Avoid Killing Your BaaS Programme: Why the open-switch model wins

September 1, 2025

A BaaS (Banking as a service) program built on a closed middleware network is a program designed to fail. This model sacrifices control, introduces compliance risks, and creates a dependency that results in high costs and low partner stickiness.

Conversely, the open-architecture "switch" model is the strategic choice for an enduring BaaS program. This approach prioritizes direct relationships, leverages open protocols, and ensures full control and compliance - the foundational pillars of a scalable and successful embedded finance future.

This article dissects the two primary BaaS models, a closed middleware network versus an open architecture switch and explains why this choice is the most pivotal strategic decision your institution will make.

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‍The two BaaS models

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‍Model 1: Closed middleware network

‍This model introduces a third-party, proprietary middleware provider as a central hub between a bank (FI) and its partners. The middleware promises a single integration point to a broad network, but it creates a three-entity ecosystem: the bank, the middleware, and the digital partner.

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‍Model 2: Open architecture "Switch"

‍This model eliminates the third-party intermediary. The technology stack, which functions as a switch, sits directly on the bank's side and connects the bank directly to digital partners through an open network. This creates a direct, two-entity ecosystem between the bank and the partner, with the switch acting as a direct conduit, not an intermediary.

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‍A head-to-head comparison

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Closed Middleware Network Open Architecture “Switch”
Cost
  • Charges both the FI and the distributor.
  • Charges only the FI.
  • Distributors are not charged, incentivizing more partnerships.
Distribution
  • The middleware controls and rations deal flow among FIs.
  • FIs have a direct relationship with distributors.
  • Distributors control deal flow to FIs.
Stickiness
  • Serious distributors eventually leave for direct relationships.
  • Provides low long-term stability for the bank.
  • Once integrated, distributors and FIs are connected for the long term.
Vendor Lock
  • Uses proprietary API specs to create vendor lock.
  • Difficult for a bank to exit or connect directly with the partner.
  • Uses open API specs, based on open protocol.
  • No vendor lock—FIs can build their own switch or change providers.
Compliance
  • A “grey area” from a compliance perspective.
  • Leads to non-compliance issues as there is no direct connection to the distributor.
  • “Most compliant” structure.
  • The direct connection between the bank and distributor is always “clean and kosher”.
Terminology
  • Known as an “aggregator” or “distributor”.
  • Sometimes hides as a technology service provider.
  • A true Technology Service Provider (TSP).

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A strong regulatory ask

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In the U.S., recent consent orders have made clear that banks must demonstrate direct control, risk assessments, and exit planning for fintech partnerships.

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In India, the RBI’s digital lending guidelines, IT outsourcing framework, and enforcement actions point in the same direction banks must avoid dependency on opaque intermediaries and ensure operational resilience.

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An open switch architecture satisfies these global supervisory expectations by keeping integration, governance, and resilience directly under the bank’s control.

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Open switch should be your next architecture

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The race to build a successful Banking-as-a-Service (BaaS) program is on, but a critical architectural misstep can kill the initiative before it starts. We strongly recommend Model 2 : Open switch architecture as the preffered model.

Refo operates on an open-architecture model that provides the technology to power a bank's embedded banking journey directly on the FI's side. By adhering to open protocols, this model ensures that the bank retains full control and avoids the vendor lock-in common with closed proprietary systems.

At Refo, we work closely with global banks to define and accelerate their BaaS programmes. Want to explore how we can help you? Contact us today.

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