Baas vs. Embedded Banking: who should control banking IT? 

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The popularity of the Banking-as-a-Service (BaaS) model is on the rise globally. However, many banks and institutions have realized that it could be a potential technological dead end. Is Embedded Banking a better solution? Not necessarily. What if we could merge both models and harness the best of both worlds? 

In recent years, IT companies offering “banking as a service” (BaaS) have gained traction in the financial sector. In the BaaS model, the service provider assumes responsibility for the smooth operation of the banking infrastructure and the implementation of changes requested by the client. This is why fintechs using BaaS can confidently deliver financial services and challenge traditional banking (source: 

What is Banking-as-a-Service and who uses it? 

Once upon a time, it was banks, and only banks, who created financial products such as bank accounts and payment cards. Today, BaaS providers offer ready-made banking services, such as fully functional current accounts. They deliver these through ready-made API solutions, available in the open banking model. (For more, see our blog post on how open banking needs flexible solutions).

The advantage of integrating financial services in this way allows the fintech, who is a nonfinancial service provider, to leverage the IT infrastructure of a “traditional” banking institution to build its offerings. They have access to a range of standard banking products (various types of accounts, payment or credit cards). This allows fintechs to operate in compliance with financial market regulations and flexibly tailor their financial solutions to their customers’ needs, all while maintaining cost efficiency. 

Moreover, a company using BaaS services doesn’t need to be an expert in banking, especially regarding the complex processes between the core system and individual business applications. With such a “banking back-end” tailored to their specific needs, fintechs, especially those unfamiliar with banking, can enter the market with a bang and offer financial services that revolutionize the market. 

The growing popularity of BaaS solutions worldwide 

The adoption of Banking-as-a-Service is increasing, as the numbers show. According to Precision Reports, by 2027, the global BaaS market will reach a value of $1.56 trillion. Meanwhile, the value of services generated through BaaS implementation is expected to amount to $25 billion by 2026 (, citing Cornerstone Advisors). 

A typical example of BaaS is debit and credit cards branded by well-known companies that aren’t banks. These companies can offer accounts that provide special rewards and benefits. Many such companies operate without needing a banking license, but they face restrictions, such as loan limits. Nonetheless, BaaS provider services instill trust in younger consumers due to the brand backing them. A popular example is the Apple credit card, which can be used to purchase and finance Apple products interest-free. 

Drawbacks of Banking-as-a-Service 

While Banking-as-a-Service may seem like the perfect solution for the modern financial sector at first glance, it’s not as flexible as one might think. In a world where banks need to frequently and efficiently launch new products but lack full control over their IT environment, they expose themselves to various challenges. 

Common issues faced by banks using the BaaS model include: 

1.     Low quality of delivered solutions. 
2.     Insufficient resources to launch required functionalities within a given timeframe. 
3.     A sharp increase in the cost of implementing a solution as the bank’s demand for services and new financial products grows. 
4.     The risk of quality degradation after switching BaaS providers, threatening customer loyalty. 

In short, a financial institution that doesn’t fully own its IT system can easily become hostage to an IT company. This was experienced by core system manufacturer, Profile, and the company FIS. Although the product itself is known for its quality, the transition to BaaS led to a cascade of errors in the company’s service offerings and significant delays in delivering new services to BaaS customers. As a result, trust in the core system, which is fundamental to it, declined, negatively impacting the FIS brand’s quality. 

Is Embedded Banking a solution? 

As a remedy for the challenges associated with BaaS, experts point to the new IT model of Embedded Banking. This model relates to integrated access to financial services. So, what exactly distinguishes Banking-as-a-Service from Embedded Banking services? 

While in the BaaS model the provider takes control of the back-end processes, in Embedded Banking, these processes remain entirely in the bank’s hands. The external provider only handles the front-end layer (which the end customer interacts with). However, the flip side is the high cost of maintaining infrastructure and IT specialists. Given today’s pace of change, the costs of maintaining such a back-end for a single bank aiming for national or global leadership are challenging to bear. This results in project delays to fit within a realistic budget, ultimately leading to delays in bringing new services to the market. Returning to a system where the bank owns its IT environment means revisiting the very banking pain point that the BaaS model was supposed to address. 

BaaS or Embedded Banking? What you need is a hybrid! 

What if we could combine the best that BaaS and Embedded Banking providers have to offer? Some banks we collaborate with have already implemented such a model. They separate the IT department into a distinct company within the group, allowing them to serve more entities (similar to BaaS). This way, they retain full ownership control (akin to the Embedded Banking model). The most significant advantage of this solution is that banks share costs and can decide on priorities within the group (in the “classic” BaaS model, the highest payer gets priority). 

How does this work in practice? For instance, in Credit Agricole Portugal, cooperative banks within the group have established their IT center. It manages the core system across all banks and implements necessary changes. Priority is determined by the number of shares in the group, but final decisions are made collectively, not just by the biggest players. 

ING takes a slightly different approach from the hybrid model. An IT company established in Romania handles individual systems (from the same manufacturer) in each of the banks. As an external company, it boasts top-tier personnel and shares decision-making responsibility with the bank on matters like resource allocation or specific solution choices. It also oversees the optimal use of resources to ensure no bank in the group is disadvantaged. 

Will the hybrid model enable faster scaling? 

As demonstrated by Credit Agricole and ING, it’s beneficial to operate in a flexible “as-a-Service” model but not advisable to allow external entities to have the final say in the process. In the “BaaS a la Embedded Banking” model banks and other financial institutions can share the costs of their IT operations. Simultaneously, it doesn’t expose them to the negative consequences of market laws – using the cheapest resources or participating in unhealthy internal competition. It also protects against the adverse effects of switching to an unreliable provider. 

We also discuss the “as-a-Service” model in banking in the context of real-time data analysis (one of our specialties). For more, see our blog post on Data-as-a-Service in banking

If you need to streamline financial services in your bank and need a reliable partner, get in touch! Want to discuss specifics? Contact us and book a free technical consultation, no strings attached.