Embedded finance vs BaaS (Banking as a Service)

Posted On
January 23, 2023

As the world is becoming more connected and digitized, financial services are also undergoing a massive transformation of their own.

More and more organizations are recognizing the power of products like embedded finance and Banking as a Service (BaaS) to build an easier, faster, and more accessible way to provide an immersive experience for traditional banking services.

Embedded finance is becoming increasingly popular within companies because it allows them to provide integrated and contextual experiences while selling products to their customers through APIs and SDKs.

On the other hand, BaaS (Banking as a Service) is offering a more complete and structured platform for companies to build financial services. BaaS helps organizations design, build, and deploy customized banking products.

Embedded finance and BaaS may seem identical but there are some key differences between them. Let's take a look at what makes Embedded finance and BaaS different.

What is Embedded finance?

Embedded finance is a type of solution that allows companies to directly incorporate financial services into their existing products and services.

This means that companies can offer banking and financial capabilities without creating or maintaining their bank accounts.

Its  primary goal is to make the customer experience smoother by cutting out extra steps like procuring financing, insurance, or investments discretely

It is safe to say that we have been exposed to embedded finance on a regular basis in our life while using apps such as Uber, Ola, Zomoto, Starbucks e-commerce sites etc. All these apps simplify the user checkout process by providing multiple payment options such as UPI/wallets/ cards/ internet banking into their apps, hence minimizing the use of physical cash or plastic money. 

Another example of it would be smart cards or virtual cards that are linked directly to a company's existing services and products. Embedded lending is also gaining traction where a company can offer credit solutions at the time of checkout weaved into their product and services.

Fundfina is a company that provides embedded finance solutions to corporates and institutions that cater to the MSME segment. Fundfina's platform when integrated into any application allows corporates to extend credit capabilities to their customers or merchants who in turn get access to goods and inventories using appropriate BNPL/ Term/ Bullet/ Credit Line products, business forecasting and much more. 

What is BaaS (Banking as a Service)?

BaaS (Banking as a Service) is a type of technology that helps companies quickly and efficiently build their banking products. It is a platform that provides the necessary infrastructure, processes, and tools to easily create financial services.

Rather than developing their own banking business with an extensive infrastructure, or sending customers to a third-party financier, BasS allows companies easier access to financing.

In simple terms, BaaS allows non-banks to offer banking services such as payments, money transfers, and even loans without the need to build and maintain their banking infrastructure, all this by integrating with the bank’s API. 

Pros and cons of embedded finance

Here are some of the advantages of embedded finance:

  • Companies can gain valuable customer data
  • Immersive Consumer Experience
  • Increased conversion rate
  • Faster transaction
  • Easy integration
  • Reduced development costs
  • Faster go-to-market

The disadvantages of embedded finance include:

  • Difficulty in keeping up with changing regulations adopted by Banks
  • Limited control over customer data and security protocols
  • Limited features and functionality compared to BaaS

Pros and cons of BaaS

The advantages of BaaS include:

  • A comprehensive range of banking and financial services
  • Access to advanced features such as loans, analytics, and risk management
  • Flexibility when it comes to integrating with existing systems
  • Compliance with regulatory requirements
  • High-security protocols

The disadvantages of BaaS include:

  • Higher setup costs
  • More complex infrastructure
  • Higher maintenance fees

Embedded finance vs BaaS: Key differences

A box in a box analogy can be used to describe the relationship between embedded finance and BaaS, where BaaS is a larger box containing a smaller box of Embedded finance along with other such boxes. 

Almost every embedded finance solution is based on BaaS. But BaaS covers more than just embedded finance. It can also be used to offer services such as payment processing, money transfers, and risk management.

Here are some of the key differences between embedded finance and BaaS:

1. Use cases

One of the key things that separate embedded finance from BaaS is the use cases.

Embedded finance is primarily used for offering banking services directly within a product or service through APIs, while BaaS is used for creating and deploying banking products and services.

For example, a company can use embedded finance to offer its customers’ membership cards/wallet facility that are linked directly to their existing product or service, while BaaS can be used to create an entire banking platform by Fintechs, non-banks and other service providers

2. Functionality

Another key difference between embedded finance and BaaS is the functionality offered by each. Embedded finance typically offers basic financial capabilities such as payments and transfers, Buy Now Pay Later (BNPL) options as well as lending options.

BaaS, on the other hand, can offer a more comprehensive suite of features including full-stack banking services, analytics tools, risk management tools, and more.

For example, let's say a company was looking to offer a loan product. With embedded finance, they can simply plug loan originations screen to their product. With BaaS, however, they will get  access to complex financial products through the platform which will need to be stitched together.

3. Cost

When it comes to cost, embedded finance is typically cheaper than BaaS as the setup costs and maintenance fees are much lower. BaaS can be more expensive due to the complexity of the services offered and the need for extensive infrastructure and compliance.

The high cost of BaaS is one of the main reasons why many companies opt for embedded finance as a more cost-effective option. 

However, BaaS can still be a good option if the services offered are more comprehensive and advanced such as loans, risk management, and analytics.

4. Target audience

Embedded finance solutions are aimed at companies that want to offer banking services directly within their products or services. BaaS, on the other hand, is aimed more at banks and fintech services that need to build banking and financial services.

This means that BaaS is generally better suited for companies that are looking to provide more comprehensive and advanced banking services, while embedded finance is a good option for companies that primarily need to embed financial services into their products or services.

5. Security

The security of both embedded finance and BaaS is critical. Embedded finance solutions usually use existing banking infrastructure and are therefore subject to the same security protocols as regular banks.

BaaS, however, uses a full-stack platform that is usually hosted on the cloud and often requires additional security protocols to ensure data privacy, integrity, and availability.

This means that companies using BaaS need to be aware of the security protocols and standards to ensure data is kept secure.

Which one is better for your organization: Embedded finance of BaaS

Both embedded finance and BaaS offer a range of features, but they also have their unique advantages and disadvantages. The decision between the two depends on your organization's needs and goals. 

A simplified schematic to illustrate the difference between BaaS and Embedded Finance is provided below though it’s not restricted to below only.

Simplified illustration depicting the difference between BaaS and Embedded Finance

If your company's major focus is enabling your customers  with traditional financial services by augmenting the experience layer, then BaaS would be a better option since it will provide you with a wide range of banking features that you can stitch together to provide a custom range of possibilities. 

Whereas if you are an end-user focused service provider (B2C or B2B)  whose major service offering is non-financial services but adding a small part of financial offering on top of your existing product/service, you should be looking for embedded finance offerings. This will allow you to integrate and get the system up and running quickly with the required service without worrying too much about the complications of compliance and regulations.

It’s important to evaluate your organization's needs and goals before deciding which one is better for your organization. You can get in touch with us to find out which would be a better option for you and your customers

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