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.
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.
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.
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:
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.
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.
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.
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.
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.
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.
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.