Over the past decade, technological progress and innovation have pushed the fintech sector from the sidelines to the center stage of financial services.

During this period, fintech companies have dramatically reshaped areas of finance with customer-centric, innovative value propositions and agile, cross-skilled teams.

As Fintechs enter a new era, the focus has shifted from hypergrowth to sustainable, profitable development as banks and nonbanks compete to meet evolving customer needs.

In this context, two terms are gaining significant traction, Embedded Finance (EF) and Banking-as-a-Service (BaaS).

Both models are revolutionizing how financial services are delivered. BaaS is a service model where banks provide their infrastructure and services to third-party companies, enabling them to offer financial products.

Meanwhile, Embedded Finance focuses on integrating financial services directly into non-financial platforms, allowing businesses to offer banking-like features seamlessly within their existing services.

Understanding the distinctions and synergies between these two models is crucial.

While Embedded Finance and BaaS share a common goal of streamlining financial services and eliminating traditional intermediaries, they differ in their technical implementation, methods, and target markets.

With businesses and consumers increasingly seeking creative and effective solutions, recognizing these differences is key to navigating the evolving landscape of financial services.

What is Embedded Finance?

Embedded Finance refers to the seamless integration of financial services, such as payments, lending, or insurance, into non-financial platforms like e-commerce sites, social media platforms, or mobile apps. Businesses outside the financial industry can still offer financial services to their customers by partnering with financial institutions. This model directly brings banking-like features to consumers within the platforms they’re using, making the experience more convenient and streamlined.

Embedded finance can range from basic transactions, like payments, to more complex services, such as loans or insurance, without users needing to leave the platform they’re already engaging with. This integration allows non-financial companies to create a more cohesive customer experience, reducing friction and increasing conversion rates. 

One example of embedded finance is seen in ride-hailing apps, where users can pay for their trips directly through the app without needing to switch to a separate payment platform. Drivers also receive their earnings through the app, and in some cases, can access features like instant payouts or financial tracking tools. This seamless payment integration makes the transaction process smooth for both users and service providers.

Another example occurs in e-commerce platforms, where merchants can not only process payments but also offer financing options to customers at checkout. Shoppers can choose to pay in installments or access short-term loans to make purchases more affordable, all without leaving the platform.

What is Banking-as-a-Service (BaaS)?

BaaS is a model where traditional banks offer their infrastructure and core banking services, such as account opening, Know Your Customer (KYC), and payment processing, to third-party companies. Through this model, fintech companies or other businesses can leverage the bank’s infrastructure to build their financial products and services without developing a banking system.

BaaS typically works via Application Programming Interfaces (APIs), allowing businesses to incorporate banking capabilities into their applications and platforms.

For instance, Zimpler can initiate A2A payments on your behalf using open banking APIs for the safest, quickest and most convenient ways to send and receive payments.

The third-party company focuses on delivering the customer experience, while the bank handles the technical and regulatory complexities behind the scenes.

BaaS doesn’t introduce new payment methods but provides a mechanism, often through open banking, for payment initiation, such as single payments or mandates for Variable Recurring Payments (VRPs). With APIs, these integrations allow businesses to consolidate various functions into a single platform, offering a smooth and unified user experience.

Key differences between Embedded Finance and Banking-as-a-Service.

Although Embedded Finance (EF) and Banking-as-a-Service (BaaS) are both reshaping how financial services are delivered, they operate with different scopes, audiences, and technological implementations.

Let’s break down their key distinctions.

Scope and functionality.

Embedded Finance integrates specific financial services, such as lending or payment processing, into non-financial platforms. The idea is to embed financial functions within existing services, allowing businesses to offer their customers seamless access to financial tools without needing to leave the platform.

Its scope is more limited to embedding particular services, primarily enhancing the user experience within these non-financial environments.

Banking-as-a-Service (BaaS) provides a broader range of financial products.

This model allows non-banks or virtual banks to offer full-fledged banking features, such as account management or investment products, by connecting to a bank’s infrastructure via APIs. With BaaS, companies can offer a comprehensive suite of financial services without establishing a physical banking infrastructure. The model empowers businesses to provide licensed banking services, going far beyond the specific integrations seen in embedded finance.

Technology and implementation.

Both models rely on advanced technologies like APIs, cloud computing, and secure data protocols to ensure seamless and safe operations. However, their approaches differ:

Embedded finance injects financial services into platforms designed for non-financial purposes, such as retail, travel, or social media. The focus is on enabling transactions without requiring users to leave their familiar environments. For example, a ride-sharing app might offer an embedded loan option for drivers, debiting the payments automatically from the same app. API integrations are central to embedding finance into these consumer-facing platforms, allowing for smooth and immediate user interactions.

In contrast, BaaS is the backbone of financial offerings by providing businesses with modular banking features, accessible via APIs. This “banking à la carte” model allows companies to select and integrate specific services, including account creation, money transfers, or investment management, without building their banking infrastructure. For fintech startups, BaaS accelerates their ability to launch robust financial services, with banks providing the underlying systems while the third-party business handles the customer experience.

Embedded Finance enhances existing platforms with financial tools, while BaaS gives businesses the infrastructure to offer full-fledged banking services independently.

Final thoughts.

Embedded finance and Baas integrate financial services directly into non-financial platforms, offering users seamless access to transactions without leaving familiar environments.

Powered by open banking, which provides secure access to banking data through APIs, it promotes innovation and enhances consumer data portability.

Payment solution providers, like Zimpler are at the forefront of this transformation, to deliver streamlined, secure payment experiences.

As the financial landscape evolves, Embedded Finance and Banking-as-a-Service will continue to reshape how people and businesses interact with money, creating more accessible and user-friendly solutions.

Join the payment revolution.

The information contained in this post is intended for informational purposes only, and should not be relied upon for professional advice of any kind. Zimpler does not make any representation or warranty as to the completeness or accuracy of the information, and assumes no liability or responsibility that may result from reliance on such information.