Open Banking vs Banking as a Service Explained for Banks

Open banking and Banking as a Service (BaaS) are two different ways a bank can put its data and infrastructure to work outside its own walls. Open banking shares customer data with third parties under government regulation, while BaaS is when a licensed bank leases out its banking infrastructure to other companies so they can build and sell their own financial products.

The distinction determines how much compliance, engineering effort, and brand control a bank takes on for a given initiative.

What is open banking?

Open banking is a regulated framework that lets banks share customer account data with licensed third parties through APIs, with the customer's explicit consent. Regulations like PSD2 in Europe require banks to expose this data through secure, standardized APIs, and equivalent regulatory bodies enforce similar technical standards in other markets, which is why open banking compliance isn't optional for banks operating in a covered region.

Third parties fall into two categories. Account Information Service Providers (AISPs) pull data from a customer's accounts, often for budgeting apps or credit checks. Payment Initiation Service Providers (PISPs) trigger a payment directly from the customer's account, bypassing card networks entirely.

The customer stays in control throughout. They choose what gets shared, with whom, and for how long, and they can revoke access at any time.

What is Banking as a Service (BaaS)?

Banking as a Service is a model where a licensed bank leases its infrastructure and regulatory charter to non-bank companies, letting them embed banking products under their own brand. This charter-leasing arrangement, sometimes called license passporting, means the bank hands over functionality, not just data: the ability to open accounts, issue cards, move money, and run other banking operations.

This is what allows a fintech, retailer, or software platform to offer a branded debit card or a business account without becoming a licensed bank itself.

The licensed bank stays legally responsible for holding funds and meeting regulatory obligations, while the non-bank company designs the customer experience and builds the product around it.

Key differences between open banking and BaaS

While both use application programming interfaces (APIs) and involve a licensed bank, there are differences between open banking and BaaS as to what gets shared, why the models exist, who holds the accounts, who the customer sees, and the regulation behind each model.

What's being shared

Open banking involves the sharing of data. A third party gets access to a customer's accounts without gaining control over them. Banking as a Service involves the sharing of banking functionality with other entities. These companies get the power to open new bank accounts for customers, issue cards, and move money on their behalf.

Regulatory vs commercial driver

Open banking was created due to regulation. Banks are required by regulation to share data with third parties, so adopting open banking is largely a compliance move.

BaaS was created because banks choose to implement it. There is no regulation that requires banks to lease out their banking infrastructure. Banks choose to implement BaaS to generate new revenue.

Who holds the license and the account

With open banking, the account never leaves the customer's original bank. Third parties are allowed to view the accounts but do not get control over them. With BaaS, a new account is issued through the partner bank, but the non-bank company manages the relationship and the brand the customer sees.

Who the customer sees

Open banking allows customers to still view and trust their banking institution of choice. Third parties operate behind the scenes without creating a branded experience for customers.

BaaS allows customers to view the brand of the non-bank company in their banking products. The licensed bank behind it is invisible infrastructure.

Regulatory and compliance load

Open banking has regulatory compliance in the lines of PSD2 in the European Union and GDPR regarding data security.

BaaS requires banks and the BaaS company to comply with all banking regulations including anti-money laundering (AML) regulations, know your customer (KYC) regulations, and licensing requirements in all markets in which they operate.

Typical use cases

Open banking is used by budgeting applications to view transaction history, account aggregation applications, credit checks based on transaction history, and bank to bank payments applications. Banking as a Service is used by companies that want to offer their own branded bank accounts and cards, embedded financial products, software platforms that offer bank accounts and financial services, and neobanks.

How open banking and BaaS work together

Open banking and BaaS are not alternatives for banks. In some cases, the two work together as part of a broader embedded finance strategy, where financial services show up inside products that aren't financial products themselves. For instance, an e-commerce company that offers a BaaS-powered branded account for business use can use open banking to access customer transaction history for credit checks at the time of purchase.

Banks do not have to choose between open banking and BaaS. Banks may use open banking to comply with the regulation for data access and to enhance the banking services that they offer customers. Banks can also use BaaS as a separate initiative so that they can generate revenue from the banking infrastructure that they license out.

What this means for a financial institution's digital transformation strategy

The decision that banks must make is not between choosing open banking or BaaS but in what degree of financial responsibility, engineering effort, and brand control the bank wants to take on.

Open banking as a compliance move

Open banking is close to mandatory in regulated markets: banks share data with third parties as required, or risk falling behind the competition in the banking industry.

BaaS as a revenue strategy

BaaS allows banks to license out their banking infrastructure and generate revenue for the bank, instead of just consuming third-party APIs. Banks with strong financial and regulatory capabilities can license out infrastructure like BIN sponsorship and white label card issuing to other companies, letting a fintech or retailer create their own branded bank cards under the bank's Bank Identification Number.

Modernizing core capabilities instead of leasing them out

Rather than licensing out banking infrastructure, banks can partner with a digital banking platform provider to modernize their own core capabilities. A bank's core banking system is the underlying ledger and account infrastructure it runs on, and rebuilding one from scratch typically takes years. Instead, banks can plug in a ready-made platform that includes account management, card issuing, payment systems, and compliance, and go fully digital in a relatively short time frame.

Weighing risk against reward

Open banking involves less risk for the bank since it isn't creating new banking liabilities, just securing data access. BaaS creates more revenue potential for a bank but increases the regulatory responsibility the bank carries toward the products built by third parties.

Depending on a bank's goals, it may lean towards open banking or BaaS, or, more importantly for banks of all sizes, a strategy that includes more than one of these models. Most banks will eventually need a strategy that touches more than one of these paths.