Open banking offers APIs to tap into existing financial products
Open banking is a concept that started in the UK. While most new financial providers struggled to break into the market around the world, the UK, in particular, was almost impossible to break into. There, the incumbent banks had been established for decades, and the number of assets and services they provided were impossible for a new company to match. Open banking became a way to bring new financial service providers onto the scene and therefore ushered in new technology and innovation into the banking space.
In our podcast with weavr and TransactionLink, we defined the principle of open banking as taking existing financial functions or existing financial products (via APIS, e.g. as requested by PSD2) and using them in new ways. It allows budgeting apps to import a person’s financial history, for example, and use it to create a personalised budget. It may allow a loan provider to analyse a person or company’s financial data in order to investigate their financial position. Open banking drove a lot of advances in the financial sector because it allowed fintech companies to build upon existing financial products to improve or create new services and functionalities.
Banking-as-a-Service platforms allow any brand to integrate financial products
Banking-as-a-Service platforms basically break down financial services, such as accounts, cards, loans or payments, into consumable APIs that any company can use to build solutions, e.g. by merging e-commerce and banking in the case of Shopify Balance x Stripe Treasury. However, this is where the Banking-as-a-Service market becomes a bit challenging to differentiate, as some providers only offer the capabilities to build new financial products, yet require the user to find a (bank) partner that provides the required licensing, e.g. for issuing credit cards. If a company wants to expand their business and offer a new service that would require them to have a banking license, it may not be worth their while to obtain a license, to begin with. Instead, they can partner with an existing bank to “borrow” their business license. Other providers, such as Solarisbank, already include the necessary licensing in their offer.
Core banking platforms provide the backend systems for regulated entities
A core banking system is a backend system that handles all of the day-to-day financial transactions. It processes payments and updates financial accounts and records. As the name suggests, a core banking system is the foundation of any bank, i.e. regulated entities, as well as the providers of Banking-as-a-Service platforms that offer their balance sheet and banking licensing as a part of their service.
Embedded finance is the development of seamless user experiences that include a financial product or service
Embedded finance describes the process of seamlessly integrating a financial product right at the point of interaction, tailored to the needs of the individual user and often improved due to the use of contextual data. An example of embedded finance is the aforementioned Shopify Capital loan or the QuickBooks Financing Line of Credit to provide faster access to lower-rate small business loans. In the latter case, the financing solution enables small businesses to use their QuickBooks Online data to apply for loan offers with the click of a button.
Embedded finance is a really interesting concept that will allow a lot of unique products and processes to emerge. You can listen to our recent podcast here to dive deeper into the topic or contact me directly for an evaluation of how your own business can successfully leverage banking APIs.