CategoriesAnalytics Banking as a Service (BaaS) IBSi Blogs IBSi Flagship Offerings

What’s the difference between BaaS and embedded banking? Quite a lot

The problem with a loosely defined term is that its meaning can become stretched. Anyone who has described a stadium-filling act such as Ed Sheeran as “indie” because he plays a guitar is guilty of this.

Banking-as-a-Service (BaaS) is just such a loosely defined term.

Some providers have stretched the term to encompass services such as Open Banking, card platforms, and APIs. This confusion is further exacerbated when aggressive marketing campaigns overlap BaaS with another fast-growing term: embedded banking. Using one term to describe all of these disparate services makes about as much sense as using the same word to describe a multi-platinum-selling artist and the band playing to three people in the local pub.

By John Salter, Chief Customer Officer at ClearBank

John Salter, Chief Customer Officer at ClearBank

 

Confusion over these terms is already widespread. According to Aite, a third of fintech providers do not believe there is any difference between embedded banking and BaaS.

There are, however, important differences between BaaS and embedded banking. Businesses need to understand the differences between these two concepts if they are to understand their own responsibilities, especially around governance and compliance, and what it could mean for scaling up or adding new features in the future.

Breaking it down: What’s the difference?

Despite its name, BaaS does not necessarily mean working directly with the holder of a banking license or that the services provided require a license. Instead, providers offer banking-related services and infrastructure, sometimes on behalf of a licensed bank, to firms including fintech startups, e-commerce platforms, and even other financial institutions.

BaaS is a “push” model. A banking product is created and offered “as a service” to a potential user. BaaS is the distribution of banking products to financial institutions and non-financial institutions. For example, non-bank players like Uber or Lyft work with a BaaS provider that is responsible for payments, cards, accounts, and loans. However, who is responsible for compliance and governance can vary between providers and use cases.

On the other hand, embedded banking is on the “pull” side. This simply means that financial services and products are embedded into financial or non-financial platforms, such as e-commerce and mobile banking applications. Embedded banking is the provision of a banking service directly from the holder of a banking license and embedded directly into the user experience. A typical example would be the Buy Now Pay Later (BNPL) functionality online shops have included at the point of purchase for customers to access installment payment options.

Do businesses need to understand the difference?

Should anyone care about this? This is a good question as most businesses won’t start with the question of whether they want BaaS or embedded banking. In fact, they’re unlikely to ask this question at all. Instead, they will have specific requirements for banking or banking-like services, and approach the right provider with those needs in mind.

So, who cares? Aren’t we simply over-analysing the technicalities?

It may seem so, but there are important implications for regulation and who is responsible for compliance.

BaaS providers may have a banking licence, or they may hold an EMI licence. Embedded banking providers are, by definition, holders of a banking licence. It’s important when entering into any agreement that the customer-facing business understands the regulatory nature of the agreement—who is responsible for compliance and KYC, how funds are safeguarded, and whether they are protected by a full banking licence. There is already concern from regulators around where consumers’ money is held and how safe it is—is there enough transparency? Knowing the difference is important, especially when the “gold standard” is when funds are held by a bank in an embedded solution.

Businesses aiming to enhance their offerings with financial services have the potential to create differentiated services that set them apart from the competition. But working with the right partner is crucial to success. When evaluating a partner, businesses must consider the range of services on offer, technology implications, compliance, security, and more.

So, a clear understanding of the differences between BaaS and embedded banking will make it easier for any business to decide what is right for them and their customers.

CategoriesAnalytics IBSi Blogs IBSi Flagship Offerings

What’s next in digital transformation in Europe

In Broadridge’s third annual Digital Transformation and Next-Gen Technology Study, 500 C-level executives and their direct reports across the buy side and sell side from 18 countries were surveyed

Mike Sleightholme, President, Broadridge International
Mike Sleightholme, President, Broadridge International

Mike Sleightholme, President, Broadridge International

On average, respondents’ firms control estimated assets of $121 billion. More than half agreed that digital transformation is currently the most important strategic initiative for their company, and the proportion of IT budgets allocated to digital transformation has increased to 27% on average, up from 11% last year. A further 71% of global respondents also say AI is now significantly changing the way they work.

The biggest increase in technology investment from European firms in the next 2 years will be allocated to cybersecurity – with respondents saying they plan to increase spending by 29% by 2025. This level of backing is followed closely by investments into cloud platforms and applications. Firms are ‘lifting and shifting’ legacy systems in favour of cost-effective, cloud-based infrastructure with microservices and APIs at the core.

Spending on data analysis and visualisation tools is planned to increase by 26% in the next 2 years. As it stands, too many firms are relying on fragmented data sets that could offer valuable insights if they were brought together and combined with powerful analytics solutions. The top driver for these investments is improved customer acquisition and retention. As market competition increases, the benefits that next-gen technologies can bring to the end-consumer are one of the most significant ways that firms may differentiate themselves from one another.

The second biggest factor in the decision-making process are cost savings and efficiencies. As next-gen technologies mature, the financial benefits become more tangible, making it easier to define a business case for investment.

Finally, speeding up the time it takes to bring new products to market is a priority for European firms and ranks as the third biggest driver for investments. This agility allows firms to take advantage of short-lived opportunities to gain market share in new asset classes or client segments as the pace of change accelerates.

The biggest challenge cited by European firms is insufficient budget for innovation. Particularly against today’s economic backdrop, firms are feeling hesitant to invest money into new projects. The second biggest challenge is staff resistance to constant change. Gaining buy-in from the teams that will be using the technology can be as important as buy-in from the C-suite approving investments. Education is important – firms must ensure their teams properly understand why these technologies are necessary, the efficiencies they can create, and how they will help the team, the business, and clients. The third most prevalent challenge for European firms is ongoing market and economic disruption. Against a backdrop of geopolitical tensions, recession fears and persistent inflation, it can be difficult for business leaders to focus their attention on technology investments.

Digital transformation is still at the top of the C-suite agenda, but it is also entering a new phase driven by more powerful technology. Widescale adoption of generative AI, as well as growing maturity in blockchain and DLT, will drive a new wave of exponential change. Other nascent technologies such as quantum computing and the metaverse are on the horizon.

When asked about the longer-term future, 65% of European firms believe that blockchain and DLT will become the core of financial markets infrastructure in 10 years’ time. Nearly a third believe that the metaverse will become a key channel for client interaction within the next 10 years. However, firms said they only plan to increase investment in the metaverse by 4% over the next 2 years, indicating a wait and see approach.

This is an exciting time for the financial services industry, adapting to the rapid pace of change may pose huge challenges for business and society, senior leaders should keep a firm eye on the opportunities created by digital and next-gen technologies as they evolve.

CategoriesAnalytics Digital Banking IBSi Blogs

Digital Banking: Prioritising Financial Inclusion

Hans Tesselaar, Executive Director at BIAN 
Hans Tesselaar, Executive Director at BIAN

In recent years, digital transformation and the rise of FinTech technologies have made digital banking increasingly accessible. Now, there is a wide variety of digital services available as banks continue to focus on delivering the best, most convenient services to their customers.

By Hans Tesselaar, Executive Director at BIAN 

There is clear momentum happening in online and digital banking, with 416 million active users of online banking in Europe alone, an increase from 398 million in 2022. This is reflected globally, with 170 million users in 2023 in Latin America, expected to spread to almost 198 million next year. Emerging technologies can support this expansion, but it’s the responsibility of the industry as a whole to ensure financial inclusion and economic growth for all, which is a priority amid this growth.

Digital inequalities caused by this shift must be addressed through collaboration and emerging technologies, an area where some developing countries are leading by example. The role of industry standards is also incredibly important when looking to better deliver digital services to all.

Counting on industry standards

We can look to the Union Bank of the Philippines as an excellent example of this. The extensive use of legacy technology within banks means the speed at which these established institutions can bring new services to life is often too slow and outdated. This challenge is also complicated by a lack of industry standards, meaning banks continue to be restricted by having to choose partners based on the ease and cost of integration. This is instead of their functionality and the way they’re able to transform the bank.

To truly digitise, banks need to overcome these obstacles surrounding interoperability with a coreless banking model. This approach to transformation empowers banks to select the software needed to obtain the best-of-breed for each application area without worrying about interoperability and being constrained to those service providers that operate within their own technical language or messaging model.

By translating each of that proprietary messages into one standard message model, communication between different parts of organisations is, therefore, significantly enhanced, ensuring that each solution can seamlessly connect and exchange data.

Adopting emerging technologies to increase accessibility

While some elements of financial inclusion and digital adoption require a more considered approach, there are instances where emerging technologies are bringing transformative services to the unbanked.

The Union Bank of the Philippines, for example, overhauled its quick loans retail engine (RLE) to serve as the central platform for the bank’s loan and credit products, leveraging its reusability and ease. Using a combination of low-code, based on the BIAN Models, and the adoption of BIAN APIs, the bank sought to establish a seamless, fully digital experience that could scale up to meet the country’s huge demands for loans by the unbanked.

This has enabled the Union Bank of the Philippines to overcome the issues preventing the RLE from scaling to the mass market to reach the 51.2 million unbanked Filipinos. Through this innovation, those who otherwise wouldn’t have access to a fully digital quick loan service now do.

This is just one example of many, as fintech adoption continues to grow in emerging markets due to the increasing use of mobile phones and the internet, the large unbanked population, and the growing middle class. It will be no surprise to see more of these examples where banks look to digital services to reach the mass market over the coming years.

Creating a supportive ecosystem

As FinTech adoption continues to grow in emerging markets, banks must form an ecosystem alongside fintech, service providers, and aggregators. This will help banks when it comes to the speed they can introduce new products.

An effective ecosystem strategy will make banks more relevant to their customers, providing an opportunity to drive better relationships and bigger wallet shares by providing the speed, scale, and differentiated products that make the most of the opportunity presented by the significant shift to digital banking. With this approach, banks can focus on offering services to meet the demand of all customers, whether that be digital, analog, or reaching the unbanked population.

The journey to digitalisation

To be truly inclusive, banks must assess their customer base and look to meet its needs.

Where digital adoption risks leaving customers behind, banks must ensure these customers are prioritised through collaboration, access to offline services, and a slow, steady digital transformation process. In other cases, digital transformation is the answer to bringing financial services to the mass market. In both situations, industry standards can be the key to unlocking new technologies and providing services to those who otherwise wouldn’t be able to access them.

Putting the customer first and taking a collaborative approach will be how the industry brings all customers along on the digitalisation journey. As long as the priority for banks remains on financial inclusion and innovation increasingly supports this, there will never be a customer left behind.

CategoriesAnalytics IBSi Blogs IBSi Flagship Offerings Open Banking

Awareness and trust holding consumers back from pursuing Open Banking products

Stefano Vaccino, founder & CEO, Yapily
Stefano Vaccino, founder & CEO, Yapily

Although the IMF recently reported that the UK economy has once again avoided a recession, the rate of inflation isn’t expected to return to the Bank of England’s target rate of 2% until mid-2025 – later than expected.

By Stefano Vaccino, founder & CEO, Yapily

This means mortgage repayments, bills, credit rates, costs of household items and more will continue to pinch consumers’ finances. Indeed, research from the Nationwide Building Society found that 74% of people were worried about their finances and ability to cover essential costs in April – with the value of spending on essentials rising 9% since earlier this year.

Within this tough environment, however, consumers believe their financial providers are falling short, with our data revealing that 53% don’t feel that their financial needs are being met. The natural conclusion you’d think is to look for a new and, hopefully, better alternative. And yet, only a tiny 2% of consumers say they have started using new products and services – meaning that many of the population could very well be stuck in a financial rut. Not great given the current state of the economy when most people need to manage their finances effectively.

Consumers trust what they know

One of the main reasons consumers don’t feel their financial needs are being met that we identified in our State of Payments report was trust. Many consumers say they only trust products and services they have heard of or that are recommendations for family, friends, and colleagues. There’s a name for this: the familiarity principle (or the exposure effect) and while it generally happens subliminally, it also influences a lot of the decisions we make… from the restaurants we frequent to the financial products and services we use.

Interestingly, though, consumers said they would be open to securely sharing more of their data with financial services organisations, like their bank or with a personal finance app if it improved their financial well-being. This includes saving money more consistently, building their credit score, and reaching financial goals quicker like saving for a mortgage.

Such services are now being provided by many major financial services providers and FinTechs in the UK – and many are powered by Open Banking. But despite these encouraging findings, 76% of consumers said they either don’t care about whether a product uses open banking or would be less likely to use a product if it is enabled by Open Banking. Again, the trust issue creeps in as a quarter say this is down to them not knowing enough about it and being wary of the technology.

An awareness issue

The plot thickens further in the issue of trust. Though consumers say they are willing to share their data, many decision-makers in financial services organisations paint a very different picture. Almost one-third (30%) indicated that trust in data sharing is the biggest barrier they face as a company in driving the adoption of their Open Banking services and products.

So, there is a disconnect here in that fed-up consumers aren’t switching to new products and services to improve their financial well-being, even though the solutions do, exist thanks to Open Banking. This may be a result of a lack of understanding around Open Banking services or the true value they can deliver to their finances, but it undoubtedly presents a missed opportunity.

Conquering the disconnect

Financial organisations must conquer a broader awareness issue so consumers know that they could have access to better and fairer financial products that support their financial well-being.  There’s an opportunity to bridge the trust gap and build confidence in Open Banking solutions to get consumers turning to new products that will power better financial experiences. These positive experiences will be key to raising broader awareness of the benefits of and, in turn, increasing demand for Open Banking.

This starts by highlighting the benefits of Open Banking vs traditional banking processes and how they impact financial well-being. For example, by highlighting that it’s easier to track spending and budgets more effectively when bringing all bank account and credit card information into one personal finance app.

Another area that needs more clarity is dispelling some of the myths that have crept in surrounding data privacy and security. Sharing financial information that was once only available to notoriously highly regulated banks, naturally raises questions about privacy. But Pay by Bank is one of the most secure payment methods and there’s a reason why: it was a top priority when PSD2 was drafted, so banks and providers are required to use highly secure and encrypted APIs. To access data in the first place, a service provider needs consumer consent and cannot access without it. Raising awareness of these issues will help ease worries and build trust around Open Banking.

Final thoughts

Now more than ever, people need tailored financial products and services that are right for them, particularly as the UK continues on unsteady economic footing. Building trust and awareness amongst consumers will be vital to drive demand for Open Banking services and importantly, let them know there are products and solutions available that will make managing their finances easier. We hope to also see the right steps taken by industry and government to ensure Open Banking can build on its seven million active users and be a success story in the UK in years to come.

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