Comparing fintech terms: BaaS, Embedded Payments, and Embedded Finance

In today’s rapidly evolving financial landscape, traditional banking is undergoing a profound transformation. With the rise of digital platforms and fintech innovations, terms like Banking as a Service (BaaS), embedded payments, and embedded finance are becoming increasingly prominent. These concepts are reshaping how financial services are delivered and consumed, offering seamless integration of banking and payment solutions directly into non-financial platforms and services. This article explores the nuances of BaaS, embedded payments, and embedded finance, shedding light on their impact on businesses and consumers, and how they are driving the future of financial services.

Having defined Banking-as-a-Service, Embedded Payments, and Embedded Finance, it is time to assess how the three fit together: and how they each differ.

Scope and Focus

BaaS or Banking as a Service essentially allows banks to provide other companies (so-called partners) with access to the technology that enables banking services such as bank accounts and bank cards via Application Programme Interface (API).

•        Embedded Payments concentrate specifically on embedding payment acceptance and transfers into non-financial digital environments.

•        Embedded Finance has the widest scope overall, incorporating a broad set of non-banking financial services – loans, insurance, investments and other offerings – into non-financial platforms.

User Experience

•        In BaaS, your licensed bank partner looks after the boring compliance and operations stuff, while you get to design your own bespoke banking products.

•        Embedded Payments – lets you enable simple checkout, person-to-person payments, in-app payments and other money movement in your own apps and sites.

•        Embedded Finance envelops expansive finance services into your digital user experiences and products for end users.

Regulations and Compliance

•        BaaS cannot work without agreement with a licensed bank, which will provide proper financial regulation and compliance.

•        Embedded Payments may require adherence to various payment technology regulations depending on region.

•        Embedded Finance regulations vary based on the exact type of financial services being embedded.

Revenue Models

•        Revenue from banking services in BaaS goes to the bank as well as the BaaS platform using the infrastructure.

•        Embedded Payments generate revenue through payment acceptance fees, interchange fees, and other transactional charges.

•        Embedded Finance monetises by creating new financial transactions and services, such as loans, insurance policies or investment fees.

BaaS and Embedded Payments are fundamentally different ideas. However, they share the same objective as Embedded Finance: to deliver financial services in a turnkey and configurable way to any digital channel – locked out of banking silos.

This embedded model unlocks super-powers we’ll explore below. But first, who are the actors powering these technologies?

The Ecosystems and Players Powering These Models

BaaS and Embedded Payments spawned extensions such as Embedded Finance that have opened up completely new worlds of enabling technology that providers and users alike are continuing to explore. Here’s an overview of some of the key players in each:

Banking-as-a-Service

•        Banks: Incumbent banks provide the regulated backend core banking infrastructure that powers BaaS for non-bank partners.

•        Fintech Companies: Where would fintech be without BaaS? It’s a win-win proposition: fintechs can build banking products and services without the overhead of a licence.

•        API Platforms: These companies connect banks with fintechs/businesses, facilitating BaaS partnerships.

•        Users: Any e-commerce firm, neobank or tech company can use BaaS to create banking functionality.

Embedded Payments

•        Payment Technology Companies: provider such as payment gateways or card issuers that operate with a licence to embed payments via APIs.

•        Users: Online marketplaces, gig economy apps, digital content producers and more use Embedded Payments to enable movement of money in their products.

Embedded Finance

•        Fintechs: Startups offer targeted Embedded Finance solutions for verticals like lending, investing, fundraising, etc.

•        Banks: Incumbents integrate financial services capabilities into third-party platforms via APIs.

•        Big Techs: Technology giants like Shopify embed financial offerings deeply into their platform experiences.

•        Users: Any retailer, real estate portal, travel app or other digital business can use Embedded Finance.

You can see the scope of the enabled user base grow from BaaS (largely fintech users) to Embedded Payments (fintechs + a broader set of digital businesses) to Embedded Finance (any company willing to integrate finance).

This means limitless potential to participate in these thriving ecosystems moving forward!

The Benefits That Drive Adoption

When we talk about BaaS, Embedded Payments and Embedded Finance, it’s evident that, once they are in place, they attract a steady and accruing set of growth vectors. But why?

What is the specific dynamic at play that gets everyone so excited? Let’s start with making payments easier to embed.

Banking-as-a-Service

For fintechs and technology companies, BaaS provides:

•        Lower barrier to entry: Sell financial products without overhead (ain’t no bank needed, and nothing to worry about compliance!).

•        Faster time to market: Leverage proven banking infrastructure to get products to market quickly.

•        Scalability: Scale financial services up or down as needed because the backend isn’t yours.

•        Focus on innovation: Concentrate resources on improving customer experience rather than building infrastructure.

For incumbent banks, BaaS opens opportunities like:

•        New revenue streams: Monetize existing infrastructure by selling access to other companies.

•        Expanded ecosystem: Sell to broader customers and markets by serving multiple channels through BaaS.

•        Regulatory compliance: Maintain control of regulated infrastructure to ensure adherence to laws and regulations.

Embedded Payments

Both payment facilitators offering API access and companies utilizing Embedded Payments benefit:

•        Expanded services: Offer integrated payments capabilities without needing to obtain licenses or build infrastructure.

•        Enhanced customer experience: Provide more contextual, seamless payments natively in your products and platforms.

•        Revenue growth: Earn incremental revenue from payment acceptance fees, interchange fees, etc.

•        Faster deployment: Go to market faster by leveraging proven third-party payment infrastructure.

Embedded Finance

For companies providing Embedded Finance, benefits include:

•        Deeper customer engagement: Integrated financial services increase customer lifetime value and platform stickiness.

•        New revenue streams: Monetize transactions and activities involving loans, insurance, investing, fundraising, and more.

•        Personalization: Use data insights to tailor and recommend hyper-relevant financial offerings.

•        Competitive differentiation: Stand out from competitors by providing complete, integrated financial experiences.

From an end user perspective, Embedded Finance offers advantages like:

•        Convenience: You apply for a loan, buy fire insurance, invest in a fund and so on all on the same site where you trust everything else.

•        Contextual relevance: Receive financial suggestions tailored to their real-time needs and situation.

•        Bundled pricing: Potential cost savings when combining multiple integrated financial services together.

So, users and providers of financial services and technology stand to gain.

Final Thoughts

We’ve compared and contrasted them, studied their unique micro-ecologies, and enumerated their key network effects that drive usage.

While these concepts are different, they do share a common forward-looking vision of financial services that are no longer buried in banking siloes, but instead are fully accessible everywhere that embedded finance springs up. That embedded paradigm sets in motion a whole new wave of innovation in fintech, the financial institutions adopting it, and the businesses that want to bring their customers into new financial relationships.

All of which basically means that for the end user, finance becomes part of her digital lives: intelligently personalised, and available on the device and in the platform she’s already familiar with.