Banking as a Service vs. Open Banking vs. Platform Banking: What’s the Difference?

1 July 2021

The three fintech solutions, i.e., banking as a service, open banking, and platform banking, can be confusing. Find out the difference and applications of each. 

While some people even use BaaS, open banking, and platform banking interchangeably, it’s important to note that they aren’t the same.

Banking as a Service (BaaS)

As the name suggests, banking as a service is a SaaS product traded between B2B businesses. Essentially, one business owns the service and can lease it to other B2Bs who need it.

Typically, BaaS providers are licensed banks, whereas BaaS clients are non-bank retailers such as fintech startups and other major holdings that would like to offer banking services without building their own banking system. BaaS allows the providers to integrate their digital banking services directly into the products of the non-bank retailers.

This way, non-bank businesses, such as a retail chain, can offer customers digital banking services, such as debit cards, checking accounts, loans, and payment services without the need to gain a banking license. 

The two systems, i.e., the bank’s system and non-bank entity’s app, communicate via APIs and webhooks, allowing the end consumer to access banking services directly from the non-banking entity’s web or mobile application rather than a bank.

However, what’s important to note is that the non-banking entity never really touches the end consumer’s money. It merely serves as an intermediary. This is very important because anyone who handles money from consumers is legally required to have a banking license. BaaS allows non-banking entities to process financial transactions without the need for a banking license.

The Carrefour Example

An excellent example is Carrefour, one of the most popular retail companies in Europe. Carrefour offers loyalty points and cards to their best customers. They are also planning to offer credit at the point of sale.  

An easy way the company can offer these services traditionally reserved for banks is through BaaS. By partnering with a BaaS provider such as Solaris Bank or Clear Bank, the retail chain can even offer to check accounts without a banking license.

Amazon and IKEA are other non-banking entities that have recently tapped into BaaS to offer banking services to their customers.

Open Banking

Banking as a service and open banking are often confused as both involve linking a non-banking entity to a banking entity via an API. However, the models serve very different purposes.

Whereas in banking-as-a-service arrangements, the non-banking entity integrates complete banking products into their own products, in open banking, the non-bank entity only needs the bank’s data for their products. Indeed, open banking is often defined as the practice of sharing financial information electronically, securely, and under conditions approved by the customer.

Application programming interfaces (APIs) allow third-party providers (TPPs), i.e., the non-bank entities that need open banking services from banks, to access financial information efficiently. This way, TPPs can provide better, more streamlined services to their customers, i.e., end-users.

Open banking is effectively a better way to deliver personal financial management (PFM) services. Initially, PFM tools required the consumer to provide the same username and password to log into your bank account. Then the app would “screen scape” (or copy) information it needed from among the info at its disposal.

Screen scraping is not only tedious but also unreliable. Any updates on the bank’s app created lots of problems. Open banking APIs resolve this problem by giving apps direct access to whatever data the app requires to complete a transaction. Whether the customer wants to check their balance or complete a transaction, no screen scraping is needed.

Open Banking Examples

 An excellent example of open banking at work is HSBC’s Connected Money app. Launched in 2018, the Money App allows customers to view various bank accounts and loans, credit cards, mortgages, and other financial details in one place.

You can look at the Known Traveler Digital Identity (KTDI) program by the World Economic Forum as another futuristic open banking application outside the financial industry. The program leverages open banking to allow consumers with digital wallets to use their mobile phones as passports to verify their identities.

Platform Banking

Finally, you must be wondering how platform banking compares to banking as a service and open banking. Well, it’s entirely different from the first two fintech solutions.

Platform banking is a digital marketplace owned and operated by a bank or other (potentially non-bank) entity that offers banking and non-banking solutions. In specific reference to how it benefits banks, platform banking refers to an arrangement that allows banks to integrate services from other fintech companies to augment their existing offerings.

Perhaps we should use an example for better understanding. We all know that banks give out loans and mortgages. However, lately, banks that offer mortgages aren’t just stopping at giving out the money. Instead, many offer match-making services to help homeowners find the right properties, homeowner’s insurance, and house maintenance services.

Platform banking can help such banks offer these non-banking services without the need for the bank to develop the requisite software. For instance, if a bank wishes to point mortgage customers to home insurance products, the bank can partner with selected home insurance companies and integrate the various insurance options on their app so consumers can easily browse through.

Banks often use platform banking as a defensive strategy to avoid losing their customers to savvier fintech. By offering several non-bank solutions on their app, they can at least keep the customer within the bank’s ecosystem.

The PayTM Example

PayTM, the Indian e-commerce payment system has evolved from a single-service entity in the prepaid mobile business to a much broader business that allows customers to purchase airline tickets, reserve hotels, and even rent cars.

The trend is growing among banks too. For instance, Golden Sachs now allows users to order food from popular food delivery companies. This way, you don’t have to open the food delivery company’s app.

Now You Know

Banking as a Service, open banking, and platform banking are novel ideas that will probably have many applications as the digital revolution reaches a fever pitch. If you want to explore further possibilities of cutting-edge Fintech concepts, contact the NIX Solutions team.