The banking industry is replete with evolving terms and concepts, leaving even experts puzzled about their distinctions. Among these, Open Banking and Banking as a Service (BaaS) have emerged as game-changers, each with its own unique prerequisites and benefits. Although they share some common ground, like fostering innovation beyond traditional banking, it's crucial to understand their differences and how they relate to each other.
The rise of Open Banking and Banking as a Service (BaaS)
Open banking originated in Europe in 2018 through regulatory initiatives like the Second Payments Services Directive (PSD2) and the Open Banking Standard in the UK. Since then, it has spread to over 50 countries, with open APIs becoming the standard for collaboration in a vibrant financial ecosystem. Banks, neobanks, fintechs, payment disruptors, and tech giants all vie for dominance in different parts of the banking value chain; one that has previously been highly fragmented.
This environment has led to the rise of embedded finance, which demands a unified digital platform for delivering both financial and non-financial products and services. Embedded finance, encompassing everything from mandated accounts and payments to mortgage loans, pensions, and insurance, has opened up new opportunities for innovation.
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One such trend gaining traction is Banking as a Service (BaaS). BaaS, which operates under the open banking framework, offers a radical departure from traditional financial services. It deconstructs the old model, putting its building blocks in the hands of a wider range of stakeholders. Success in open banking and BaaS hinges on modern technology—cloud-native, API-first, built on microservices, and powered by AI.
What is Open Banking?
Open banking refers to the process where banking institutions share customer information with third-party providers, with the account holder's explicit consent. It is a collaborative model that uses APIs to share banking data between two or more unaffiliated parties, aiming to enhance end-customer capabilities. These third parties could be service providers (eg. Insurers) or technology providers (i.e Fintechs).
Disintermediation of the retail banking value chain
The retail banking value chain has seen a decrease in end-to-end manufacturing and distribution within a single bank. This is due to the entry of non-traditional players, high costs, and technologically savvy but less loyal customers. Banks now need to collaborate with other ecosystem players like fintechs, telcos and retailers to assess which elements of their value chain add the most value to the end customer.
Open banking in action
Open banking is a system that allows financial institutions to share customer data securely and in real time with third-party applications through APIs. Consumers can authorize these digital apps to access their financial data, and third-party aggregators act as a bridge between account providers and third-party apps. This provides customers with a seamless experience by allowing them to access multiple financial services through a single application.
Open banking APIs have revolutionized the financial industry, providing new ways of sharing information and enabling Banking as a Platform. This infrastructure allows financial institutions to more readily "plug and play" with new features and offerings such as digital banking, faster payments, and digital lending.
The purpose of open banking is to give consumers and businesses a fast, transparent, and accessible way to track, spend, borrow, and invest their money while allowing financial institutions to give their customers better insights and more convenient services through open banking platforms. Fintechs can continue to innovate, design, and build better consumer and business solutions and experiences through open banking technology, driving the industry forward.
The benefits of Open Banking
Increased competitiveness: Open banking enables competition with fintech companies and other new players in the market.
Increased revenues and customer loyalty: By providing access to access to customer data and services, banks can create new revenue streams through partnerships with third-party providers. Banks can also benefit from increased loyalty by offering more personalised and relevant services.
Cost Savings: Open banking can help banks reduce costs associated with developing new services and maintaining legacy systems. By leveraging the capabilities of third-party providers, banks can reduce the time and resources required to create new products and services.
Improved customer experience: With open banking, banks can provide customers with a seamless and integrated banking experience. By connecting with other financial institutions and service providers, banks can offer customers a more complete view of their financial position and help them make more informed decisions.
Improved compliance and regulatory efforts: Open banking regulations require banks to share customer data with third-party providers, which can help them comply with regulatory requirements and avoid potential fines or penalties.
Improved cash flow management: Open banking allows businesses to have better visibility and control over their cash flow by providing access to real-time transaction data, which can help them make more informed decisions.
Easier access to financing: By sharing financial data through open banking, businesses can provide lenders with a more complete picture of their financial situation, making it easier to secure financing.
Streamlined accounting and bookkeeping: Open banking can simplify the accounting and bookkeeping process by automating the collection and categorization of financial data.
Increased efficiency and cost savings: With open banking, businesses can automate financial tasks and reduce the need for manual intervention, saving time and money.
Innovation opportunities: Open banking creates opportunities for businesses to collaborate with fintech companies to create new products and services that can improve customer experiences and drive growth.
Enhanced security: Open banking provides a secure and reliable way to share financial data, reducing the risk of fraud and increasing customer trust.
Increased competition: Open banking fosters competition among banks and financial institutions, leading to better products, services, and rates. It encourages new players to enter the market, which can lead to more innovative products and better customer service.
Improved access to financial services: Open banking allows customers to access a broader range of financial services and products from different providers. It helps consumers to easily compare the services and rates offered by different providers and choose the best one that suits their needs.
Better control of personal data: Open banking gives customers greater control over their financial data. They can choose to share their data with only the providers they want to and can also revoke access at any time.
Enhanced security: Open banking increases security by using secure APIs for data sharing, which are often more secure than traditional methods of data sharing. It also allows customers to monitor their accounts in real time, enabling them to quickly detect and respond to any suspicious activity.
Cost savings: Open banking helps customers to save money by providing them with more competitive rates and reducing transaction costs. It also allows for faster and more efficient transactions, which can save customers time and money.
What is Banking as a Service?
Banking as a Service (BaaS) operates under the open banking umbrella, offering a radically different approach to financial services. It allows fintech companies to provide a comprehensive suite of financial services without building and maintaining their own banking infrastructure. Instead, they can partner with traditional banks, which provide the necessary infrastructure and regulatory licenses.
How does BaaS work?
Banking as a Service (BaaS) enables non-bank companies to offer banking services through licensed banks' core systems via APIs. This model provides customisable modular services, scalability, compliance, security, and cost savings for third-party providers. Ultimately, BaaS enables greater innovation and competition in the financial services industry by allowing non-bank companies to offer banking products and services to their customers. This not only provides more options and better services for consumers but also drives the industry towards continuous improvement and digital transformation.
Open Banking & BaaS: What's the difference?
While both business models rely on APIs, their purposes differ. BaaS enables firms to offer banking products, while open banking facilitates access to data. Understanding the subtle differences is key to harnessing the full potential of these powerful financial service innovations.
Ukheshe’s approach has consistently involved collaborating with banks, telcos, and fintech firms to assist them in tailoring their digital payment services for their customers. clients. Through our multi-functional platform, Eclipse, Ukheshe has long been ahead of the fintech curve by offering BaaS – a game changer in the industry and an absolute essential in securing a competitive advantage in a rapidly digitised environment.