As the embedded finance industry grows, a question that often comes up from innovators and digital startup founders is: what’s the difference between embedded finance and Banking as a Service?

On the surface, they both offer ways of integrating financial services into digital platforms, and it’s the subtle differences between them which make it easy to get confused. If you’re a company new to fintech or payment innovation, how can you pick apart what makes Banking as a Service (or BaaS, for short) and embedded finance different? And more importantly, how can you decide which solution is the best one for your business?

What is Banking as a Service?

You’ve probably come across other “as-a-Service” models before. Whether it’s infrastructure, mobile back-end, IT management or something else, the idea is always the same: providing customers with expertise or tools they can’t (or, for good reason, don’t want to) build themselves, so they can simplify parts of a value chain of delivery – and improve their product or service. 

Banking as a Service follows the same principle. 

Imagine Banking as a Service didn’t exist… if you’re an innovator looking to offer financial products like loans, accounts or virtual and physical cards as part of your application, building that functionality from the ground up is out of the question. It basically requires you to become a bank yourself, and that’s hardly a viable solution.

BaaS enables innovators to bypass some of this process, with financial services that integrate directly into your platform. Your app connects to the BaaS provider via APIs allowing non-banking businesses to access services from licensed financial institutions. 

However, often BaaS providers will provide raw APIs and do very little other heavy lifting. Their customers have to become an agent of the BaaS provider, thereby shouldering the regulatory and compliance burden themselves. Customers using BaaS need to create bespoke UX and product logic to manage the provision of the financial service(s) end to end (onboarding, account creation, money movements, viewing balances etc). 

While the difficulty is not in the same league as becoming a bank, a BaaS project is still a huge endeavour, running to 6, 9, 12 months or even longer. You’ll need to hire developer teams and source all first parties. It’s a major drain on resources, both from a people and financial point of view – the average cost is $250k, and it can sometimes rack up to $1m.

To get a fuller picture of BaaS’s limitations and what it will require of your business, ask your BaaS supplier these 10 questions.

How is embedded finance different?

At first glance, embedded finance looks like another term for the same solution. It’s also a way for innovators to plug financial products into their platforms. But the biggest difference is in what you get as part of the integration.

In the simplest sense, everything BaaS providers require their customers to manage themselves, embedded finance providers solve. 

Embedded finance customers don’t have to become an agent because the provider has built in everything required from a regulatory and compliance point of view (Compliance as a Service, if you will). 

The providers have selected Know Your Customer (KYC) and Anti-Money Laundering (AML) providers and built onboarding tools. They have integrated with card processors and issuers, and they allow for white-labelling. Some have even now added Google Pay and Apple Pay to offer the seamless experience today’s consumers expect. 

How much financial oversight do you, or your board, really want to take on? 

Embedded finance also allows you to weave banking services into your platform with less hassle. There is no need to assemble your own compliance team in-house, it’s one less thing you need to worry about.

Meanwhile BaaS is going to be a different story. You’ll need to take on the responsibility of ensuring compliance with financial regulations, sourcing and contracting with third parties, introducing new support processes that deal with sensitive customer data, and a whole lot more. If you want to learn just how weighty a lift that is, read up on everything you need to know about compliance.

Pretty soon, those investing in BaaS can feel like they’re becoming a bank, or a fintech at least. It certainly comes with a significant level of oversight – and new levels of risk and responsibilities that board directors might be reluctant to accept. 

All this means that the traditional way to deploy financial services – “Banking as a Service” (BaaS) – is far from a palatable solution for most. Meanwhile, embedded finance can give a business all of the benefits of becoming a fintech without these challenges or burdens. 

Making the call between BaaS and embedded finance

When it comes to choosing the right solution for your business, it’s not that one is always better than the other.

If you are looking to build the next neobank from the ground up, and you want to own the product architecture and the relevant compliance challenges, then BaaS is the right approach for you. 

Embedded finance, on the other hand, creates new ways to consume financial services, predominantly for non-financial businesses. It can put – or embed –  financial services invisibly inside digital experiences. 

So, instead of depending on the ordinary banking system to deliver financial services in parallel or after the event, you can provide everything your customers need in one seamless package. Imagine a project-management software that allows you to settle invoices automatically when a milestone is reached, or a healthcare marketplace that settles invoices raised in the background when treatment is delivered. (You can read more about such uses cases in our reports on embedded finance for B2B payments and employee-directed applications).

Anywhere that money flows, embedded finance can step in. For example, Weavr’s embedded finance system powers Ben, which helps businesses offer 100% flexible employee benefits and branded cards anywhere with 0% admin – you can read their full story here.

Whatever you choose, the future of BaaS and embedded finance is an exciting place to be

Embedded finance is the next evolution of what BaaS started. Ten years ago, innovators only had a choice between becoming a bank or partnering with a BaaS supplier, and the barrier to entry left many out in the cold. 

Now embedded finance brings a third option to the table, and one that’s growing rapidly – by 2026 the value of the embedded finance market is forecast to reach $51 billion.

Its growth has been driven partly by the pandemic and the need for so many businesses to shift online, but there are also new use cases emerging every day as adoption grows, from alternative investment platforms to the gig and creator economy. Banking as a Service originally helped to breathe new life into a stuttering banking environment, and now embedded finance is creating entirely new financial frontiers. 

Whether your offering is an application, marketplace or platform, if you’re looking to embed finance into your business, set up a meeting with one of our experts in your industry and request a demo today.

So now you know the difference between BaaS and embedded finance, come and learn about the next generation we’re building at Weavr.