Frenemies – how Open Banking, BaaS, & Embedded Finance marries banks and fintechs

Bitter competitors are now co-dependents: what do these fintech banking solutions bring to the table?
29 September 2022

GOCardless booth at TechCrunch Disrupt Berlin 2019. (Photo by Noam Galai / GETTY IMAGES NORTH AMERICA / Getty Images via AFP)

In the past, there were limited viable alternatives to the entrenched banking industry. But then, change was necessitated when financial technology (fintech) startups began disrupting the hierarchy of the established financial services industry (FSI). Classical banking could no longer get away with rolling out the same old financial products anymore on archaic systems, not with the specter of fintechs coming in with their accessible product alternatives. This competition came with lower overheads and risk assessments providing greater entry to consumers, small business owners, and anyone else who didn’t qualify or ran afoul of the rules of traditional banks.

These financial disruptors would have been seen as natural rivals to FSI incumbents, who never had to put up with any ‘real’ competition to their dominance of all things monetary. But beset by financial scandals and under the weight of increasingly creaky system architecture that is really showing its age – not to mention lacking the agility to implement some of the newer, innovative financial solutions that fintechs were offering – the unthinkable is slowly happening:

Rather than being exclusively competition, the widening landscape of fintech-driven financial offerings is even attracting traditional banking to adopt them, often motivated by the easier route to integrate readymade, purpose-built solutions rather than endure the significant costs and operational headaches of developing their own solution in-house.

In recent times, the integration of payment options, data structures, and the use of application programming interfaces (APIs) to quickly deliver prebuilt bank-like functionality to non-bank entities would be known as ‘open banking’. Now, open banking has been treated as somewhat of a catchall term, but there are some distinct differences, as outlined by Ankit Agarwal, fintech thought leader and CTO of Hexaview Technologies, in a Forbes Business Council post.

Open Banking

Open Banking can loosely be defined as empowering interoperability between third-party financial service providers and a bank, almost always via API connections, as well as access the data and credentials of retail banking customers, including the account holder’s name, account type, currency, account open date, transaction details, etc..

A very common application of the feature is to integrate payment services, providing alternatives to the tried-and-tested use of cards to make cashless, one-off payments. In this instance, the aptly-named GoCardless – a London-based fintech that works with over 70,000 businesses and processes US$30 billion in annual payments worldwide – enables direct debit between two banks, both for one-offs and for automated recurring payments, making it an ideal alternative for e-commerce transactions.

Called Instant Bank Pay, advancing this feature was so integral that GoCardless was given US$95 million in funding at end of 2020 to move up its open banking strategy timetable. With Instant Bank Pay, those pesky one-off fees that sometimes even accompany monthly charges (for example, the annual fee or the deposit for a new membership) can now be dealt with, even if the merchant did not have a pre-existing relationship with the bank, or vice versa.

“Open banking has converted personal finance from reactive to proactive,” commented Agarwal in his post, adding that “third-party entities can improve and enhance the relevance of their suggested services by accessing the customer’s account information.”

Banking-as-a-Service (BaaS)

On paper, BaaS might sound virtually identical to open banking, but while open banking supplies access to bank customer data, BaaS “allows third-party access to the bank’s functionality”, according to Agarwal. This makes it extremely crucial for smaller banks and financial institutions who want to provide their customers with more innovative services that might otherwise be too costly to for the provider to develop independently.

The growth potential of partnering with fintechs for this is a US$25 billion revenue opportunity for banks, according to the Cornerstone Advisors report The State of the Union in Bank-Fintech Partnerships. Partnerships allow the bank to provide financial services to the third party’s customer base, while leveraging the bank’s charter and capabilities like account management, compliance, fraud management, payment, and/or lending services.”

Banking-as-a-Service can help to overcome the shortfalls that traditional financial institutions face when trying to develop their own digital banking platform, opening up a whole new base of potential clientele, but without the hurdles of having to build systems in-house.

Amount is one such platform, enabling banks of all sizes to embrace digitization holistically, offering comprehensive but modular solutions that can be tailored to individual FI needs, be they regional banks, credit unions, merchants, even other types of fintech. Not only is each module an end-to-end experience in itself, which can be white labelled to match the rest of the platform’s experience, solutions are flexible enough to support a variety of data reasoning and analytics, and gather them all in one place to make it easy.

Embedded finance

Lastly, embedded finance usually amounts to payment or credit services that are delivered by non-FSI firms directly to consumers for completing checkout experiences or access credit options quickly. In embedded finance, the financial service’s brand might be invisible, so it looks like the platform itself is offering payment or loan options to the end-user.

One such provider is Currencycloud, which enables industries of all maturities to embed finance options into the core of their digital business. Currencycloud is just as equipped to help financial services companies as digital businesses, powering cross-border money movements and simplifying their process for collection, conversion, and payment to be more consumer-friendly.

Currencycloud white labels its platform services so the banking or financial institution will look like it’s offering digitalized financial services. This goes for automating end-to-end payments and presenting real-time wholesale FX rates too, as well as regulated activity facilities that help ensure the end-user receives payment in their local currency, which is pretty cool.

The opportunities presented by embedded finance literally ‘embeds’ banking options into the platform of non-financial companies. And these are mutually beneficial to all parties, including the consumer who doesn’t have to jump through a few hoops to make the payment. This sort of cross-pollination with third parties is also what open banking and BaaS bring to the table, albeit in differing forms, but with the shared outcome of evolving traditional banking to kick open the door to a new, mutually beneficial reality where classical banking and neobanking can coexist.