Open banking and banking-as-a-service (BaaS) are often mentioned together, but they solve different problems. These two pieces of modern financial infrastructure offer different advantages and disadvantages when businesses are developing a product that needs to touch traditional banking networks.

Below, we’ll discuss what open banking and BaaS are, how each works, and how to choose one when you’re deciding how to move money or embed financial products into your platform.

What’s in this article?

• What is open banking vs. BaaS?
  
• How does open banking work?
  
• How does banking-as-a-service (BaaS) work?
  
• What’s the difference between open banking and BaaS?
  
• When should a business use open banking instead of BaaS?
  
• What are the risks of open banking and BaaS?
  
• How Stripe Payments can help
  

What is open banking vs. BaaS?

Open banking is a way for people and businesses to securely share their bank data with third parties they select. Open banking lets banks share certain account data—such as balances, transaction history, or account details—through secure application programming interfaces (APIs). Licensed third parties can use that access to build services on top of existing bank accounts. In markets such as the UK and EU, third parties must be regulated and meet strict security and compliance standards before connecting to bank APIs.

Banking-as-a-service, or BaaS, is a model that lets nonbank companies offer banking products without becoming banks themselves. Instead of building its own licensed banking infrastructure, a business partners with a regulated bank and accesses its capabilities through APIs. BaaS is one of the primary ways software platforms, fintechs, and customer brands embed financial products into their own products.

How does open banking work?

Open banking works by letting banks and third parties connect through secure, standardized APIs, with the customer in control at every step.

Here’s a closer look at how open banking functions:

• Customer consent: Access starts after a customer approves it. The customer chooses what data can be shared, for what purpose, and for how long. They can revoke that access at any time.

• Secure authentication: The customer authenticates directly with their bank, typically using the bank’s own app. This ensures access is tied to a verified identity, and third parties never see any banking credentials.

• API-based data access: Once approved, the bank shares the requested data through secure APIs. The third party receives only what was authorized.

• Payment initiation: Open banking can also enable payments. A licensed provider initiates a bank-to-bank transfer on the customer’s behalf, and the customer confirms the payment through their bank.

• Standardization and reliability: In markets where open banking is common, shared technical standards help make integrations consistent across banks. This reduces errors, improves uptime, and makes it easier for businesses to expand across institutions.

How does banking-as-a-service (BaaS) work?

Banking as a service plugs regulated banking infrastructure into products that customers already use.

Here’s how BaaS powers full financial products:

• Licensed bank at the core: A regulated bank provides the underlying accounts and payment networks, and safeguards funds. The bank is legally responsible for holding money and meeting regulatory obligations.

• API-driven infrastructure: The bank makes its capabilities accessible through APIs, either directly or through a BaaS platform. These APIs handle functions such as account creation, balance management, payments, card issuance, and transaction processing.

• Integrated customer experience: The company using BaaS designs and controls the customer experience. For the user, the financial product lives entirely inside the business’s app or platform, even though a bank powers it behind the scenes.

• Shared compliance: The bank oversees core compliance, while the business typically handles customer onboarding flows, disclosures, fraud prevention inputs, and ongoing user support.

• Ongoing oversight: Transactions are monitored continuously for risk, fraud, and regulatory requirements. Both the bank and the business must meet standards around security, resilience, and reporting.

What’s the difference between open banking and BaaS?

Open banking and BaaS both rely on APIs, but they solve different problems. The fastest way to understand the difference is to look at what each model can help a business achieve.

Here are the major differences between open banking and BaaS:

• Accessing vs. creating: Open banking connects to existing bank accounts to read data or initiate payments. BaaS powers the creation of new financial products, such as accounts, cards, or wallets, that live inside a business’s own platform.

• Who owns the bank account: With open banking, the customer’s account stays with their bank. With BaaS, the account is issued through a partner bank but is managed through the business’s product.

• Depth of integration: Open banking adds financial capabilities alongside an existing product. BaaS embeds banking directly into the product itself, making financial features feel native.

• Regulatory posture: Open banking operates within a regulatory framework focused on data access and payments. BaaS is subject to broader banking regulation.

• Complexity and scope: Open banking integrations are narrower and faster to deploy. BaaS integrations are deeper and support more use cases.

• Risk exposure: Open banking limits exposure because the company doesn’t hold customer funds. BaaS increases exposure because businesses participate in money movement, account management, and financial risk controls.

• Typical business intent: Open banking is about improving decisions, payments, and visibility. BaaS is about becoming a financial provider inside your own product.

When should a business use open banking instead of BaaS?

The choice between open banking and BaaS often depends on how much financial responsibility a business wants.

Here are a few scenarios where your business should use open banking instead of BaaS:

• When you need financial data: Open banking is the right fit if your product needs visibility into existing bank accounts, such as for income verification, transaction analysis, account verification, or cash flow insights.

• When payments should stay simple: If you want to move money directly from a customer’s bank account without issuing cards or storing balances, open banking payments are often the easier option.

• When speed to market matters: Open banking integrations are typically faster to implement.

• When you don’t want to hold funds: Open banking lets money move between banks without your business ever holding customer funds. That keeps your regulatory exposure narrower and risk lower.

• When you’re operating across multiple regions: Open banking standards make it easier to connect to many institutions through a single integration. That flexibility matters for businesses that need broad coverage rather than deep banking features.

• When banking isn’t your core product: If financial functionality supports your product rather than defining it, open banking keeps finance in the background where it belongs.

What are the risks of open banking and BaaS?

Both models come with trade-offs. Understanding where the risks are helps businesses choose the right level of financial involvement.

Consider these risks and limitations of open banking and BaaS.

Risks to consider with open banking

• User trust and consent: Open banking depends on customers being comfortable sharing financial data. Clear communication and transparent consent flows are key, especially in markets where customers are still learning about this type of data sharing.

• Scope limitations: Open banking is narrow. It can’t create accounts or support native financial products, which limits what businesses can build without adding infrastructure.

• API reliability and coverage: Open banking quality varies by market and institution. In less mature regions, inconsistent standards or downtime can affect reliability.

Risks to consider with BaaS

• Compliance burden: BaaS introduces a lot of legal responsibility. Even with a bank partner, businesses must provide onboarding, monitoring, disclosures, and customer support like a bank.

• Expanded risk: Holding or moving funds through BaaS increases exposure to fraud, misuse, and regulatory scrutiny.

• Partner dependency: BaaS ties core product functionality to a banking partner. Changes in that relationship can directly affect customer experience and continuity.

How Stripe Payments can help

Stripe Payments provides a unified, global payments solution that helps any business—from scaling startups to global enterprises—accept payments online, in person, and around the world.

Stripe Payments can help you:

• Optimize your checkout experience: Create a frictionless customer experience and save thousands of engineering hours with prebuilt payment UIs, access to 125+ payment methods, and Link, a wallet built by Stripe.

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• Unify payments in person and online: Build a unified commerce experience across online and in-person channels to personalize interactions, reward loyalty, and grow revenue.

• Improve payments performance: Increase revenue with a range of customizable, easy-to-configure payment tools, including no-code fraud protection and advanced capabilities to improve authorization rates.

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Learn more about how Stripe Payments can power your online and in-person payments, or get started today.