at the transaction time.
In contrast, BaaS solutions are bundled offerings, co-branded or white-labelled to carry the business’ branding instead of the financial services provider the non-bank uses to offer the service.
The Future Outlook
BaaS and embedded finance are helping users, banks and non-banks to reimagine banking.
As per reports, the transaction value of embedded finance will double and reach $7trn by 2026. There is tremendous growth in BaaS, too; Juniper Research suggests total BaaS platform revenue will exceed $38bn by 2027 compared to $11bn in 2022.
As both BaaS and embedded finance are witnessing robust growth, service providers might wonder which route to take. Understanding the differences and what is appropriate for what you offer customers can help you choose. Businesses should keep in mind their long-run goals and ensure that the solution fits into their overall strategy.
Enterprises looking at tapping the potential of BaaS and embedded to boost customer experience and growth can benefit from the solutions offered by Finezza.
Whether credit evaluation or lending lifecycle management, our solutions can help you streamline your processes and integrate these models into your business.
Talk to us now to learn more.