Embedded finance vs banking-as-a-service 


Two of the biggest buzzwords in fintech and finance right now are embedded finance and banking-as-a-service (BaaS). Despite their prevalence, their meanings can often be hard to nail down. This is made more confusing by the fact that many in the sector use embedded finance and BaaS interchangeably.  

To a degree, this is understandable. The two sectors work in sync – one at the backend and one at the frontend – while the outcome is similar. That is, they can offer innovative financial products without building them from scratch.  

However, as our EMEA President, Charlie Platt, said in his speech at Fintech Talents London: ‘If a business has the wrong expectations of what embedded finance actually is and can achieve, they set themselves up for disappointment. But with the right ones, they can go out there and meet them.’ The same goes for banking-as-a-service.  

In this guide, we’ll look at what differentiates and unites the two sectors. We will explore how businesses can use them and why they present such a huge opportunity.  

Embedded finance explained  

Embedded finance involves taking financial products such as bank accounts, digital wallets, payments, loans, or insurance and incorporating them into an end-user’s journey. The most prominent examples are embedded payments on mobile apps such as Uber or embedded point-of-sale loans from providers like Klarna.  

Sometimes these different products will be labeled as their own specific sub-sectors such as embedded payments or embedded insurance. But the tech behind them is the same. Integration via APIs into non-financial products or ecosystems to provide the smoothest possible customer journey.   

But, as our Head of Embedded Finance, Vishal Shah, said in our recent article What is embedded finance?, embedded finance’s end goal isn’t just finance for finance’s sake. This is more than just digital finance like mobile banking or digital payments. Instead, says Shah, ‘the motivation should not be integration. It should be: how can I make an experience frictionless for the end-user by enabling them to perform financial activities within their natural habitat? How can I eliminate the unnecessary?’ 

Inspired by that mission the opportunities of embedded finance go well beyond just payments and point-of-sale loans. It’s completely revolutionizing the experience of financial services by focusing on three elements: context, elimination and personalization. 

1. Context

This doesn’t just mean who the user is or what they want. It also means understanding the context from the moment the customer is aware of the problem they want to solve, all the way until using the product or service and beyond. 

2. Elimination

After gaining a deep understanding of the context, providers identify and eliminate the unnecessary steps.  

3. Personalization

Without the unnecessary steps, providers can now build a more personalized experience around the core value proposition that matters to the end user. For example, insights into customer purchasing behavior from open banking that inform better credit decisioning and offer hyper-personalized loans. 

The use cases are virtually endless. As such, the embedded finance market is already worth an estimated USD $241 million, and is expected to grow steadily at a compound annual growth rate (CAGR) of 23.9% over the next seven years.  

Banking-as-a-service explained  

Banking-as-a-service involves licensed financial institutions becoming sponsors of non-banking brands and other fintechs. In this case, the licensed financial institution becomes a BaaS provider. They offer access to their services via the use of APIs combined with regulatory compliance and operational expertise. In other words, BaaS providers facilitate backend banking functions, and BaaS consumers take care of the frontend. This enables brands and fintechs to offer a wide range of innovative financial services to their end customers. Brands typically create a package or a bundle comprising their non-financial product with a financial product to better serve their end customers. Fintechs on the other hand typically create their own differentiated financial products and customer experiences.  

Predominantly, BaaS customers already exist in the finance space and are looking to further expand and enhance their offering or they are non-banks looking to create a new financial product. Many embedded finance service providers even use the services of a BaaS provider for their backend. While many BaaS providers partner with embedded finance companies to help them offer a frontend option.  

Banking infrastructure redefined

Banking services such as account services, deposits, payments, and loans are heavily regulated and main street banks have an expansive network which makes them the ideal BaaS providers. For a non-bank or a smaller fintech, building these networks and meeting compliance needs can be hugely time-consuming and costly. As BaaS providers already have those licenses and networks in place, their clients can integrate them into their own offerings without the need to build them or acquire the correct licenses and keep track of evolving regulatory compliance landscape.  

Just like embedded finance, the banking-as-a-service market is already impressive and growing substantially. The global BaaS market size was valued at USD $19.65 billion in 2021 and is expected to expand at a CAGR of 16.2% from 2022 to 2030 to $74.55 billion. 

The key differences of embedded finance and banking as-a-service

Frontend vs backend 

The way financial services are distributed and consumed today is through dedicated bank-owned channels.  

Initiatives such as Open Banking & API banking have transformed banks to become BaaS providers by offering their technology, compliance and operations as a service bundle to enable other companies to offer financial services to their customers. Therefore, BaaS providers and consumers both are focused on ultimately delivering a financial product or a service.  

In contrast, embedded finance is about enabling the consumption of the financial service to fade in the background. The focus is delivering the core value proposition to the end user. Therefore, embedded finance is the capability that enables an end user (business, person or even a machine) to instantly consume personalized financial solutions within the context of a business transaction and seamlessly embedded in the system where the business process is currently executing.  

Embedded finance use cases and benefits  

Currently, most embedded finance use cases are in the B2C (Business to Consumer) arena. These are mobile retailers, eCommerce platforms, digital businesses, fintechs and virtual banks offering embedded payments, loans or insurance, often at the point of sale and point of purchase. Customers benefit from this frictionless experience and access to world-leading financial products just when they need them most. Businesses benefit from higher engagement and retention and additional revenue streams. Due to the network effects, financial service providers benefit from a far wider and more easily accessible pool of customers than through traditional channels.  

There are several potential embedded finance use cases emerging in the B2B space as well. They usually emerge at the intersection of hyper-digitized physical and financial supply chains. According to OECD, there is a growing trend of global trade becoming digitized. And businesses are ever more connected via digital ecosystems. This generates a wealth of digital data about the flow of business transactions. 

Due to the huge volume of data open to providers, the potential for understanding the context and end-user personalization is huge. While the emergence of embedded finance aggregators (i.e. software that brings together vast a number of services onto one platform and offers them one with integration) means that any digital business can essentially become a one-stop-shop for all financial services.  

In a B2B context, there are many more benefits to embedding financial solutions beyond creating frictionless user experience. Other tangible business outcomes can include enhanced cash-flow management, increased product engagement with revenue impact, greater customer retention, reduced fraud risk, and many more.  

Plus, it gives financial service providers the ability to extend their reach into new markets and customer segments with differentiated products & customer experiences. 

Banking-as-a-service use cases and benefits  

For the end-user, the use cases for banking-as-a-service are mostly the same as embedded finance – that is, loans, insurance, wealth management and payments – but also include far more traditional banking services such as accounts, wallets, overdrafts, and cards as well as regulatory checks such as know-you-customer (KYC). 

As mentioned, the customers for these products are often existing financial service institutions (FSIs) like fintechs and banks or businesses looking to build an entirely new financial product – many of which will go on to become embedded finance products later down the line. By partnering with a BaaS provider, they can gain access to the appropriate banking infrastructure without the cost, time and regulatory burden involved with building it from scratch. However, they can build their own frontend on it or use the infrastructure to create entirely new and innovative products of their own or even launch their own bank.   

But, in recent years, this potential pool of customers has begun to expand to include large online retailers, such as Amazon and Ikea, building their own banking functions. 

The benefits for businesses and FSI clients are similar to embedded finance; access to vast swathes of data; additional revenue streams; fast route to market. While the BaaS providers benefit, again, from a considerably larger customer base.  


There are key differences between embedded finance and BaaS that are vital to know for anyone looking to reap the benefits of these two rapidly growing markets. However, there are also many similarities and a large degree of cross over amongst the two sectors. No more so than the two key ingredients for a success: understanding your end-user and finding the right partner.  

A strong embedded finance or BaaS strategy must always start with one question: what does my end-user want to achieve? Once you understand that, you can figure out what financial tools and data are necessary to give them that experience.  

Then it’s all about finding the right partner to help you build it.  

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