(This article was first published in The Paypers' Embedded Finance and Banking-as-a-Service Report 2023, which is the latest comprehensive market overview and analysis focusing on the key products and players within the Embedded Finance and BaaS ecosystem.)
Embedded Finance involves the integration of financial services into non-financial offerings, driven by the digital revolution and evolving customer preferences for seamless and comprehensive experiences. While Embedded Finance might sound like the freshest spell in town, its ancestors have been weaving their magic wands for quite some time! Remember those store or branded credit cards that you’ve seen for ages? Those were early glimpses of Embedded Finance in action. However, what sets Embedded Finance apart is its ability to directly incorporate financial processes and offerings into any non-financial environment through interactive distribution rails known as APIs.
So, what exactly is Embedded Finance? It’s like a supercharged software platform that goes beyond the usual stuff you find in apps. This magical platform brings financial services right to your fingertips while keeping things simple and convenient. Picture this: while you’re busy going about your everyday life, you can effortlessly access banking, payments, lending, and insurance services all in one place!
In our Embedded Finance and BaaS Report 2023, Jeff Tijssen, Expert Partner and Global Head of FinTech at Bain & Company, defines Embedded Finance as a non-financial software platform that provides adjacent financial services while assuming some degree of economic ownership. This empowers platforms to offer banking, payments, lending, and insurance services within the context of everyday life. The emergence of Embedded Finance heralds a new era in how customers interact with financial institutions. While traditional banks still play a major role in our financial lives, Embedded Finance is like a gust of wind that’s blowing things around. It’s changing the game and shaking up how we interact with financial institutions. Customers are increasingly drawn to the convenience of accessing payments, lending, and insurance seamlessly integrated into their day-to-day platforms.
I think of ‘Banking-as-a-Service’ and ‘Embedded Finance’ as two sides of the same coin. Banking-as-a-Service is a capability that enables Embedded Finance
Embedded Finance and BaaS share a close connection as both are aimed at simplifying financial services for people and businesses in the digital marketplace. They enable any company, regardless of their industry, to participate in the world of fintech.
To put it simply, both Embedded Finance and BaaS allow businesses to offer financial services, even if they are not traditional banks. However, there are some important differences between the two concepts that are essential to grasp to understand their distinct roles in the fintech world.
Embedded Finance and BaaS have a close relationship. One way to understand this is to recognise that Embedded Finance is enabled by BaaS. Embedded Finance takes the comprehensive BaaS model and presents it as an integrated financing option for consumers who are using other products or services. Essentially, BaaS plays a crucial role in supporting the structure of Embedded Finance.
The two terms are often used interchangeably, but they are not the same thing. BaaS is the bottom, infrastructure layer that feeds into the various Embedded Finance offerings on the outcome, front-end side, as indicated by Panagiotis Kriaris in this exclusive article for The Paypers.
BaaS serves as the foundation, the rock-solid infrastructure upon which the dynamic and innovative Embedded Finance offerings thrive. Embedded Finance is more defined by the front-end access to financial services, whereas BaaS is more defined by its back-end banking functionality. In other words, the former centres on integrated access to solutions; the latter centres on the technological foundation that digital banks and non-banks rely on to deliver financial services.
At its core, BaaS lays the groundwork, a powerful bottom layer that fuels the engine of financial innovation. It acts as the connective tissue, allowing different players in the financial world to seamlessly interact and share services. This is where the magic happens – a hub of possibilities that opens up endless opportunities for growth and collaboration.
But here’s the twist: Embedded Finance steps into the spotlight, transforming the customer experience. It’s the front-end magic that takes shape, putting the power of financial services right into the hands of the end users. Imagine a world where financial tools blend seamlessly into the apps and platforms you already love and use daily. No longer confined to traditional banking institutions, this fusion of BaaS and Embedded Finance disrupts the status quo, propelling us into a realm of unprecedented convenience and accessibility.
In this brave new world, we witness the decoupling of the customer experience from the cumbersome infrastructure.
But the excitement doesn’t stop there. The fusion of these two distinct layers, intertwined into a single, irresistible offering, amplifies the transformative potential even further. It’s a bundled package of financial wizardry, where users can revel in a delightful experience, untethered from the shackles of traditional banking.
According to Erik Howell, Partner at Flagship Advisory Partners, Embedded Finance involves integrating fintech services into non-financial use cases, making these use cases more valuable and profitable. It is a broader concept that includes various business models, such as embedding payments acceptance into software, Open Banking enablers, Cards-as-a-Service, and Payments-as-a-Service.
BaaS, on the other hand, is one of several business models providing Embedded Finance. Historically targeted at fintechs, BaaS is now catering to corporate customers, offering a bundle of licensing, payments, banking, and other fintech services.
Embedded Finance focuses on seamlessly integrating financial solutions with other goods and services to create a smooth and convenient customer experience. In contrast, BaaS operates as a back-end process, enabling digital banks and non-banks to quickly offer financial products and services to customers through APIs, explains Patricia Partelow, Managing Director, Americas Payments Competency Leader at EY.
Another significant difference is how payments are processed, adds Patricia Partelow from EY.
With Embedded Finance, payments are usually dynamic and happen when you’re buying something online or using a service. For example, if you’re shopping on an ecommerce website, they might offer you financing options during the checkout process.
On the other hand, BaaS payments are pre-agreed upon and take place behind the scenes. This means that the fintech company and the bank have already worked out an arrangement. When you make a payment, the bank handles it through their APIs, but you might not even know the bank is involved because the front-end brand takes care of everything for you.
Businesses using Embedded Finance don’t need to worry about setting up financial infrastructure or getting tangled in regulatory red tape, according to Nirav Patel, CEO of Andaria.
BaaS: 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.
In summary, the following are some of the core differences between Embedded Finance and BaaS:
Embedded Finance represents a transformative shift in the financial landscape, driven by the digital revolution and changing customer preferences. By integrating financial services into non-financial offerings, Embedded Finance brings banking, payments, lending, and insurance right to users’ fingertips, simplifying and enhancing their everyday experiences.
While the concept of Embedded Finance may seem like a new phenomenon, its roots can be traced back to early manifestations like store or branded credit cards. However, what sets Embedded Finance apart is its ability to seamlessly incorporate financial processes into any non-financial environment through interactive distribution rails known as APIs.
The role of Banking-as-a-Service (BaaS) in this relationship is fundamental. BaaS serves as the underlying infrastructure that enables the dynamic and innovative offerings of Embedded Finance to thrive. It acts as the connective tissue, facilitating collaboration and interaction between different players in the financial world.
The fusion of BaaS and Embedded Finance has opened up unprecedented opportunities for creativity and disruption in the fintech industry. It decouples the customer experience from cumbersome infrastructure, propelling us into an era of convenience and accessibility previously unimaginable.
Embedded Finance and BaaS, while distinct in their roles, together empower businesses to offer seamless financial services to customers without becoming traditional banks. By embracing this powerful combination, companies can unlock the true potential of financial innovation and create delightful experiences for their users. As the financial landscape continues to evolve, Embedded Finance and BaaS will undoubtedly remain at the forefront of shaping the future of fintech.
Oana is a Lead Editor at The Paypers. Her expertise lies in the areas of Banking and Fintech innovation, with a particular focus on Open Banking, Open Finance, Embedded Finance, and Banking-as-a-Service. She is responsible for managing content and conducting interviews with key experts in the abovementioned fields, representing The Paypers at various banking and fintech events, researching trends and producing content, and providing strategic planning and coordination for large-scale, industry-specific research, reports, and projects. If you wish to get in touch with Oana, she can be reached via email at oana@thepaypers.com or on LinkedIn.
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