“Every company will be a fintech”. 

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You can argue all day if that’s correct or not. But businesses must collect payments from their customers. And to do that, they will interact with some form of financial system.

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More people and businesses are accepting digital payments all over Africa. A few years ago, digital transaction volume was less than 80 billion in 2019. Projections say it’ll reach $314bn by 2028. 

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There are different drivers for this growth. Internet penetration has increased over the years. Fintechs and banks have multiplied; making room for embedded finance and banking-as-a-service companies to drive digital transactions in Africa. 

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While embedded finance and banking-as-a-service might be similar, they are different.

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If you stick with me to the end of this piece, you’ll be able to lecture your friends about embedded finance and BaaS because you’ll get a simple, yet technically rich explanation of their differences.

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What is embedded finance?

Say you're booking a flight on an airline’s website.

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During checkout, on the payment gateway, you can pay directly using a bank transfer or card without ever leaving their site. That seamless experience is embedded finance in action.

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Embedded finance allows businesses to integrate financial services from other financial institutions into their platforms through APIs.

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Most times the financial service is a means to an end with the end being the purchase of their primary product or service. 

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Think of ride-hailing apps like Bolt and Uber – they let you keep money in an in-app wallet for easy ride payments. This kind of integration creates a smooth, convenient user experience. So, embedded finance can help companies boost customer engagement, loyalty, and overall satisfaction.

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Examples of embedded finance

GIGL

GIG Logistics is a delivery service in Africa. They help individuals and businesses ship packages from China, the UK and the US to Nigeria. They offer an integrated wallet that customers use to fund using Kora, making it easy for customers to pay for parcel deliveries. Embedded finance is what powers both the wallet and payment gateway experience. 

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ValueJet

ValueJet, a Nigerian domestic airline, makes choosing and paying for local flights a breeze. 

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During checkout, they offer different payment options through a payment gateway. Embedded finance makes this possible. By integrating with Kora, ValueJet can seamlessly accept payments directly within their own booking platform.

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What is banking-as-a-service (BaaS)?

BaaS makes it possible for financial or non-financial businesses to offer banking services like accounts, card issuing and loan products – directly to their customers. These businesses access BaaS through APIs from banks or financial institutions (which liaise with banks). 

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This is very useful for businesses that don’t need a banking license to run their core business or can’t afford to get one.

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For example, to get a national banking licence from the Central Bank of Nigeria, you need a capital requirement of about NGN25 billion which is approximately 18 million USD  (conversion rate gotten from the CBN’s website as of May 2024). This could be a roadblock for early-stage startups building a fintech product in Africa.

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By integrating with BaaS platforms, you can build and launch your banking products to the market without having to invest the time, money, and effort required to build a full-fledged banking infrastructure from the ground up.

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Examples of banking-as-a-service

Oystr finance

This is a BaaS platform that allows you to build and offer lending services to your customers in Africa. 

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They streamline the process by providing access to their APIs while also managing the complexities of compliance, regulation, and liquidity. 

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This allows businesses to focus on customer experience and product design, rather than the technical and legal hurdles traditionally associated with financial services.

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Embedded finance vs Banking as a service: What’s the difference?

Branding

Embedded finance gives you some control over your branding, but there may be limitations. Your customers are most likely to see your payment partner's logo. BaaS on the other hand is more difficult to spot because it works in the background. Companies that use BaaS build their own interface on the infrastructure.

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Embedded finance solutions do offer varying degrees of customisation. But this depends on the solution. For example, payment gateways typically necessitate displaying the partner's branding. But in other instances like the GIG Logistics wallet, there’s more flexibility, allowing businesses to tailor the customer experience to match their own branding.

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Regulatory Compliance

Compliance obligations for both business models differ. You have more responsibility towards regulatory bodies when you implement BaaS in comparison with when you implement embedded finance. This is because most companies that use BaaS usually offer banking services in some form and that puts you directly on the regulator’s radar.

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For example, building a digital bank or loan app using a bank's infrastructure means every aspect of your operation falls under the oversight of the regulatory body.

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Contrast this to a fashion store using a payment gateway like Kora to accept payments through embedded finance on its website. Their core business is a fashion product and they only use Kora for payments so they don’t directly fall under any regulatory body. 

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Instead, Kora reports directly to regulatory bodies.   

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Target market

Most of the time, non-financial and non-banking businesses whose primary product is not usually a financial service use embedded finance. For them, using embedded finance is a way to extend the value they create and improve their customer’s experience on their platforms.

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BaaS on the other hand caters to businesses, financial institutions and fintechs who want to provide financial services to their customers. Offering banking or financial services is the core business of this audience.  

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Banking as a Service and Embedded finance services are similar. 

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While BaaS inherently utilises embedded finance, not all embedded finance solutions qualify as BaaS. The key distinction lies in whether the primary business focus is offering banking/financial services themselves

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