Demystifying Extensibility: Open Banking, BaaS and Embedded Finance

Jump To:   Open Banking  |  Banking as a Service (BaaS)  |  Embedded Finance

There are many terms used in the market to describe the vast connectivity and extensibility in the world of digital banking and financial services, including: Open Banking, Banking as a Service (BaaS), and Embedded Finance – just to name a few. 

These terms are sometimes used interchangeably in conversation, which leads to confusion. While these terms are related in some capacity, they each have their own distinct applications and qualities. 

The three most popular terms commonly used to describe extensibility and enabling connectivity to the greater financial services ecosystem will be demystified below. When used correctly, your financial institution (FI) can take advantage of extensibility to grow and prosper. What they are will be explained, how they are used, and how they’re expected to disrupt the market in the coming years.

Open Banking – The Framework for Extensibility

Open banking serves as the framework for extensibility by allowing third-party providers (TPP) to securely access the financial data of banking customers through the use of application programming interfaces (APIs). These TPPs access FI users’ financial data—with permission from the account holder—in order to provide them with non-banking services such as: 

• Account aggregation: Allows account holders to view and manage multiple accounts from different institutions in a single application.
• Financial wellness: Allows financial apps to analyze account activity data to provide personalized budgeting and savings recommendations.

Many FIs are already leveraging open banking by partnering with fintechs and other service providers to enhance account holder engagement and expand offerings. In fact, the open banking market is expected to grow by 25% annually during the next five years, which will further accelerate innovation in the space. This anticipated growth is driven largely by consumer demand for a more personalized banking experience. According to Elizabeth Kopple of Plaid,  “72% of U.S. consumers agree that when choosing a bank, the ability [for users] to connect [their] accounts to apps and services [they] want to use is a top priority.”   

A few key points to remember about open banking are: 

• It is a framework that allows banks to collaborate with third-party providers.
• It can be used by FIs and non-FIs alike, as long as they have authorization from the account holder.
• And, contrary to its name, it does not enable banking services such as lending or deposits, which require a banking license—that is where Banking as a Service comes in. 

Banking as a Service (BaaS) – A Model of Extensibility

The Financial Brand defines BaaS as a model in which regulated institutions provide their charter to non-regulated companies that want to offer financial services without needing to acquire a banking license of their own. BaaS enables these TPPs to embed banking services seamlessly into their own platforms or applications. For FIs, it provides an opportunity to monetize their infrastructure and expertise while reaching new consumer segments. Examples of BaaS include:

• Neobanks—digital-first banks: Offer banking services through their own apps or platforms, leveraging BaaS to access core banking capabilities.
• Non-bank businesses: such as an airline, that offers banking services like credit cards or travel loans without needing to acquire a banking license of their own. 

BaaS allows regional banks and credit unions to extend their reach beyond traditional banking channels by allowing these providers to use their charter for a fee. As such, it can be a powerful tool for generating non-interest income. By partnering with non-banking entities, FIs can drive innovation and user-centric solutions, enabling traditional FIs to remain competitive in the digital era.

Embedded Finance – An Application of Extensibility

Under the umbrella of BaaS, embedded finance takes advantage of extensibility by integrating banking services directly into non-financial platforms or applications. It allows users to access banking functionalities without the need to switch between different apps or websites, creating a seamless and frictionless experience. Examples of embedded finance include:

• Embedded lending: Point-of-sale financing options or seamless payments integration. Buy-now-pay-later (BNPL) is a common form of embedded lending.
• Embedded payments: Allow the customer to pay for a product or service directly from their bank account without having to leave the third-party app. Ride-sharing apps, like Uber or Lyft are examples of this. 

Ultimately, embedded finance enables regional banks and credit unions to deepen account holder  relationships by integrating banking services into their account holders’’ everyday activities. By delivering financial services within existing platforms, FIs can increase account holder  loyalty, improve retention, and expand their revenue streams.

Become Extensible, Not Expendable

As you can see, these extensibility concepts have the power to drive innovation, enhance account holder  offerings, and expand the reach of banking services. With FIs under constant pressure to deliver new products and services, extensibility allows them to continue configuring their digital banking platform whenever they need new features and functions.

In essence, FIs can control their own destiny by using extensibility to access and deploy the latest technologies at speed and scale and ultimately improve the customer experience.

To learn how to best leverage extensibility for your FI, click here.