Open Banking Archives

December 1, 2023December 18, 2023 byPriti Gaikwad

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

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.

Analytics IBSi Blogs IBSi Flagship Offerings

October 21, 2023December 18, 2023 byJeet Vasa

Is regulation enough to propel Open Banking adoption?

Recently, the European Commission set out its intentions to advance open banking with the introduction of PSD3. The update to its Payment Services Directive (PSD2) shows a commitment from the EU to realise the potential of Open Banking, and it’s one welcomed by the industry.

Hans Tesselaar, executive director at BIAN

While PSD3 sets out several key changes to realise its goal of driving Open Banking adoption forward, the aim to standardise payments across the EU with its move from a directive to a regulation poses the question: is widespread adoption possible with regulation alone?

The benefits of regulation

A new Payment Services Regulation will update and replace elements of PSD2 to ensure its rules are applied more consistently across Europe. This new regulation will bolster Open Banking by enforcing better API functionality, allowing smoother payment data sharing and eliminating unnecessary steps hindering data flow.

Apart from refining PSD2, these proposals enhance user control via a centralised dashboard, ensuring easier management of data sharing. In addition, new measures like increased bank cooperation will support the industry’s attempt to combat fraud and elevate consumer confidence.

This regulation puts FinTechs and banks on a level playing field, giving technology providers more control over the service they provide to customers through easier and more secure data sharing, while reducing infrastructure costs.

Europe is not the only country taking a regulatory approach. The UK for example, a pioneer in Open Banking innovation on a global scale, has been prioritising regulation since the launch of Open Banking in 2017 by the Competition and Markets Authority (CMA) following the introduction of PSD2. Now, its recent announcement from the Joint Regulatory Oversight Committee, regarding its commitment to a long-term regulatory framework, reaffirms its commitment in the area.

While these regulatory measures allow fintechs and banks to implement Open Banking more effectively and aim to give customers a seamless experience, independent regulation does limit innovation without the correct considerations.

The realities of regulation

The state of open banking is still very immature, but there is no denying its growth. The number of users worldwide is forecast to reach 132.2 million by 2024, a significant increase from the 24.4 million users in 2020.

Countries like the UK risk reducing their role as a driver of progress without the access to the wider European population that it had before Brexit, as an example. And as the European market is predicted to be the largest open banking market by 2024, the continent as a whole would do well to collaborate to better understand customer needs, react to market demand and expand further.

Being open to learning from global examples and listening to industry leaders, including larger banking institutions with global influence and international exposure, will be important to ensure successful practices are promoted, which will encourage open banking more widely within these countries and different regulatory frameworks.

Meeting the demand

Focusing on regulation must not overshadow market demand, and looking at countries with a market-driven approach, such as Singapore, will reveal what governments and organisations should be prioritising when it comes to open banking.

Singapore’s market-driven stance has led to high open banking adoption. 90% of professionals consider open banking either a ‘must have’ or ‘important’ and a further 90% agree that it has also had a positive impact on the industry and made it more collaborative. This is despite no mandatory requirements.

Adoption has accelerated in APAC over the past few years due to the opportunity it has to make the industry more collaborative and the potential to bring about fairer and more equal financial services. However, the space remains in the early stages of development. Many banks are just starting their digital transformation journeys, and struggling with core legacy systems and closed or outdated architectures. This is why overcoming these barriers and industry collaboration will be at the heart of open banking adoption.

Coreless banking

Regardless of a regulatory or market-driven approach to open banking, banks must create an ecosystem with fintechs, providers and aggregators. This is to boost the speed at which best-of-breed products can be implemented to meet customer demand and make the most of the opportunity that lies within the open banking space.

A coreless banking solution will be key to empowering banks to overcome issues around interoperability and selecting the software vendors needed to obtain these best-in-class solutions for each application. In turn, this will promote industry collaboration and ensure customers are provided with the optimum service to further encourage open banking adoption.

Coreless banking implies that each of the needed (IT)-services works seamlessly together. If this is established, financial institutions can migrate to a “best of breed” environment so they will have the ability to utilize and combine third-party solutions to deliver the best open banking services for their customers.

This means banks can focus on incorporating the technology they need to enable open banking services and respond to customer demand – regardless of whether this is from a regulatory or market-driven starting point – at a faster and more efficient pace.

The answer lies in collaboration.

Is regulation enough for open banking adoption? The short answer is no.

Whether countries decide to push open banking from a regulatory standpoint, or adoption is driven from the market demand, industry collaboration will be the answer. This will enable greater innovation, so from PSD3 in Europe, to Singapore’s market demand, the industry can unlock the ultimate outcome for open banking with an open attitude.

Analytics IBSi Blogs IBSi Flagship Offerings Open Banking

October 21, 2023December 18, 2023 byJeet Vasa

Awareness and trust holding consumers back from pursuing Open Banking products

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.

Open Banking

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

Is regulation enough to propel Open Banking adoption?

Awareness and trust holding consumers back from pursuing Open Banking products

Consumers trust what they know

An awareness issue

Conquering the disconnect

Final thoughts

Call for support

Follow us

Follow us

Quick links

Recent Post

Recent Posts

Subscribe