While both Open Banking and Banking as a Service (BaaS) are geared towards, among other things, driving innovation and efficiency, they differ in their approach – and this is exactly what we’ll be discussing in this article. What are these solutions, exactly? How do they work? What are the differences between them? Similarities? There’s plenty to talk about, so let’s not waste any more time and get to it.

Open Banking vs Banking as a Service: A Comparative Guide

In this Guide, we’ll explore the powerful and transformative financial paradigms called Open Banking, and Banking as a Service, including their benefits and relation to embedded finance. 

By leveraging modern APIs, both Open Banking and BaaS are commonly used to enhance financial services, foster innovation, optimise user experience, and expand the range of services that companies are able to offer to customers.

In addition to these similarities, there’s also a number of key differences – but let’s not get ahead of ourselves, and start from the beginning.

What is Open Banking?

Open Banking is a system where banks open their financial data to third-party providers through APIs, while implementing principles like customer consent and control over data, secure data sharing, and standardised APIs. Its uses include enhancing financial management tools, offering personalised banking services, and improving credit assessment.

In Europe, it is governed by the PSD2, and in the UK – by the Open Banking Standard. Additionally, Open Banking requires compliance with data protection laws such as the GDPR to ensure security, as well as effective management of access rights and consent.

Apart from the benefits mentioned in the previous section, Open Banking also enables greater transparency and market competition, as well as plays an important role in the process of digital transformation.

Here’s an example of Open Banking in action. ConnectPay uses Open Banking to let customers view and manage multiple bank accounts within its dashboard, providing a unified financial overview and seamless money management. 

How does Open Banking work

In traditional banking, data is typically siloed within individual banks, making it difficult for external applications to interact directly with financial accounts. Open Banking, on the other hand, requires standardised data formats and secure communication protocols, thereby decentralising banking for all involved.

With Open Banking, third-party services can easily connect with multiple banks through APIs and use their infrastructure to create new value-added products and services.

Key benefits of Open Banking

Open Banking offers significant advantages for both consumers and businesses.

For consumers, it provides:

1. Enhanced financial management: Access to consolidated financial data allows for better budgeting and expense tracking.
2. Improved service options: Increased competition leads to innovative services and personalised financial products.
3. Convenience: Seamless integration of financial services enables easier payments and account management.

For businesses, the benefits include:

1. Increased market access: Smaller financial service providers can compete with established banks by offering niche products.
2. Enhanced customer insights: Access to comprehensive customer data enables the development of targeted products and services.
3. Operational efficiency: Streamlined processes and reduced costs through automated financial transactions and improved data accuracy.

All of this is to say that, on the whole, Open Banking fosters a more dynamic and customer-centric financial ecosystem.

What is Banking as a Service?

Banking as a Service enables non-financial businesses to offer banking and other financial services by simply integrating them into their existing platforms via APIs. Unlike traditional banking, where services are directly managed by banks, BaaS provides white-label banking infrastructure to third-party providers. 

It’s also important to note that BaaS providers must comply with financial regulations, such as licensing requirements and data protection laws, and adhere to Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations. 

One of the virtues of this model is that it democratises access to banking services, allowing fintechs and other companies to offer financial products without becoming fully licensed banks themselves. 

A good example of this would be PayPal’s integration with traditional banks to provide users with services like debit cards and loans, enabling PayPal to offer banking features without being a bank itself.

How does BaaS work

Broken down into its component parts, a typical BaaS workflow looks something like this:

1. First, a financial institution, such as a bank, grants access to its data and functionality via an API integration.
2. Next, a non-financial institution, such as a fintech or other type of business, gains access to the institution’s data and functionality via an API.
3. Finally, using the data and functionality of the financial institution, the fintech or other type of business integrates that functionality into existing products or develops new ones.

BaaS usually offers banking methods such as account creation and management, payments processing, fund transfers, debit and credit card issuance, and lending services. These services are white-labelled, meaning they are branded under the third-party provider’s name while the underlying infrastructure and compliance are managed by the licensed bank. 

Key advantages of Banking as a Service?

Banking as a Service offers businesses the ability to enhance customer experience and broaden their service offerings without the need to become regulated financial entities themselves. For consumers, BaaS provides seamless, integrated banking features nestled within their favourite apps, improving convenience and accessibility. They can also enjoy a more personalised and efficient banking experience, often with faster service and better integration with their daily financial activities.

Businesses, on the other hand, benefit from increased customer engagement and loyalty, as they can offer tailored financial solutions, while also gaining new revenue streams from financial services. 

Additionally, BaaS allows for greater innovation in financial products, driving competition and improving overall service quality in the financial sector. This symbiotic relationship between businesses and consumers fosters a more dynamic and user-friendly financial ecosystem.

Comparing Open Banking and Banking as a Service

Both of the two banking methods aim to enhance financial services but operate differently. Open Banking involves sharing customer data with third-party providers via APIs, which promotes transparency and competition. It enables consumers to access a range of financial products and services from multiple providers in one place.

In contrast, BaaS allows businesses to embed banking services directly into their platforms, offering financial products under their own brand without going through the complicated, time-consuming, and expensive process of obtaining a financial licence.

While both methods share the benefit of improved customer experience and increased innovation, Open Banking focuses on data sharing and interoperability, whereas BaaS centres on integrating financial services into non-bank platforms.

Here are some basic use cases:

• Open Banking suits fintech apps offering aggregated financial management tools like budgeting apps.
• BaaS is ideal for companies wanting to provide embedded financial services, such as e-commerce platforms offering branded credit cards.

What does Open Banking have to do with BaaS and embedded finance

All three of these are actually quite complementary. Open Banking facilitates BaaS and embedded finance by enabling secure data sharing between banks and third-party providers through APIs. And it is this interconnectedness that allows businesses to offer personalised financial services directly within their platforms. For instance, an e-commerce site can use Open Banking to access customer bank data to enable seamless payments and instant credit checks, thereby enhancing customer service and reducing friction.

By incorporating Open Banking into BaaS, fintechs are enabled to develop innovative solutions like integrated expense tracking in payroll software or automated investment advice in financial planning apps. They can also benefit from real-time data access, improving operational efficiency and offering tailored services. Examples include budgeting apps using Open Banking to provide a comprehensive view of finances, and ride-sharing platforms integrating BaaS to offer instant driver payouts. 

Food for thought

As should hopefully be clear by now, adopting Open Banking and BaaS can significantly enhance customer experience and operational efficiency. When it comes to both methods, there’s hardly any downside to using them – and a whole lot to be gained.

By the way, if you’re planning to start looking for the best vendor for your, here’s some general advice to make the process a bit easier:

• Prioritise robust security, compliance with regulations (ideally, look for embedded compliance), and a proven track record.
• For smooth integration, make sure the vendor’s APIs are flexible and well-documented.
• Test extensively to guarantee seamless functionality and reliability.
• Monitor update integrations to adapt to new customer needs and regulatory landscapes.

Interested in ConnectPay’s embedded solutions?

Finally, we’d like to encourage you to think about your current payment strategies and contact ConnectPay specialists if you find anything that could be improved. Our embedded solutions – everything from virtual cards and digital wallets to cross-border payments and segregated accounts – have been tailored to suit a wide range of business needs to perfection. Looking forward to hearing from you, or else – see you in the next article!