Embedded finance vs Banking as a Service Baas: What’s the difference?

These include merchants’ lack of adoption of the latest digital payment acceptance tools, such as contactless functionality, as well as a lack of support for consumers’ preferred payment methods. Finally, the continued rise in the number — and scope — of data breaches and fraud reflects the difficulties consumers face in keeping their sensitive payment credentials safe and secure at the places where they shop. Embedded cards will help you to make your service even more relevant for your customers. When you own a bigger chunk of the customer journey, you also get access to a larger pool of data. This data provides you with customer insight that you can harness for further developing your service. Embedded finance and BaaS are very similar, as they both deliver financing opportunities from providers other than traditional bank systems.

An additional 22% said it is part of their planned business model and the need to accelerate new revenue streams for growth was 17%. Binariks is a web and mobile app development provider specializing in fintech software. We create digital banking, money transaction, and loan management platforms from scratch or can assist you with API integrations. Software with embedded finance services is more convenient and, therefore, more likely to keep customers. Besides, the revenue from financial services enhances customer monetization while increasing the customer lifetime value. After being acquired, customers stay with you much longer and return to your company to order something again.

In both examples, embedded banking is designed to increase platform loyalty through a convenient user experience and special rewards. When a Lyft driver has a Lyft checking account that gets them paid faster, it’s less likely they’ll also drive for Uber. BNPL. A BNPL offering gives customers the chance to pay for goods or services in installments at the point of purchase. Deferred payments usually come in four installments, paid within 12 months.

Other categories have recently emerged, including compliance , human capital management , and procurement within marketplaces. Embedded fintech is the term used to describe the adoption of fintech services into the business processes of financial institutions. Examples of these services include money management, data security, and identity protection.

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HES Fintech, a leader in providing financial institutions with intelligent lending platforms. Dmitry Dolgorukov is the Co-Founder and CRO ofHES Fintech, a leader in providing financial institutions with intelligent lending platforms. The world looks a lot different today than it did 3, 5, or even 10 years ago, especially in the digital sphere.

Scale faster and unleash developer productivity with the most trusted and performant cloud native API platform. Now, across the globe, both customers and regulators are setting requirements for both transparency and trust to ensure the customer is protected. This icon serves as a link to download the eSSENTIAL Accessibility assistive technology app for individuals with physical disabilities. Financial services organizations can take advantage of opportunities inherent in each. We are a not-for-profit organization and the leading globally recognized membership association for risk managers.

Big banks need to embrace embedded finance – and fast

An example of this is a blockchain banking company that offers all of the above services so customers can acquire crypto straight from their salary account. Traditionally, a customer would have to embedded payment in 2025 apply for a loan or credit card to borrow money for a large purchase. With embedded lending, they can now apply for a loan and decide on their terms of repayment during the purchase pipeline.

• By assigning each of their customers with a virtual IBAN, all payments could be reconciled automatically, eliminating human error and saving their Ops team hours of painstaking work.
• Once integrated, it can create immense value for your business and its customers.
• Shopify Pay, which allows users to save their payment information for later use, is a prime example.
• We found that embedded finance already accounted for $2.6 trillion, or nearly 5% of total US financial transactions, in 2021, and by 2026 it will exceed $7 trillion, or over 10% of total US transaction value.
• This way, by embedding financial capabilities, you make your platform more profitable.
• So far, four domains use embedded financial solutions the most, including retail and eCommerce (73%), travel and entertainment (53%), food and beverage (27%), and transport and logistics (47%).

These fintech companies are creating new routes to market and more efficient business models based on technology, value and customer service. New fintech platforms enable clients to engage on a whole other level with the industry and invest in a way that suits them. In addition, embedded finance tools being added to investment applications allow users to connect with their brick-and-mortar banks and invest in ways that meet their financial needs and spending habits.

In this article, we will look at what embedded finance is, the role of BaaS, and examples of how they function in the global market. An established professional kitchen could give you access to their premises, equipment, highly trained staff, and ingredients, and take care of compliance with health and safety regulations in exchange for a fee. And apps like Wolt and Lieferando could handle customer orders and deliveries.

Embedded finance enables every company to be a fintech company—and is creating a massive economic opportunity

One of the most common applications of embedded finance is integrated payments, which streamline laborious redirects between banking systems, but allow transactions to be processed simultaneously upon a deal. The ride-share company Lyft uses its own debit cards to make instant payments to the drivers. Drivers are allowed to create separate savings accounts without leaving Lyft’s financial ecosystem as well. What embedded finance offers is a bundle of financial services, tech and licences from a single provider. What this means is that you no longer have to spend years building out financial infrastructure, before then attempting to meet the required regulatory demands. Instead, you ‘plug in’ to an embedded finance provider and select the financial services you need.

This is the case of Uber’s alliance with BBVA Mexico, whereby Uber has provided a digital bank account to its driver and delivery partners, who operate directly from the Uber app. The account, linked to the ‘Tarjeta Socio Conductor’ international debit card, however, is provided and managed by BBVA Mexico. Thus, Uber employees can receive their earnings within minutes and access both financial (e.g. credits) and non-financial benefits (e.g. discounts and rebates when refueling). Any business that wants to offer embedded finance products purchases access to one or more APIs. It can plug into a ready-made API, put their branding on the product, and offer it as if it were their own — what is known as white-labeling. Alternatively, it can use one or several APIs as building blocks to create a unique new product or service which it then offers to its customers or sells to other businesses.

Moreover, embedded finance is generally used to streamline the buying process, whereas BaaS encourages greater use of business as it offers additional financial products. Banking heavyweight Goldman Sachs did this when it partnered with Apple so the tech giant could create its branded credit card. Similarly, several banks have partnered with Google for an upcoming embedded banking product, code-named Project Cache. Furthermore, partnering with a banking-as-a-service provider can be advantageous to licensed financial services firms too, because it allows them to call on expertise they might not have in house.

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Now, with embedded insurance, brands can offer insurance and payment simultaneously to the consumer in one easy step during checkout. With most forms of insurance, it isn’t about saving money, it’s about convenience. Consumers do not want to head to other companies or insurance offices to buy it. Brands are now able to provide the insurance at the point of sale, which is beneficial to all parties that are involved. A simple API integration can enable businesses to give their customers the integrated financial services they’re looking for, and many businesses are already seeing the benefits. According to research, 70% of businesses have stated that increasing customer demand for financial services is driving a faster rollout of embedded finance.

Looking at industries, retail and e-commerce platforms form the lead use cases. They’re highly digitized, with universally accepted checkout and payment options. SMBs, which represent 57% of B2B card volume, will be significant adopters as embedded penetration rises from 5% in 2021 to 15% in 2026. Much of the growth here rides on ensuring that late or unpaid invoices are fulfilled, generally by integrating a one-click payment mechanism, initiated by the customer upon receipt. We estimate the 2021 US market for platforms and enablers at $22 billion in total revenue across payments, lending, banking, and cards.

Similar to embedded payments, embedded lending allows non-financial brands and companies to offer lending products or credit, through the platform directly to the consumer. Companies can now have instant access to loans or credit to help scale their business, without ever having to step foot in a bank. Almost any business that sells a service or product can embed finance into their sales. However, embedded finance tools are designed for those that trade online or via an app. There are virtually no limits to the type of non-financial transactions into which you can embed finance. For example, a small jewellery business can sell insurance, a local carpenter could offer payment plans, or a bookkeeper could offer a savings account to their clients.

Partnering with a banking-as-a-service or a payment provider saves time and reduces complexity, enabling businesses to launch high quality financial services products quickly and cost effectively. It provides a payment service provider with expertise in solutions for processing, white label card issuance, and payments. It is one of the first companies to use embedded finance technology and methodology, and it strives to keep clients and raise their lifetime value. Remember that identifying your company’s objectives to take embedded finance initiative is also an essential part of the process. These could include improving customer service, expanding an existing clientele, or starting a new business to cater to a particular target market or demand. For instance, embedded payment is one strategy that can help you improve clients’ satisfaction.

In the “Embedded Finance Tracker®,” KeyBank’s Bennie Pennington tells PYMNTS how this technology is allowing merchants to offer more cohesive end-to-end services to their customers. These offerings can either be embedded as individual options, such as lending, or several features, using a BaaS product to create their financial environment. The environment that financial institutions operate in is always changing.

Services

Most readers will likely be familiar with PayPal or Stripe as two good examples of API-led platforms helping facilitate embedded finance. The third party using the bank’s services never directly has access to a customer’s finances — they only act as an intermediary. Open banking initiatives have taken flight in many economies across the globe. Predicated on the open access of banking data for the overall benefit of customer choice, open banking comes with many challenges — security not the least of them. It is the conduit through which the front-end financial solution communicates with the back-end system. It is able to facilitate the interaction in such a way that the system and the application understand each other.

How APIs are unlocking financial services

I’ve seen over the past few months that industries are starting to pick up on the potential of embedded banking. Creating a successful embedded finance strategy that meets the demands of your business is the first step. This entails assessing your digital requirements and choosing the tools you wish to integrate.

In this post, we’ll talk about embedded finance, open banking, the benefits of challenges of open banking, and how open banking APIs are driving Digital Banking Solutions. What are the three support pillars for financial services transformation? The application of embedded finance will increase in parallel with the advance of global ecommerce markets. According to Statista, the sales figure of e-retailers exceeded US$5.2tn globally in 2021 and is projected to continue soaring in the coming years. Apps like the Cash App from Square and Venmo from PayPal are key examples of this and are rapidly changing the way we view the world of digital and embedded finance.

In fact, over time, banking has always experienced an evolution in the methods by which financial services are distributed. For banks and other traditional financial services firms, partnering with a specialist and productizing their services into an API could enable them to reach a wider audience without increasing customer acquisition costs. Far from being a passing fad, the technology is already revolutionizing how financial services are offered and consumed, presenting tailor-made products to customers at the time and on the platform where it makes most sense.

Airbnb makes use of this as they provide Host Protection and Guarantee insurance for their hosts. The programme ensures that hosts are confident any damage or injuries on their property will be covered and not come out of their pocket. Between 2020 and 2021, the coronavirus crisis https://globalcloudteam.com/ caused businesses to rethink and accelerate their digitization strategies unlike ever before. Digitization projects planned for years in advance were completed within months. In fact, rather than be out of pocket, they’d generate revenue by selling access to their API.

That is an incredible rate of growth for an industry that can be considered to be still in its infancy. It is estimated to be worth approximately $7.2tr by 2030, with over 92% of businesses planning to roll it out within the next five years. More and more businesses are becoming aware of how embedded finance can reshape their business, simultaneously cutting costs and boosting revenue. By assigning each of their customers with a virtual IBAN, all payments could be reconciled automatically, eliminating human error and saving their Ops team hours of painstaking work.