In today's rapidly evolving financial landscape, two terms frequently appear in discussions about the delivery of financial services: Banking as a Service, usually shorted to BaaS, and embedded banking. 

While these concepts are closely related and sometimes used interchangeably, they represent distinct approaches to solving how financial services are delivered. BaaS is a popular yet loosely defined term in the UK and Europe. Fintech firms, payment institutions, non-bank entities and embedded banking providers are all part of the transformative model that is decoupling the front-end customer experience from the underlying core applications. 

This article examines and defines embedded banking, explores the key differences between it and BaaS and the implications for the financial services industry in the UK and Europe. 

BaaS broadly refers to the provision of banking services by a regulated entity to a third party. However, as I outlined in a previous blog post, they’re not necessarily provided by a licenced bank. For example, Electronic Money Institutions (EMIs) and authorised Payment Institutions (PIs) can offer services such as accounts, virtual and physical cards, access to payment rails, and more. 

Embedded banking represents an evolution of the BaaS model. Rather than providing banking capabilities as separate services, embedded banking seamlessly integrates those services into a brand’s customer journeys and experiences. 

This has led people to use the terms embedded finance and embedded banking interchangeably. However, embedded banking is a specific type of embedded finance that entails both regulated financial firms and non-financial firms, offering banking products and services such as current accounts or savings accounts. Embedded finance is a much broader set of services including, but not limited to, loans, insurance and even mortgages, which I'll explore in another post. 

Embedded banking focuses on the contextual delivery of banking services within other products or services. So, while BaaS provides the basic infrastructure, embedded banking goes further by focusing on how those services are woven into a brand's experiences.  

This can be seen in ClearBank’s partnership with UK fintech Tide to deliver bank accounts for SMEs, or Chip for savings accounts and Cash ISAs. Another leading example is Lyft Direct, a service exclusively offered by the ride hailing app for its drivers, offering a current account, savings account and cards. With Direct, its drivers instantly receive payments into their accounts, cash-back offers and exclusive rewards on the cards, alongside a savings account. 

Historically, firms looking to deliver embedded experiences have faced a compromise – work with a BaaS provider that offers technical innovation and agility, or an incumbent that has proven governance and control frameworks, processes and oversight but may lack the real-time APIs they need. 

That has changed in the last five years as more banks have embraced the opportunities for embedding their services into the experiences of third-party firms. ClearBank has been at the front of that trend. 

At ClearBank we specifically define embedded banking as the BaaS model delivered by a regulated banking entity to a firm that then offers those services to its customer base. That includes embedded accounts, both current accounts and savings accounts and embedded payments. By building on top of a regulated bank’s proven infrastructure, a firm can deliver compliant services and the associated benefits, such as protection on eligible deposits, without incurring the substantial cost of applying for a bank licence. 

While BaaS has provided the foundational infrastructure for modern financial services delivery, embedded banking represents a more sophisticated implementation of the model. Embedded banking delivered by an authorised bank can offer all the benefits of BaaS complemented by the processes and controls expected by their regulatory status. 

For example, ClearBank allows the customer-facing aspects to be managed by its clients, enabling them to oversee and interact with their customer base in an approach consistent with their existing user experience. However, each client must adhere to our minimum standards and cooperate with the bank’s oversight requirements on an ongoing basis. That ensures robust governance and ownership expected of a bank is combined to the agility of launching new services in the BaaS model. 

ClearBank Embedded Banking is proven to deliver significant return on investment (ROI) to our partners. This was shown by leading consultancy firm Forrester and its Total Economic Impact (TEI) model that considered the various factors that contribute to an ROI. You can read its in-depth assessment here. 

The headline ROI of 90% highlights how the financial advantages extend well beyond immediate gains, providing firms with a robust foundation for sustained growth. It also serves as a testament to ClearBank’s effectiveness in delivering value over the long term. 

The Forrester analysis also revealed a rapid 10-month payback period, and based on client interviews and market analysis, attributed increased incremental profits of £9.7 million from product expansion and cross-selling. This demonstrates ClearBank’s position as a leader in the embedded banking sector, offering solutions that provide immediate gains and deliver long-term value. 

These benefits are compounded by significant operational efficiency gains. For example, Forrester calculated that the organisation saved nearly £63,000 through the reduction of service desk tickets. This is a direct result of the customer services team experiencing a 10% reduction in monthly service desk tickets opened by customers. 

Beyond just the financial benefits, ClearBank’s partners cited our pragmatic approach and focus on understanding the organisation’s business model, what was important for them, and what they were looking to deliver to their customers. 

Embedded banking continues to evolve and in its next phase will expand with services seamlessly integrated into non-financial brands across B2B and B2C use cases. Which then leads to another nuanced discussion on the growth of embedded finance and embedded banking. 

I'll examine the growth of embedded finance in my next article, looking at the trends and drivers and how and where it is subtly different to embedded banking.