In the ever-evolving landscape of financial services, three groundbreaking concepts have emerged, reshaping the way we interact with financial services: Edge Banking, Banking as a Service (BaaS), and Embedded Finance. These innovative models, fueled by the rise of edge banking and the relentless pursuit of superior customer experiences, are revolutionizing the financial landscape.‍

Unveiling Edge Banking

Edge banking is a model where financial services are delivered directly at the point of need, often through digital platforms. It's about bringing banking to the "edge" of the customer's digital experience, making it more accessible and convenient. This concept is not unique to the financial industry. We've seen similar trends in other sectors, such as retail, where e-commerce platforms have brought shopping directly to consumers' homes, or entertainment, where streaming services have made it possible to watch movies or listen to music anytime, anywhere.

Understanding Banking as a Service (BaaS)

Banking as a Service, or BaaS, is a model where banks and financial institutions offer their services via application programming interfaces (APIs). This enables third parties, such as fintech startups or even non-financial businesses, to build and offer their own financial products using the bank's infrastructure.

Take the example of a fintech startup like Chime. Instead of building their own banking infrastructure, which can be costly and time-consuming, they leverage BaaS to access banking services via APIs. This allows them to focus on their core competency - creating a superior digital wallet experience - while leaving the banking services to the experts.

The Revolution of Embedded Finance

Embedded finance is the seamless integration of financial services into non-financial platforms. It's about making financial services accessible right where the customer needs them, within the platforms and services they already use.

Consider Uber, the ride-hailing giant. They've integrated a payment service into their platform, allowing customers to pay for rides directly within the app. This not only enhances the customer experience but also opens up new revenue streams for Uber.

Beyond embedded payments, here are a few examples of embedded finance that go beyond the typical Uber and embedded payments scenario:

1. Shopify and Embedded Lending: Shopify, an e-commerce platform, offers its merchants the ability to secure loans through its Shopify Capital service. This is a great example of embedded finance because it integrates financial services directly into the platform that merchants are already using to run their businesses. The loans are based on the merchant's sales history on Shopify, making the lending process more seamless and tailored to each business's needs. [2]
2. ‍Grab and Embedded Financial Services: Grab, a ride-hailing app in Southeast Asia, has expanded its services to include a range of financial products through Grab Financial Group. These include payments, rewards, lending, insurance, and even investment products. By embedding these services into its app, Grab is able to provide a more comprehensive and convenient service to its users. [3]‍
3. Amazon and Embedded Insurance: Amazon has partnered with Acko, an Indian digital insurance company, to offer auto insurance to Amazon customers. Customers can purchase insurance directly from Amazon Pay, with policies managed through a digital interface. This is a prime example of how e-commerce platforms can embed financial services to enhance their customer experience. [4]‍
4. Affirm and Embedded Financing: Affirm, a fintech company, partners with retailers to offer point-of-sale financing. This allows customers to finance purchases with simple, straightforward loans that they can apply for during the checkout process. This is a form of embedded finance that directly supports the retailer's core business.‍
5. Square and Embedded Banking: Square, known for its payment processing solutions, has expanded to offer a full suite of business banking services. These include bank accounts, debit cards, and loans, all integrated with Square's payment processing and business management tools. This is an example of how payment processors can embed broader financial services into their platforms.

These examples illustrate the wide range of possibilities for embedded finance, and how it can enhance the customer experience and create new revenue streams in a variety of industries.

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The Emergence of BaaS and Embedded Finance

According to a report by PwC, the market for embedded finance applications is projected to grow fivefold, from US$54.3 billion in 2022 to US$248.4 billion, by 2032. [1] The advent of these models is largely due to the emergence of edge banking and the pursuit of frictionless customer journeys. As PwC puts it, "As consumers’ appetite for frictionless financial services increases, re-examining prevailing attitudes within the industry reveals new opportunities to create value."

While these concepts of BaaS and Embedded Finance are relatively recent developments, their potential to generate significant value when implemented effectively is substantial. They facilitate the broadening of the financial services sector, fostering a win-win situation for all parties involved. Banks have the opportunity to reach new clientele without undermining their existing operations, and businesses can seamlessly incorporate financial services into their offerings, eliminating the need to vie for limited market share.

The Interplay Between BaaS and Embedded Finance

Banking as a Service (BaaS) and embedded finance are two sides of the same coin, each playing a crucial role in the delivery of financial services. BaaS, acting as the backend, provides the core banking infrastructure. It's like the engine of a car, powering the vehicle but not directly interacting with the driver. BaaS includes the fundamental banking services such as account management, payments, lending, and compliance, all of which are made accessible to third parties via APIs.

Embedded finance, on the other hand, is the frontend, the user interface that customers interact with. It's like the dashboard and steering wheel of a car, providing the driver with controls to operate the vehicle and information about its status. Embedded finance includes the tools and interfaces that businesses use to design and introduce new financial propositions within their own customer journeys. It's the part of the car that the driver sees and interacts with.

Without BaaS, embedded finance would be much harder to achieve. While developers can easily integrate with the backend and its APIs, the need to simplify usability for most people has given rise to a new suite of tools that build the frontend - that's embedded finance.

Together, BaaS and embedded finance form a complete financial services solution. BaaS provides the essential banking services, while embedded finance provides the customer-facing interface that makes these services accessible and easy to use.

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BaaS, Embedded Finance, and Open Banking: Understanding the Differences

Open Banking is a banking practice that provides third-party financial service providers open access to consumer banking, transaction, and other financial data from banks and non-bank financial institutions through the use of APIs. The primary goal of open banking is to put the power of data into the hands of consumers and encourage competition among financial service providers. This can lead to the development of new apps and services that provide customers with more choices, better deals, and more innovative financial products.

The Fundamental Differences:

1. Data Sharing vs. Service Provision: The most fundamental difference between Open Banking and both BaaS and Embedded Finance lies in the nature of what is being provided. Open Banking is about sharing data. It involves banks providing access to customer data (with the customer's consent) to third-party developers. On the other hand, BaaS and Embedded Finance are about providing services. BaaS involves banks offering their banking services to third parties, while Embedded Finance involves integrating these financial services into non-financial platforms.
2. Regulation: Open Banking is often driven by regulation. For instance, in the European Union, the Revised Payment Services Directive (PSD2) requires banks to provide third-party providers access to their customer's accounts. BaaS and Embedded Finance, on the other hand, are more market-driven, emerging from the opportunities created by digital transformation and changing customer expectations.
3. End Users: With Open Banking, the end users are typically fintech companies or other third-party developers who use existing financial data to create new services for customers. With BaaS and Embedded Finance, the end users can be a broader range of businesses, including both fintechs and non-financial businesses that want to integrate financial services into their offerings.
4. Impact on Customer Experience: Open Banking can lead to improved customer experiences by fostering competition and innovation, leading to the creation of new services. BaaS and Embedded Finance can also enhance the customer experience, but they do so more directly, by enabling businesses to integrate financial services seamlessly into their own customer journeys.

While Open Banking, BaaS, and Embedded Finance are all transformative trends in the financial sector, they each have a unique focus and role to play. Understanding these differences can help businesses and financial institutions to better navigate the evolving financial landscape.

Looking Ahead: The Future of BaaS and Embedded Finance

As we look towards the future, it's clear that BaaS and embedded finance will continue to play a pivotal role in the evolution of financial services. With advancements in technology and increasing consumer demand for seamless, integrated financial experiences, these models are poised for significant growth.

Conclusion

Banking as a Service, Embedded Finance, and Edge Banking are not just buzzwords; they are the future of financial services. They represent a shift towards more customer-centric, convenient, and innovative financial solutions. If you're interested in exploring how these models can benefit your business, we at Staq are here to help. Contact us today to schedule a free consultation and learn more about how we can support your journey into the future of finance.‍

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References

1. PwC. "Embedded finance: Challenging common assumptions." Last modified 2023. https://www.pwc.com/gx/en/industries/financial-services/publications/embedded-finance-challenging-common-assumptions.html.
2. Shopify. "Business Funding Made for Entrepreneurs | Shopify Capital." Accessed July 16, 2023. https://www.shopify.com/capital.
3. Grab. "Grab Financial Group | Grab SG." Accessed July 16, 2023. https://www.grab.com/sg/grab-financial-group/.
4. Livemint. "Amazon Pay joins hands with Acko to offer auto insurance." Last modified July 22, 2020. https://www.livemint.com/companies/news/amazon-pay-ventures-into-insurance-in-india-11595427759424.html.