From Open Banking APIs to Banking-as-a-Service: How big is the leap?

Open Banking and Banking-as-a-Service (BaaS) are terms used for APIs in the financial space. But do they mean the same - can they be used interchangeably? Does a bank automatically offer Banking-as-a-Service when it offers Open Banking APIs?

Commonalities

Both Open Banking and Banking-as-a-Service are terms used to refer to financial APIs that are provided by banks. And being APIs, they can be embedded into other products and services. The API consumers, let’s call them fintechs, provide the app, the context in which the API is embedded. Due to the capability of APIs to be embedded, both Open Banking and Banking-as-a-Service can be subsumed under the term Embedded Finance.

Differences

The difference between Open Banking and BaaS APIs is how deeply the respective type of API can be embedded, how much of the lifecycle of the exposed banking product is captured by the API, and which lifecycle activities of the banking product happen within the embedded context vs. outside of it.

Illustration of the differences

Let’s illustrate the difference with an API that provides access to a cash account. 

If the API allows access to the full lifecycle of a cash account, it is a Banking-as-a-Service API. The complete product lifecycle can happen within the embedded context, i.e. the app of a fintech, covering: creating a new account for an end-user, retrieving metadata of the account, retrieving transaction and balance data from the account, initiating and executing payments from that account and closing the account.

An Open Banking API of a cash account only covers a part of the lifecycle, e.g. retrieving transaction and balance data from the account, but leaves out other lifecycle activities. In an Open Banking API, essential lifecycle activities, such as creating and closing the account are not covered by the API and need to take place e.g. on the website of the bank, inside the mobile app, or even in the bank branch.

BaaS

BaaS provides an autonomous, embeddable product, a product that can completely live within the embedded context. BaaS APIs allow a fintech to build a service that looks like a bank. Using BaaS, the API provider is completely invisible to the end-user - the API consumer is able to completely own the channel to the end-user. The end-users might not even be aware of the existence of the BaaS provider - as they only interact with the fintech (API consumer).

Open Banking

Open Banking only provides embeddable features of a bigger product, which needs to live outside the embedded context. Open Banking APIs do not allow a fintech to build a service that looks like a bank. End-users mainly interact with the bank via the bank's own channels (at least for opening and closing the account) and only sporadically access their data via the Open Banking APIs on a fintech app.

Summary

Open Banking exposes features of banking products as APIs, whereas Banking-as-a-Service exposes banking products as a whole in the form of an API. The functionality covered in Open Banking APIs is only a small subset of the functionality that needs to be covered by a BaaS API.

Photo by Edu Lauton on Unsplash