A mindset shift is permeating the banking sector. Historically, banks were closed shops, focused on selling an ever-wider range of their own products and services in order to increase revenue and growth. No more. Finastra’s Financial Services State of the Nation Survey 2021 found that 94% of financial institutions agree that Open Banking is a must-have for growth. Some 78% have started to open their APIs, and 85% of banks feel that Banking-as-a-Service (BaaS) will be their primary area of growth in the future. But this is just the opening up of their plumbing. Reaping the rewards promised by this more open banking world requires a change in culture, thinking and operating principles. In short, banks must learn to bring the outside in.
Rise of contextual banking
‘Embedded finance’ is the phrase of the day and is really the next wave of fintech innovation, with BaaS technology key to unlocking the potential. Put simply, embedded finance is where a financial service – traditionally provided by banks or some other dedicated financial entity – is embedded into a non-financial brand to create a far more seamless customer journey.
This requires a different way of thinking about marketing and creating financial products. Previously, the industry used to aspire to so-called ‘conscious banking’. That is, a customer thinks: I need a bank account, I need a loan, I need to pay these people. These are all conscious decisions for financial services, with customers going directly to their local bank branch or, more recently, logging onto their digital banking app.
Banks just had to be aware of their customers’ needs and provide solutions and products to meet them. But in an embedded world, financial institutions are pushed into the background and finance options are available in the purchase pathway of what a customer is looking to buy, exactly when and how they need it.
For example, a holiday is a big-ticket item for anyone. Imagine that during the checkout experience, at the click of a button, the customer is offered a range of options for a loan or payment plan directly through the holiday provider. Imagine too, that these offers are more competitive than financing the transaction on their credit card, and inside the monthly amount that they can afford individually. Then after purchase, they also receive an offer for holiday insurance. Suddenly, the process of financing the holiday becomes much more straightforward and joined up.
This approach is what we call ‘contextual banking’, and it’s on the rise. The opportunities derived through providing financial services in this way are huge. At Finastra, we predict the market to be worth $7 trillion in revenue by 2030. And by shifting the distribution of these financial products to a third-party – be that another financial institution or non-financial brand – the cost of customer acquisition can be lowered significantly.
Data is key to customer-centricity
While the scale of the opportunity for financial institutions is huge, monetizing new embedded channels for financial products is a lot harder than embedding them in the first place. It requires a far greater degree of outside-in thinking. Not only does a financial company need a more in-depth understanding of the customers they are trying to serve, they also need to show how they can benefit third parties, to form strategic and profitable partnerships.
Consumer-facing brands know that confused customers sit on the sidelines. What’s needed is to provide simplicity, clarity and information to the consumer so they can make a simple decision. Financial service providers, therefore, need to be able to show that they are part of this solution. Data is key here. A financial company, for example, can use their intimate understanding of a customer’s financial decision-making behaviour to provide a product or service at the exact price point for a customer to make a purchase. That’s what helps expand marketing buying power, something that is of great benefit to a potential collaborator.
Where to play in a blurring of where finance begins and ends
As embedded finance and contextual banking start to take hold, traditional banks and financial institutions need to consider where they can best play to win. Fintechs are maturing to look more like banks; banks are implementing digital tools to look more like fintechs; meanwhile, Big Tech is entering the fold and launching e-money services. All three are competing for a slice of this emerging and lucrative market, as the old lines of where finance begins and ends are irrevocably blurred.
The banking industry is steeped in brand legacy, built on hundreds of years of trust in protecting people’s money. This is a noble cause and counts for a lot. Fintechs and Big Tech thrive on creating convenience for the end-user but are not immediately thought of as trusted financial custodians. As banks try to position themselves as an embedded brand, they need to play to this strength and look beyond themselves. They must take a truly customer-centric approach to consider where they can add the most value within the customer journey, opening up exciting new collaborations and revenue streams.
This article was first published on Finextra.
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