Open banking has become a powerful force driving change in the global financial services industry. But what is open banking, exactly? And what is open banking vs banking as a service? Read on to learn the key differences, how open banking and banking as a service work, their real-world applications, and which suits your business needs.
H2: What is open banking?
Open banking is the framework that has opened up modern, user-centric banking services like never before. It opens up access to customer banking data, enabling banks to share with third party providers, subject to them having the customer’s explicit consent to do so.
his data-driven approach supports product innovation in the financial services sector at the same time as it gives customers greater control over their account data and ownership of how it is used, and by whom.
How open banking works
At the heart of open banking are an API framework and secure data sharing mechanisms. FDX, which stands for Financial Data Exchange, has become the open banking standard in the US, recognized by the CFPB and bringing widespread standardization across the industry.
This standardization, combined with strong customer authentication and a robust framework for data sharing, is powering new ways for third party providers to connect with banks and integrate products and services. It enables account information service providers (AISPs) to provide users with information from multiple accounts via a single interface. Tools such as budgeting and credit scoring apps make use of this functionality, which is provided via secure APIs, making it easier for customers to manage their finances.
Another example of open banking in action is when payment initiation service providers (PISPs) enable customers to initiate payments directly from their bank accounts without going via the debit/credit card network.
Open banking has already changed the banking industry significantly. The concept is now extending to new banking products under the wider open finance agenda – something you can dive into the details of with this lively discussion of how FDX is shaping financial services.
By enabling real-time banking data accessibility across multiple institutions, open banking services support a vast range of collaborative new use cases. Easier, secure, API-based data sharing has also enabled banks to open banking as a service up as a model for third party providers to use.
What is banking as a service (BaaS)?
Banking as a service is a model where a bank lets a third party partner use its infrastructure and services. The third party provider can build on the ecosystem provided by the bank to create its own products and services.
How BaaS works
Banking as a service is a three-party ecosystem made up of licensed banks, BaaS providers and third party companies. The BaaS platform provider sits between the regulated bank and the third party company (a fintech/non-bank business). It provides whatever API, compliance and integration tools and structures are necessary for the third party to offer services using the bank’s infrastructure.
When fintechs collaborate with banks in this way, security and compliance are paramount, ensuring every user is protected during the exchange of their data between one institution and another. API integration enables this, while also providing seamless service delivery.
APIs also underpin private-label solutions and embedded banking capabilities. This is where non-financial institutions offer financial services as part of their process, such as an ecommerce platform offering financing as the user checks out. This kind of integration moves more towards banking as a platform vs banking as a service.
Open banking vs banking as a service (BaaS): Overview of key differences
| Aspect | Open banking | Banking as a service (BaaS) |
| Definition | A regulatory framework that enables banks to share customer financial data securely with third parties via APIs, with customer consent. | A business model that allows non-bank companies (like fintechs) to offer financial services by using a licensed bank’s infrastructure and APIs. |
| Primary purpose | Promote innovation, transparency, and competition by allowing customers greater control and ownership of their data. | Enable non-bank businesses to deliver financial products and services without obtaining their own banking license. |
| Core function | Data sharing and API-based access to financial information. | Service integration and delivery through white-label or embedded financial solutions. |
| Stakeholders | Banks, third-party providers (AISPs and PISPs), and customers. | Licensed banks, BaaS providers/platforms, fintechs, and end customers. |
| Regulatory focus | Compliance with open data regulations such as PSD2 (Europe) and FDX (US) to ensure secure data sharing and consent. | Compliance with banking license and financial service regulations, managed by the partner bank or BaaS platform. |
| Revenue model | Banks and third-party providers monetize data access and insights through APIs, analytics, or subscription-based services. | Fintechs and non-bank businesses generate revenue through transaction fees, lending, or embedded financial products built on the bank’s infrastructure. |
| Examples | Account aggregation apps (e.g. Plaid), budgeting tools, payment initiation services. | Neobanks (e.g. Chime, Current), embedded finance (e.g. Shopify and Stripe), BNPL providers (e.g. Klarna, Affirm). |
| End-user benefit | Greater control over financial data, seamless account management, and personalized financial insights. | Access to integrated, branded financial services directly within non-bank platforms. |
| Relationship between them | Open banking provides the standardized data-sharing framework that enables BaaS models to exist. | BaaS builds on open banking infrastructure to deliver new financial services to customers. |
Key differences between open banking and BaaS
To make the distinction between open banking services and banking as a service clearer, let’s look at some key differences between the two.
Primary purpose and function
Open banking’s purpose is to make the financial system more transparent, competitive and innovative. It achieves this by providing the functionality for customers to share their data securely, via APIs, with third parties through permissions that the user can easily manage and revoke.
The primary purpose of banking as a service is to empower non-bank companies (such as fintechs or retailers) to offer regulated financial services without owning a banking license. BaaS providers facilitate this through APIs, compliance tools and flexible integration capabilities.
Stakeholder relationships
With open banking, the primary stakeholders are banks, regulated third party providers (the AISPs and PISPs we mentioned above), and the customers. Data sharing is the core focus of this relationship.
With BaaS, the primary stakeholders are the banks, the BaaS platform providers, the fintech/non-bank companies, and the customers. With this model, it is service delivery that is the core stakeholder relationship focus.
Regulatory requirements
Regulation, of course, touches on all financial services. Banks and fintechs must comply with regional regulatory requirements and remain compliant even as they evolve new services and enhance existing products. Yet there are differences with how this impacts open banking vs banking as a service.
For open banking, regulatory compliance is focused on standards for secure data sharing – such as Europe’s PSD2 regulation. For BaaS, the emphasis is more on banking license compliance, with the BaaS platform ensuring regulatory and operational integration.
Business models
There are fundamental differences between the open banking vs banking as a service business models. Open banking typically operates on a data sharing model, with banks providing third parties with access to customer data via APIs as part of the open banking framework. The third party providers then monetize their insights, analytics and services via subscription fees or transaction fees.
The BaaS model, by contrast, is a service integration model. Third party fintechs and non-bank companies deliver branded financial products to their end customers using the infrastructure of the licensed banks.
Real-world applications and use cases
We mentioned a couple of example use cases above, but let’s look at a few more real-world applications of open banking and banking as a service to gain a deeper understanding of their uses.
Open banking applications
Open banking’s myriad use cases include:
- Account aggregation: A budgeting app can access transaction data from a user’s bank account through open banking. With the power to authorize account access for the budgeting app, the customer can gain valuable financial insights that give them better control over their money.
- Payment initiation: Direct account-to-account payments bypassing card networks are achievable with open banking. This can reduce payment costs by cutting out the use of debit and credit cards.
- Credit assessment: The real-time nature of financial data access under open banking makes instant creditworthiness verification possible using a customer’s transaction history. This transparency can transform financing options for ecommerce platforms wanting to give customers more choice at checkout.
- Personal financial management: Apps like Emma and PocketSmith enable users to track their finances in an efficient and easy manner. Customers can track everything from bill payments to subscriptions via such mobile apps, supporting them to better manage their finances.
- Business financial services: Cash flow analysis and automated accounting are enabling businesses to take a more efficient approach to financial governance, with open banking supporting scalable solutions that businesses of all sizes can use as they develop and grow.
BaaS applications
Providing access to banking infrastructure and processes through BaaS enables use cases that benefit a wide range of businesses and their customers. Examples of these include:
- Embedded payments: Shopify building in merchant payments via Stripe is perhaps the best-known example of embedded payments, but it’s just one of many. Look around and you’ll see embedded payments in action everywhere. Uber offers the Uber Pro Card, powered by Branch, to drivers and couriers for cash back on refueling, free automatic cashouts after each trip, and a “backup balance” of up to $150. It also offers the digital Plus Card to Uber Eats drivers to pay for customer orders. Likewise, Lyft provides drivers with a debit card for instant, secure access to their earnings.
- Neobanks: BaaS customers include a long list of neobanks – digital-only banks that operate through mobile apps and online platforms. They use BaaS infrastructure to enable this, keeping their costs lower as a result and connecting with customers in new markets in new ways. Examples of neobanks include Chime, Dave, MoneyLion, and Current.
- Corporate cards: Companies like Brex and Ramp offering expense management solutions
- Buy now, pay later: Companies such as Affirm and Klarna use BaaS for payment facilitation. They can then offer embed their services with retailers, providing ecommerce customers with financing options that spread the cost of their payment – all handled seamlessly in real-time during the checkout process.
- Gig economy financial services: Banking as a Services is underpinning powerful partnerships, such as that between Marqeta and Payfare, which are providing instant payout and digital banking solutions to gig workers. It means that companies such as DoorDash can better support gig workers who pay for orders at restaurants and grocery stores before delivering them to customers.
How open banking and BaaS work together
Open banking is the framework that is opening up a whole range of new financial services, supporting fintechs and non-bank companies to innovate, scale, and reach previously underserved customer groups. This is making financial products more customizable and personalized, as well as enabling real-time decision-making. It is empowering firms to innovate and share new products at pace, while customers benefit from greater ownership of their data, using their financial information in new ways.
Banking as a service leverages the open banking framework to deliver a model that further enhances the range of new services available, often at a lower price point than would have been possible previously. It is supporting innovation across a range of third party companies, again ultimately benefiting the end user through greater choice and enhanced service.
Dive deeper into open banking
Having looked at open banking and banking as a platform vs banking as a service, if you find you’re hungry for more, head over to LEAPxFinance. You can watch this comprehensive event on demand, exploring in depth how APIs and AI are reshaping financial services in the global context of open banking and open finance.
The Tyk team is also happy to talk through all your needs, so if you’re keen to provide open banking as a service to your customers, be sure to reach out and connect.