Open Banking vs Embedded Finance: Transforming the Payments Industry

Meeting customers' increased demands is almost impossible if you do not keep abreast of innovations and modern technologies. New, more modern systems and human achievements are slowly replacing outdated ones.

According to the 2023 FIS Global Innovation Report, nearly half (44%) of financial firms are set to invest heavily in technologies that enhance payment solutions, reflecting the growing interest in Web3 and cryptocurrency.

Central to this shift are two groundbreaking concepts, Open Banking and Embedded Finance, reshaping how companies and consumers handle financial transactions.

What is Open Banking?

This technology enables financial institutions to share customer data securely with third-party providers through APIs. This data-sharing framework, regulated by initiatives like the Payment Services Directive 2 (PSD2), allows for more personalised services.

For consumers, it offers innovative tools like budgeting apps and account aggregators, helping them manage multiple accounts in one place. It also enhances the user experience by allowing platforms to interact with bank accounts directly.

For instance, a ride-hailing app might automatically check a user's balance before completing a transaction, streamlining the process.

What is Embedded Finance?

It is the integration of financial services directly into non-financial platforms, providing a seamless experience. It allows businesses to offer features like "Buy Now, Pay Later" or integrate crypto wallets directly within their apps.

This creates a frictionless experience for users, who can access monetary services without needing to engage with separate platforms or traditional banks.

Key Differences

While both concepts aim to improve financial services, they differ in scope, regulation, and user experience. Open Banking is regulatory-driven and enhances traditional banking by sharing data securely.

On the other hand, Embedded Finance focuses on integrating financial services directly into non-financial platforms, giving businesses more flexibility in offering payment or lending options.

Conclusion

It’s obvious that both open banking and embedded finance will be crucial in shaping the future of the payments industry. These innovations not only enhance the user experience but also offer businesses new ways to integrate financial services, including cryptocurrency, into everyday operations.