The world of finance is constantly shifting. As we have proven many times over, the buzzwords in this industry really make sense. They are not empty phrases but real cases that shape how customers are using FinTech products. One of the most important trends is called contextual banking. The idea is to integrate financial services into non-financial offerings. This provides tremendous value to clients and businesses alike. How does it work and what is required to push the envelope here?
From embedded to contextual banking
Seamless integration of financial services into customer’s daily lives and experiences is done through advanced analytics. With it, banks and corporations can increase customer satisfaction and maintain competitiveness in an ever-changing marketplace. It’s also a method of strengthening consumer relationship and providing more assertive offerings.
In practice, the model reverses the order of supply and consumption. Unlike the traditional system, in which financial institutions offer products on a mass basis, contextual banking anticipates customer demand. Part of if is, naturally, the anticipatory design in FinTech.
You know that service offering that matched exactly what you were going through in a given moment of your life and that maybe you didn’t even know you needed? That’s what contextual banking aims to provide.
The customer should always be at the center of FinTech business processes. Customers expect personalized services and standards of support. But the hyper-personalization is only possible through access to data and information. It enables you to learn about each customer profile and provide the right offering, at the right time and through the most appropriate channel.
Why is contextual banking relevant in the industry?
There are many advantages for the banking and FinTech industries to invest in alternative methods of payment. Some examples:
- If performed properly, personalization in scale can mean lower customer turnover rates and higher sales indexes for banks and fintechs. Annual revenue increases can reach 10%, as shown in the study conducted by Boston Consulting Group.
- The same study by BCG estimates that, for each US$ 100 billion in assets that a bank has, it can make as much as US$ 300 million in revenue growth by personalizing their customer engagement.
- Improving customer experience is still an important issue for banks and fintech. For 71% of them, improving CX is a high or critical priority according to data provided by Forrester regarding.
Contextual banking personalization drives performance and brings better results for customers, as shown in a study conducted by McKinsey. Rapid-growing companies lead 40% more revenue for personalization than their slow-growing competitors.
How does contextual banking enhance your financial service offering?
A given customer has a low balance in their banking account. Based on their cashflow history, the contextual algorithm identifies that a payment must be made soon and that there aren’t enough funds. In this case, the system can automatically offer a credit solution, even before the user realizes their revenue deficit.
In a different scenario, let’s assume that a customer is trying to transfer money to a third party. The contextual model can provide a list of options, highlighting the fastest and most accessible manner to make the wire transfer.
Or else, the user can start anticipating their payments for a bill, and the contextual algorithm can suggest a different date for a payment so that the money is transferred to a daily liquidity investment.
Those are a few examples of how Contextual Banking can make the financial industry more fluid. However, the potential to transform the industry is unlimited.
To enhance your financial service offering, you will need few components:
- Location
- Preferred channel
- Time
- Purchase history
- Previous behavior
- Device-based data
- Web search history
These elements will help you identify users and offer them specific, hyper-personalized offers. Along with sending them reminders, discounts, display partner actions, etc.
What is embedded finance?
Embedded finance is basically the integration of financial services directly into the products and services of non-banking companies. This allows customers to use banking services without having to leave the third-party platform or application.
Some examples:
Banking apps: Hypothekarbank Lenzburg provides its banking license to operate the modern banking app Neon.
Payment services in e-commerce: Customers can pay directly on an online retailer’s website without having to use external payment portals. A prominent example is the integration of Samsung Pay into the Solarisbank ecosystem.
What are the benefits of embedded finance?
Among others, you have:
Increased reach: Financial services are embedded directly into customers’ everyday digital environments, resulting in greater visibility.
Seamless customer experience: Customers benefit from a smooth and convenient use of financial services without having to switch platforms.
New revenue streams: Companies can tap into additional revenue streams by integrating financial services.
What is contextual banking?
Contextual banking goes one step further. It provides financial services at the exact time and in the context of the customer’s needs, based on data and analytics that take into account the customer’s behavior and preferences.
Some examples:
Buy Now Pay Later (BNPL): Customers are given the option to pay in installments directly when purchasing a product in e-commerce or at the point of sale, based on their creditworthiness and individual financial data.
Personalized loan offers: Based on real-time credit checks, customers receive personalized loan interest rates that are precisely tailored to their current financial situation.
What are the benefits of contextual banking?
Among others, you have:
Personalization: Customers receive customized financial services that are precisely tailored to their needs and situations.
Flexibility: Financial services are offered exactly when they are needed, increasing customer satisfaction and loyalty.
Data-driven decisions: By using real-time data, banks, and companies can make more precise and relevant offers.
What are the main differences between embedded finance and contextual banking?
We can talk about it while taking into account three main areas: integration, use cases, and technical requirements. Both concepts have key differences among them:
Integration vs. Context:
Embedded finance focuses on the general integration of financial services into the products and services of other companies.
Contextual banking offers specific and personalized financial services based on individual customer needs and context.
Use cases:
Embedded finance refers to the general availability of financial services within other platforms.
Contextual banking provides personalized financial services in specific situations based on real-time data and analytics.
Technological requirements:
Embedded finance requires technological integration and partnerships between banks and third parties.
Contextual banking also requires advanced data analytics and the ability to interpret customer behavior in real-time.
What are the use cases for contextual banking?
Most existing use cases of embedded finance focus on the basic concept of distribution – incorporating one product within another product. while this approach does provide some value, the overall experience remains limited.
Financing. The lending space holds a myriad of opportunities for contextual finance. Intuitively, we’ve defined use cases of Buy Now Pay Later [BNPL] or financing offerings within the checkout that help drive the purchasing decision as contextual, while post-transactions use cases of net-terms financing within invoice and bill pay are more suitable for the definitions of embedded.
InsurTech. Insurance is one of the most exciting areas in terms of contextual finance. There are many use cases whereby customers are enabled to purchase additional protection for the product they initially intended to buy. Those aspiring to make a living or earn a few extra dollars by driving an Uber, for example, don’t first look for insurance, yet it’s the product that enables them to achieve that goal.
Wealth. Embedded finance examples abound in this category, with relevant calls to action for investors to open up high-yield savings accounts, purchase research tools, or pursue options trading, just to name a few. However, the space has plenty of opportunity to transition from embedded to contextual.
Earned wage access. Earned wage access is a form of financing against payroll designed to give employees more control and flexibility to build their financial well-being. There are many opportunities to inject context for both the employer and the employee. For hourly workers, the need is especially relevant, and ZayZoon offers a fascinating approach, embedding its services on payroll and timekeeping platforms, enabling it to offer access to advanced wages based on specific behavioral patterns such as clocking in fewer hours in a particular week or month.
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