BaaS vs. BaaP: Navigating the Future of Financial Ecosystems through Embedded Payments

Traditional banking models no longer fit in the new digital era where customers expect seamless purchase experiences. In a world of connected journeys and experiences, embedded payments have emerged to play a critical role.?

Embedded finance refers to offering financial services on non-financial platforms or journeys. Embedded finance has been around for quite some time, for instance, sales financing at retail stores and auto loans at dealerships. These avenues offer newer channels for banks to reach out to end consumers through embedded payments.?

Banks can harness the power of embedded payments using Banking as a Service (BaaS) and Banking as a Platform (BaaP) to expand their reach and innovative financial propositions within these ecosystems.

The vast potential of BaaS can be portrayed by Market Research’s projection of the BaaS market projected to reach $2.3 trillion by 2028. This growth comes at a CAGR of 26.33% from 2021 to 2028. Similarly, Gartner’s research suggests that 62% of banks are looking at building new offerings by partnering with fintechs as a high priority.

While both BaaS and BaaP can be used for businesses, a key difference is that the former serves the non-bank business’ customer with integrated bank services, while the latter serves the bank’s customer with integrated fintech services.

Thus, BaaP is essentially the opposite of BaaS, where the bank integrates third-party services into its own system via APIs.

Here is more on these emerging trends.

Demystifying Embedded Payments: The Foundation of Change?

Embedded payments is a novel concept that involves placing financial products within a non-financial customer experience or journey. For example, consider a departmental store that offers its own branded credit card with relevant rewards for customers.?

Many experts see embedded payments as a positive pathway that can help financial service companies gain exposure to new clientele and creatively engage with them. Rather than selling financial products in the traditional way, embedded payments allows for highly meaningful partnerships that can help both the business and the customer through greater convenience and broader financial inclusion.?

The embedded payments space presents a promising opportunity for growth that banks cannot afford to miss out on.?

Banking as a Service: Empowering Non-Financial Players?

BaaS refers to offering banking services as part of a software solution to customers. It can involve integrating banking services into a non-bank third-party app or website. For example, consider how payment apps offer insurance and loan services as well.?

Some common examples of BaaS include account opening, payment processing, and loan processing within e-commerce websites. The primary advantage of BaaS is that it makes the customer journey very easy. There is no need to visit the nearest branch of their bank and stand in line and deal with physical forms and documentation. Customers can access the majority of banking services straight from the convenience of their homes through commonly used smartphone apps and on the same journey.?

Banks can consider partnering with fintech companies, e-commerce platforms, ride-sharing apps, etc. to offer BaaS solutions.??

Banking as a Platform: Banks as Ecosystem Generators?

The other path or complementary path is BaaP. This involves banks creating their own software platforms through which they can offer their financial products to their customers. For instance, banks have their own mobile app through which customers can gain access to all information about their bank account, their loan account, their deposits, and so on.?

The primary advantage of BaaP is not just customer convenience but also higher customer engagement. Banks can inform customers about their other services through the app which acts as an upsell or a cross-sell. It can help banks maximize their customer lifetime values more in comparison to other strategies.?

BaaP is expected to grow at a CAGR of 20.9% between the years 2023 to 2031. It offers a unique opportunity for banks to leverage extant technology to improve their offer and value.?

Choosing the Right Path: BaaS vs. BaaP for Businesses?

The above table encapsulates the key differences between choosing between BaaS and BaaP. In our view, the right way for banks to move forward in today’s age is to choose both.

BaaP has become non-negotiable as many competitors already offer their own platforms which act as convenient gateways to their services for customers.?

BaaS should be considered as a complement to a bank’s own app and a way to reach a more diverse target audience that may be unreachable otherwise.

End Note

The transformative power of embedded payments is yet not completely explored and holds the key to reshaping the financial ecosystem. For banks, two technologies that hold the key to unlocking the true potential of embedded payments are BaaS and BaaP. While these models work on different sides,? they are not mutually exclusive and are essential for a well-rounded embedded payments strategy.

Banks cannot stick to their incumbent models when consumer demands change. BaaS and BaaP are the tools they can leverage for driving maximum impact with optimized efforts for all the players in the fintech industry.

The world of banking is ripe with exciting possibilities, and embedded payments is the way forward for banks that put customer experience first.