Banking as a Service vs Open Banking

Those who aren’t quite familiar with the fintech industry often use Banking as a Service (BaaS) and open banking synonymously. This is a common misinterpretation as both frameworks communicate with financial institutions through APIs to deliver financial services to clients.

However, while this mixup is harmless, it is still unequivocally wrong. These terms are not interchangeable. Not only will understanding the difference help you avoid getting schooled at a networking event, it will also give you insight into the disruptive forces currently animating the fintech industry.

So, let’s parse these terms.

What is Open Banking?

Open banking framework allows companies to access a client’s financial data through the use of APIs. Application programming interfaces (APIs) are essentially software that facilitates communication between information systems, thus allowing 3rd parties access to the data of financial institutions.

Here’s a use case for open banking. Let’s say you’re house hunting. APIs could take your aggregated financial data from various financial institutions and share it with an open-banking-enabled application. This app would then analyze your data and provide personalized housing recommendations based on your net worth, spending habits, transactional data, and financial history.

This use case can be scaled to effectively manage even your most granular consumer decisions. Open banking empowers tech start-ups, online vendors, and other third parties to create innovative solutions to help clients visualize and interact with their financial data without building native infrastructure.

What is Banking as a Service?

Banking as a Service (BaaS) also uses APIs to communicate with financial institutions, but for a different purpose. BaaS is the framework that allows third parties to lease a financial institution’s infrastructure, rather than build their own bank.

Take the Apple Card for example. Apple didn’t build their own banking infrastructure, they leased it from Goldman Sachs. Now Apple can build brand loyalty through credit incentives and Goldman Sachs can capture new clients.

BaaS isn’t just for massive corporations like Apple. Smaller enterprises, like retail shops and restaurants can offer branded debit cards, allowing them to track spending behavior and improve marketing.

BaaS effectively allows businesses, from e-commerce to healthcare, to act as banks. It has also spurred the rise of neobanks that can now provide services that might not be as profitable for less nimble, established financial institutions.

Similarities and differences between Banking as a Service and Open Banking

BaaS and Open Banking both rely on APIs to deliver services to their customers. The primary difference is that BaaS uses APIs to access functionality while open banking uses APIs to access consumer data.

If you’re using an app to check your credit score, that’s probably enabled through open banking. If you’re getting a micro loan from a neobank, that’s BaaS — information vs. infrastructure.

Both open banking and BaaS will have a huge impact on fintech, the financial services industry in general, and every sector affected by finance, which is every sector.

These frameworks are reinvigorating the financial industry with new talent, disruption, and innovation, forcing established players to compete with start-ups. That means better customer services, cheaper services, and creative solutions are coming. EMBank is a banking as a service provider and aims to create a  service base for fintechs to enhance their business scope.