Banking as a Service vs Open Banking vs Embedded Finance: Who Owns What

Banking as a service, open banking and embedded finance are used interchangeably in conference talks and mean different things in contracts. The cleanest way to separate them is to ask, for each, three questions: who holds the licence, who holds the customer relationship, and who holds the money. Each term gives a different set of answers.

Banking as a service

Banking as a service (BaaS) is a licensed bank exposing its regulated capabilities (accounts, payments, cards, sometimes lending) through APIs so that another company can build a financial product on top. The bank holds the licence and, usually, the money. The fintech or brand holds the customer relationship and the product experience.

A BaaS provider is either the bank itself or, more commonly, a platform that sits between the bank and the fintech: it aggregates one or more sponsor banks, adds the technology (ledger, card issuing, onboarding, compliance tooling) and sells the combination as one API. Providers differ mainly in which of those pieces they own and which they resell.

What a BaaS provider actually supplies, in order of how hard it is to get elsewhere: the sponsor bank relationship and the licence coverage; the network memberships for card issuing; the compliance programme the bank requires; the ledger and account structures; the APIs. The first three are the real product. A fintech evaluating providers should ask about those before asking about the API documentation.

The responsibility question is where BaaS has had its problems. When the fintech runs onboarding and the bank holds the accounts, regulators have asked who really knows the customer. The answer that satisfies them is: the bank, with evidence supplied by the fintech under a contract that says exactly what evidence, how often. The partnerships that failed were the ones where that answer was assumed rather than written.

Open banking

Open banking is a regulatory or market framework under which banks expose customer data and payment initiation to licensed third parties, with the customer's consent. The bank holds the licence, the account and the money. The third party holds the customer's consent and builds a product on the data or the payment capability: account aggregation, credit decisioning, pay-by-bank checkout.

The key difference from BaaS: in open banking the third party does not create accounts or issue cards. It reads from and initiates payments on accounts the customer already has with a bank. The customer relationship for the account stays with the bank; the third party has a relationship for its own product only.

Open banking is a regulatory construct first, which is why it looks different in each market. Where it is mandated with standard APIs, third parties can build across many banks. Where it is voluntary, it becomes a series of bilateral integrations. I have written about the product architecture in open banking product architecture.

Embedded finance

Embedded finance is the outcome, not the mechanism: a financial product delivered inside a non-financial customer journey. Instant payouts inside a ride-hailing app, financing at a marketplace checkout, a card issued by a software platform to its business customers. Embedded finance is built on BaaS (when it needs accounts or cards) or on payments infrastructure (when it needs to move money) or on open banking (when it needs account data or pay-by-bank).

So embedded finance answers "what does the customer experience", BaaS answers "how are the regulated capabilities supplied", and open banking answers "how is access to existing bank accounts governed". They are three layers of the same picture, which is why they get conflated.

The three questions, answered

The frontier-market version

In the markets Simpaisa operates in, the BaaS vocabulary arrived after the practice. Wallets, telecom billing and bank transfers were already the rails, and the arrangement between a fintech and a partner bank was settled case by case: the bank holds the settlement accounts, the fintech runs the product and reconciles daily, and card issuance, where it exists, runs on the bank's sponsored BIN. Our own prepaid debit issuance for a client ran exactly that way, with the bank as the issuer of record and the product, onboarding and support on our side.

The lesson that transfers to any market: the arrangement worked because the bank's questions were answered before the product launched. Which account holds the float. Who reconciles. What evidence the bank receives about the customers. What the bank can switch off, and how the customers are told. The terminology can be whatever the market uses; the questions are the same.

How to choose

If you need to create accounts or issue cards under your own brand, you need BaaS, and the provider's sponsor-bank strength matters more than its API. If you need to read customers' existing bank data or let them pay from an existing account, you need open banking access, and the market's regulatory framework determines how far you can scale. If you are a non-financial company adding a financial feature, you are building embedded finance and should decide which of the two you are building on before choosing a vendor.

FAQ

What is banking as a service? A licensed bank exposing regulated capabilities such as accounts, payments and cards through APIs, directly or via a platform, so that another company can build a financial product on top while the bank holds the licence and the money.

Who are banking as a service providers? Either sponsor banks with their own API platforms, or intermediary platforms that aggregate sponsor banks and add ledger, card-issuing, onboarding and compliance technology. The value is mostly in the bank relationships and compliance programme rather than the API.

What is the difference between open banking and embedded finance? Open banking is regulated access to a customer's existing bank accounts (data and payment initiation) by licensed third parties. Embedded finance is any financial product delivered inside a non-financial journey, which may be built on open banking, BaaS or payments infrastructure.

Is embedded finance the same as banking as a service? No. BaaS is a supply mechanism; embedded finance is the customer-facing outcome that often uses it. A software platform issuing cards to its customers is embedded finance, built on BaaS.

What is a bank API? An interface a bank exposes to authorised partners for account creation, balances, payments, card issuing or customer data. In open banking the APIs are often standardised by regulation; in BaaS they are defined by the bank or its platform.