Contextual Finance
What is Contextual Finance?
As an encompassing concept, contextual finance prioritises the availability of financial products and services precisely when and where they are needed within the user's specific context, taking into consideration their current and past activities (e.g. time, location, purchase history, etc). Such a comprehensive and personalised approach (often labeled as “contextual banking”) ensures that the right customer gets the right product/service at the right time and via the right channel.
Representing a step further than embedded finance, this paradigm shift delivers an innovative solution that enhances customer convenience and unlocks new business opportunities. Thanks to the integration of relevant offerings into customers' daily lives and leveraging advanced data analytics, banks and financial institutions can both elevate customer satisfaction and maintain a competitive edge in a dynamic marketplace.
Key Features of Contextual Finance
Here are the main characteristics that make meeting customers’ unique needs with tailored offerings possible:
- Hyper-personalized assessment: By gathering comprehensive information about an individual's or organisation’s financial situation, including income, expenses, assets, liabilities, and risk tolerance, it’s possible to create a highly personal financial profile that serves as the basis for subsequent decisions.
- Seamless integration: All sorts of financial services, such as lending, payments, and investments, are seamlessly integrated within apps, platforms, or services that users already utilize, thus eliminating the need to navigate multiple channels.
- Scalability: Contextual banking experience can be easily scaled to accommodate a multitude of users, leveraging technology to deliver personalised experiences on a large scale.
- Risk management: Through deep understanding of the user's risk tolerance, banks and financial institutions can recommend strategies that align with their comfort level. This helps mitigate potential losses and protect financial well-being.
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How Does Contextual Finance Work?
The simple answer is that it works by embedding financial services and products directly into digital environments where users are already active. However, that process relies on the user’s circumstances and preferences, so a lot of intelligence and data is going on in the background.
First, there is the use of artificial intelligence to gather information about the user, including their financial situation, objectives, risk tolerance, and various other factors. Then, big data analytics provides real-time insights and recommendations, helping craft a personalized financial profile.
From there on, a customized financial plan is developed that aligns with the customer’s financial goals and risk tolerance. It may include suggestions for payments, investments, budgeting, savings, and any other that make the banking experience impactful and meaningful for the customer.
On a technical level, core systems and foundational elements such as legacy mainframes are embedded with third-party solutions through API connections and microservices. These solutions allow not only traditional banks but also different types of businesses to offer relevant banking services via their digital channels and customer touchpoints.
One example of applying context in finance is Buy Now, Pay Later (BNPL), where customers can purchase without having to pay the full amount upfront. It’s a flexible payment option tailored to individual needs and budgets, ultimately making it easier to achieve a customer’s financial goals without breaking the bank.