Open banking, open finance, embedded finance: what do we mean?

Open Banking, Open Finance, Open Economy, Embedded Finance, Banking-as-a-Service definitions

Those are some terms that we see today in much of the news from the fintech world, but they can be very confusing and can even complicate our understanding of whether we are talking about the same or different things.

The fintech world, which represents a step forward in the evolution of the provision of financial services, brought with it new terms that are important to know in order to carry out an adequate analysis and implementation of models that have the potential to bring great benefits to the parties involved in daily financial transactions and activities. It is important to establish the differences and similarities because different results are obtained from each model and different impacts are generated; each model involves different strategies within companies and they may be subject to different regulations.

Our definitions for each open banking term

After reviewing several sources that offer different definitions, it can be concluded that there is still no standardized understanding and that is why we share our vision in this blog, that is, where we see these models converging and how they differ.

To begin with, they are all technology-based solutions that allow connections to be made between two systems that speak a different language, for example, those of an incumbent bank vs those of a third party. The connections are made through APIs, application programming interfaces, which allow two systems to communicate with each other, with the same language.

But the objective and function of each of the solutions is different, and therefore, one must begin by understanding what type of strategy must be adopted to achieve a desired result. At Platformable we understand each concept as follows:

Open Banking: An approach in which banks offer APIs that expose core functionality (usually payments, account information and transaction histories, and bank product details as a minimum) to third parties, where the bank customer has consented to sharing their data with the third party in order to receive value-added services and products. 

At Platformable, we apply the term ‘open banking’ to any API-enabled bank offering, including APIs that are targeted at corporate accounts. Others choose a narrower definition where open banking refers only to those APIs that are mandated to be made available by the bank (for example, payments and transaction history for retail bank customers). Our challenge with this narrower definition is that it prevents global comparisons, as some regions like Brazil mandate a wider range of APIs including credit, while other regions like the US at present are market-driven where banks themselves decide what APIs to offer. 

Open banking often includes aggregators in its definition, that is, third parties that specifically offer an API that connects to the bank’s APIs. These have arisen because in areas where there are no common API standards for open banking, aggregators have converted the diverse range of slightly-differently configured bank APIs into a single API so that third party providers who want to build new products and services can do so without having to individually integrate each bank’s APIs into their product. The Open Banking APIs are consumed by third-parties or Fintech apps and these will provide a service to the data owner.

Open banking ecosystem: The network of stakeholders including banks, aggregators, third parties, regulators, standards bodies, end users, API tools and data providers, researchers, advocates and others that participate in decisions related to open banking and in the creation of products and services using open banking APIs. 

In some jurisdictions (like EU, India, Mexico and UK), third parties consuming the APIs must be specifically accredited to participate in the open banking ecosystem, while in other jurisdictions (like Singapore, the USA or China), third parties may make use of open banking APIs as long as the banks themselves approve of their use. (Noting they may require third parties to have other accreditations in the wider banking or financial system.)

Open Finance: An approach in which APIs are exposed by a broader range of stakeholders beyond banks, including payments platforms, credit providers, insurance companies, investment agencies, pension funds, digital wallet providers, and so on. 

Open finance also covers the activities of aggregators that go beyond offering bank APIs. Many are now offering APIs that aggregate from payment provider APIs or are offering other API products beyond a bank aggregator API. These services from aggregators would be considered part of open finance, whereas only their bank aggregator API would be considered part of open banking. 

Regulations are newly in place or emerging in some countries to ensure the security of data, robustness of stakeholders, and protection of consumers in open finance. In other areas, financial institutions are able to offer APIs as long as they meet their other responsibilities under broader financial and banking regulations. The Open Finance API’s are consumed by third-parties or Fintech apps and these will provide a service to the data owner.

Open Finance ecosystem: The wider network of banks, aggregators, third parties (including payments providers, credit agencies, investment services, insurance companies, digital wallets providers, marketplaces, pension funds and others), regulators, standards bodies, end users, API tools and data providers, researchers, advocates and others that participate in decisions related to open banking and in the creation of products and services using open finance APIs. 

In an open finance ecosystem, it is becoming increasingly possible for some end users to access a full range of financial services without even having a bank account. They may save and store their money in a digital wallet (provided by a telecommunications provider for example) and make payments, demonstrate creditworthiness and gain access to credit, purchase investments, allocate savings to their pension account, and buy insurance products all via open finance integrations and services.

Open Economy: An approach in which banking and financial data and services are combined with other datasets from other industry sectors. It refers to data sharing at a level that goes beyond the financial sector. 

Energy, telecommunications and health data are emerging as frontier sectors in which data is exposed to create new digital products and services or to provide insights and analysis for better planning and resource allocation. For example, energy data could be used alongside a customer’s bank transaction data to give a more complete picture of greenhouse gas emissions and calculate carbon tax requirements for businesses. In the US, personal health data has been proposed to be used to enable more personalized insurance products rather than aggregating for general characteristics like age range when determining levels of risk. There are some countries that are already working on developing regulations to enable a regulated Open Economy, as it is the case of Australia (with their Consumer Data Right framework) and the United Kingdom, which is currently working on their Digital Information and Smart Data Bill, to achieve an open economy. The impact of this model is to generate competition in the different markets and customization of products and services.

Embedded banking: An approach in which a bank’s digital products and services are made available within the product or service of a non-banking institution. That is, a new channel is opened so that banks can offer their products and services from within another app or website. For the bank, this acts as another distribution channel. 

For the host embedding the service, it allows customers to stay within their platform when completing transactions. For example, banks that offer credit application APIs are targeting particular sectors like car sales and energy efficiency renovation services so that when customers look at purchases on those platforms, they can apply and confirm credit offerings during the purchasing user journey. The benefit for users is that they can now interact with their bank within the non-financial applications they use. 

Some stakeholders would (rightly) refer to embedded banking as a part of open banking. Others want to make the distinction that open banking is the provision of open banking APIs, and embedded banking occurs when those APIs are used to provide the banking services in predominantly non-financial sectors. Under this definition, you could also argue that all e-commerce checkouts that offer customers the opportunity to pay directly from their bank account (via open banking and aggregator APIs) are embedded banking services.

Embedded finance: An approach in which a bank or financial institution’s digital products and services are made available within another digital product or service. 

For example, airlines, travel and hotel accommodation websites often have insurance offerings available during the checkout process. Buy Now Pay Later services are also offered as Open Finance models.

Banking-as-a-Service (BaaS): An approach in which a licensed banking institution makes its infrastructure available to third-parties, often larger enterprises, so that they can offer white-labeled banking products to their customers and users. For example, some department stores may issue their own branded credit card, and some marketplaces are offering loan products to vendors selling on their marketplaces. These are underwritten by the bank but branded as the third party.

The common denominator of these approaches is that they are enabled via APIs, but each one has a different objective and regulatory context, and may involve different stakeholder relationships, with a range of potential value generation opportunities for both the API providers and the third parties, as well as end users and others along the value chain.

Examples for each open banking-related term