Context banking is a trend that has been observable for some time now: This means that financial services are becoming more and more embedded in the life and business process contexts of people and companies. Google and Apple’s payment services are the latest examples of this trend. But mobile payments are only interim solutions: Payment is about to detach itself from all devices and become a background process for which neither a smartphone nor a credit card have to be used. The Amazon take-away shops, currently being developed in the US, which can simply be left with purchased goods “without” payment, are the innovative spearheads of payment applications here. German public transportation companies are working on ticket systems that automatically calculate and collect fares according to the automatically recognized route. Similar developments can also be observed for loans, accounts, deposits or securities transactions. Loans can be seamlessly integrated like an alternative payment method at the digital point of sale, the saving of money can be linked to everyday events, or accounts can be embedded in platforms or apps of non-banks, if the application cases make this useful.
APIs – the technical basis for context banking
The technical basis for context banking are APIs, software interfaces that allow digital banking processes to be integrated into any external technical system. With the API constraint imposed by the PSD2*, legislators have reinforced this trend and simultaneously regulated API usage by introducing access services subject to authorization. From the customer’s perspective, contextual banking means that access to financial products and
banking services are available exactly where and when the living and business context requires them – without a bank being physically or virtually present. From this perspective, banking moves from a first-level to a support process in the background.
Context banking with new partners: the eco-system
For banks, contextual banking means working with partner companies that are closer to their customers’ life and business contexts than the banks are. In part, the PSD2 is forcing these new forms of collaboration. But beyond this constraint, banks offer new strategic options if they accept contextual banking as a strong driver that will change customer behavior sustainably.
If banks manage to open up to context partners with an attractive offer of banking as a service, and if they also succeed in building a living eco-system from these context partners, new attractive competitive positions can be taken. If the context partners then benefit not only from the banking services, but can also expect to win more end customers through the partnership, the business model approaches that of a “real” platform in the platform-economic sense. This could be achieved, for example, by making it easier or cheaper to use contextual banking services by belonging to a banking platform; digital POS loans, for example, can be paid out more quickly and have lower interest rates because the borrower is already known.
Context Banking and the Customer Interface
A frequent objection to a context banking strategy is the argument that the customer interface is lost. This is only partly true for financial services in particular and may not be so tragic for them.
In the context banking model, banks do not completely lose contact with the end customer. For regulatory reasons, they remain their contractual partners for the products or services requiring identification and legitimation. In other words, the current account, custody account or credit agreement is concluded with the bank and not with the context partner; a complete white labeling of the bank is not possible. This creates potential for the development of a strong “embedded banking branding”. In practice, it can already be observed today that non-bank partners in the eco-systems are also aware of the brand strength of the banking platform in the background in marketing. Even digital natives place different demands on banks than on their social networks or streaming services. Therefore, they are not indifferent to who executes the embedded financial processes in context banking.
Customer relationships remain and become more valuable
These customer relationships are particularly valuable in the financial service business. When entering into the first business relationship with a bank, the customer has gone through a more or less time-consuming onboarding process, which always includes legitimation in line with money laundering requirements and often also suitability and appropriateness tests for the selected financial product. Not only the bank, having onbooarded the customer, benefits from this customer, but also the entire ecosystem of partners, who can serve these customers now without having to repeat these processes.
Thus, the regulated company bank, which is a strategic driver and not a driven one, always remains the natural focus, the platform hub of its ecosystem. Banks should therefore have the courage to develop context banking strategies based on open banking systems and cooperation with partners who are close to life and business of their customers.
*PSD2: The Payment Service Directive 2 is EU regulation that obliges banks, among other things, to offer interfaces to the current accounts of the customer. Customers can then permit other companies to read out account data or trigger payments via the interfaces. These companies require to possess a BAFIN license as account information service or payment initiation service.