Soon, we may have to relearn everything we know about banking and even FinTech. “Contextual banking” is on its way to carry the customer-centric service approach to the next level and optimize services.
The constantly evolving and changing (retail) banking and financial technology ecosystem keeps introducing us to new concepts every day. On one side, we experience retail brands increasingly evolving into FinTech companies. On the other side, the banking ecosystem is developing and advancing with trends such as personalized banking, embedded/integrated banking, invisible banking, purpose-driven banking, customer-centric banking, responsible banking, seamless banking, and intuitive banking. Among all the concepts we have encountered recently symbolizing transformation, contextual banking is, without doubt, the most important one. Although it is used as one with the embedded/integrated banking concept in most sources, contextual banking is actually a framework concept that defines the eventual destination for banks, namely ideal banking, including many different streams.
Next-level customer-centricity and optimized services
What does contextual banking mean, then? First, contextual banking entails the big picture in the ecosystem, a combination of personalized, digital, frictionless, omnichannel, embedded, data, and customer-centric banking, namely the banking status quo. Within the scope of contextual banking, products and services are designed and customized directly for a specific customer segment (e.g., SME payment systems, saving products for university students working part-time, or deposit accounts specific to Generation Z) rather than assuming similar needs for the entire market. Contextual banking correctly understands that each segment and individual have different needs. Products and services constantly evolve in a development cycle which analyzes the needs, behaviors, and other data in the best way possible. Thus, contextual banking carries the customer-centric service approach to the next-level, optimizing services.
Custom interfaces on the way
While designing contextual banking products, every personalization element is crucial. In this context, geography is another dominant factor besides customer needs. It is known that technology leaders such as Google and Facebook practice unique strategies for each customer using specific data points. Banks are expected to curate customized strategies for their customers using algorithms in the exact same way. Just as Facebook, Instagram, and Snapchat interfaces change according to the user and the platform preferences, creating a unique timeline for each individual, it is now possible to talk about personalized mobile and online banking interfaces (with the contribution of open banking).
Limited banking license alternatives will emerge
In corporate terms, contextual banking is likely to impact business models and working styles. In particular, a “plug-and-play” model seems to emerge during which non-financial institutions reduce the workload of banks by providing embedded services, enabling banks to specialize through outsourcing or FinTech collaborations for the secondary areas or areas with low-profit margins/high operating costs.
As specialization in banking becomes the norm, we are likely to see regulators hop on the bandwagon, developing limited banking license alternatives that envision a lighter, faster, and more economic licensing process for certain activities.
Banks will offer food and beverages, FinTechs will provide e-commerce services
On a different note, contextual banking is an indicator of a future in which banks improve the customer experience by offering non-banking products as additional value (when needed). As banks started planning non-banking services, including food and beverages, and FinTech start-ups planning to enter the e-commerce vertical, it seems that soon we will have to forget everything we know about banking and even FinTech.
The futuristic banking products are likely to address customer passions and offer lifestyle products. Moving towards this direction, Standard Chartered recently revealed its plans to create a platform (“Autumn”) supporting its customers as they prepare for older age by providing them with a range of tools, products, and services across all aspects of wealth and health, and lifestyle. Open banking might have triggered banking across platforms; nonetheless, contextual banking seems to move it further in terms of interconnectivity, combining financial and non-financial data, dictating holistic lifestyle decisions. Standard Chartered offers similar services to its digital-native user base via Mox Bank, the local neobank found from scratch within 543 days, in cooperation with trip.com. The trend seems to spread further to Europe, as Revolut announced expanding into the travel industry, setting aside £70 million for cashback incentives. So, it appears as banks will soon enter a competition creating traveling and lifestyle offers that will make up for the travel-free lockdown periods their customers had to bear.
Although contextual banking indicates a tipping point for banking, it represents a milestone rather than a destination. In the future, all banks will offer data-driven, embedded/integrated, seamless, purpose-driven, and intuitive, and, therefore, contextual banking. As a result, customers applying to banks for their account, loan, saving, and investment needs, and thus banks being in the center of finance, will be a thing of the past. Customers will connect banking and financial transactions to each of their decisions in a unified and contextual way.
The rise in service standards triggers the few institutions at the top of the service pyramid, contextual banks, to strive further for differentiation instead of retreating with relief. This balance shift reveals FinTech’s most significant contribution to banking, which would be classifying banks as “adaptive businesses” by giving them flexibility.
“Agile ones” do not initiate change; they merely follow the trends
Companies with an adaptive strategy have the most superior competitive advantage in this dynamic entrepreneurial environment where the concept of USP (unique selling proposition) has become blurry. According to BCG, the leading consultancy, adaptive strategies consist of continuous, uninterrupted testing and rapid adaptation processes rather than long-term analysis and planning. Such strategies work best when business environments become unpredictable due to technological developments, changes in customer needs, and increased competition.
According to a report by Forrester, “symbiotic loops between technologies and people are forcing market changes at a pace most firms can’t match with digital’s reactive responses and agile’s iterative delivery.”
Recently, we observed “agile culture” becoming more of a PR slogan for institutions. However, when we follow the corporate innovation chain, we can easily see that “agile” businesses only follow the path opened by adaptive companies. Instead of initiating change, agile companies merely follow the trends and developments, revealing that the agility factor that companies have been boasting about is only relevant when enough trendsetter (adaptive) businesses exist in the ecosystem.
After all, much of the ecosystem merely follows the trends, taking the easy way out. Nevertheless, quoting Stripe executives, “Executives and employees must address broad and continuous business change — not cling to what worked in the past.”
Examples of adaptive businesses and the danger awaiting banks
Today’s adaptive banks and FinTechs have created various trends such as crypto trading services and sustainability, paving the way for other institutions with low-risk appetites. Just like the brands that started adding crypto trading services after Revolut and PayPal, small and medium-sized players are expected to follow trends next, such as debit cards from recycled materials or “carbon footprint calculator” features.
On the other hand, adaptive players of tomorrow are already chasing different technologies and experiences far beyond today’s trends. Innovative initiatives, including Amazon’s palm-scanning payment infrastructure (currently) being distributed to retailers, Alipay’s digital yuan payments, and Apple’s family credit score prototypes allowing “a joint and equal credit score,” can be cited in this category.
The fact that adaptive business examples consist primarily of FinTechs and BigTechs rather than banks is an essential sign of the dangers awaiting banks (the ones that resist change and fail to adapt sufficiently fast) in the future. However, all concepts aside, when we take the ever-evolving and changing ecosystem, products, and services into account, we understand that the trends in banking are temporary and shape up according to the market needs and evolution. In other words, “The only thing that is constant is change,” as stated by Heraclitus. As a result, we single out the adaptive players of the ecosystem as the winners of banking in the long run (regardless of their scale, type, and focus).
If you are not actively seeking and creating opportunities that always involve an element of risk, it means you are exposing yourself to more serious risks in the long run.
*This article was updated and recycled as an excerpt of the PSM Magazine piece published in the June 2021 edition, which can be accessed via this link.
FinTech Istanbul Advisory Board Member, Digital CEO
Gazi University Faculty of Law graduate Ş. Elif Kocaoğlu Ulbrich has degrees in Private Law from Galatasaray University and MBA from WHU – Otto Beisheim School of Management, and is also a fellow of Jean Monnet, Joachim Herz Stiftung. After working as a lawyer in various international law firms in Istanbul and Ankara for more than six years, Denizbank A.Ş. He started his banking and finance career in 2013, specializing in business development, project management, FinTech regulation and lobbying activities at FinTech startups (FinLeap, Cringle, Lendico) in Hamburg and later in Berlin. Co-author of The PAYTECH Book, The AI Book and The LegalTech Book, which are planned to be published in 2020 in cooperation with FINTECH Circle and Wiley, Kocaoğlu Ulbrich has been providing consultancy, training and publishing services since 2019 through Berlin-based Contextual Solutions, which she is the founder of.