The journey from open banking to embedded finance to contextual banking and the future role of banks

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If you look at today’s bank customers, they are always digitally active in their respective living environments. What role can banks play in these living environments and how can you reach out to people there in a targeted manner? McMakler provides an example of positioning in customers’ living environments.[1] For example, if people search on Pinterest for design ideas for self-built furniture, McMakler displays real estate offers that match their known living preferences (style, location, etc.). Of course, there is also the option of financing the desired property accordingly. This is done in the context of a cooperation between McMakler and over 400 banks, including Deutsche Bank and DKB.[2] Under certain conditions, banks can therefore offer their services in the respective living environments of their customers.

However, this option is only one alternative as to how banks or individual banking divisions can position themselves strategically. In Stefan Knaus’ blog post from October 24, 2023, we presented four different strategic role profiles in the context of open banking (see figure below). We would now like to take a look at current market developments and see which specific use cases banks have now advanced. We are also interested in the other buzzwords in this context, “embedded finance” and “contextual banking”. How do these three terms differ and do they build on each other?

Figure: Positioning potential for banks and banking services

But let’s start with a brief recap and description of the four role profiles. Basically, the four options can be differentiated according to whether the service creation is carried out by the banks or third parties and whether the bank’s services are offered in-house or via third parties.

Traditional banking was characterized by the fact that the customer experience was completely controlled and services were provided on the bank’s own infrastructure. This autonomous way of acting as an individualist is no longer fully possible in the EU. The starting signal for the “opening up of customer data” was the establishment of open interfaces where end customers can make their personal financial data accessible to various banks, financial service providers or FinTech companies. This was driven by regulatory requirements (PSD2) and the existence of corresponding interfaces such as APIs. Such regulation does not (yet) exist in Switzerland, but measures are also being discussed here if the banks are not sufficiently committed to opening the interfaces.

In the role of integrator, banks can integrate third-party offers into their own offering. A typical example of this is the enhancement of UBS’s offering for company founders with insurance services by Zurich Insurance.[4]

In principle, one would assume that a company founder would like to choose between different insurance policies. However, in the “trouble” of founding a company, the choice of insurance is just a pain point that needs to be resolved quickly and the fees are rather low in the context of the overall business. This means that founders are probably not interested in comparing different insurance policies, especially as Zurich Insurance advertises discounts. A large number of FinTechs have launched with services as an “enhancement” of online banking, e.g. Contovista or Weltsparen[5].

As a producer banks can offer their products and services in collaboration with other companies via new channels. Prerequisites include a clear USP and the ability to scale their own services. One example of the pursuit of such a strategy is Solaris[6], where end users can pay for purchases with a Samsung cell phone using Samsung Pay.[7] In addition to linking the Samsung Pay account with the account of their respective house bank, there is also the option of so-called splitpay. End customers can use a credit installment from Solaris without having an account there themselves.[8] The account is managed for Solaris by Mambu[9], a financial services provider. Solaris determines the credit limit by checking creditworthiness with SCHUFA. Once a credit limit agreement has been set up, end customers can decide each time they make a payment within the credit limit agreement whether they want to switch to payment by installments. A prominent Swiss example of embedded banking can be found at Hypothekarbank Lenzburg. Hypothekarbank Lenzburg makes its banking license and the core banking system of its wholly owned subsidiary Finstar (Banking as a Service Provider) available to its partner company Neon. The latter offers a modern banking app that enables users to open a bank account in just a few minutes. A further collaboration takes place with Cembra Money Bank AG. Cembra now offers savings accounts and obligations digitally. The bank uses the Finstar open banking platform technology for this. Hypothekarbank Lenzburg also supports Cembra with customer support services. [22]

The role of the producer is often subsumed under the generic term embedded finance, i.e. banking services are “exported” and can therefore be used outside the traditional online banking of a particular bank. Conversely, the integration of insurance products into a bank’s online banking, in the role of integrator, could be referred to as embedded insurance. Both strategies are thus characterized by the fact that customers can obtain services from outside the industry for the company.[10]

In terms of positioning as a platform, various forms can be observed in practice, although they cannot be clearly distinguished from open banking and embedded finance: Banking as a Platform (BaaP), in some cases also operated directly by banks, and platforms operated by banks, but with only a partial connection to financial services. In the case of BaaP, there are consumers on one side of the market and financial solution providers on the other. These platforms are characterized by the fact that customers can select or put together attractive financial solutions and, on the other hand, the providers of financial solutions are offered a profitable user base.[12] Typical examples here are comparison platforms for overnight savings accounts (check24.de) or mortgages (comparis.ch). The increased transparency is pleasing for the end customer but is relevant for the banks in terms of the margins they can realize. Frankly ZKB, which offers a 3a pillar solution, is taking a step towards opening on the customer side. However, the provider side is limited to the securities offered by Swisscanto.[13]

Some banks also combine the topic of consumption with payment. ING-DiBa operates Dealwise, a platform with more than 800 connected retailers, where customers receive up to 15% cashback.[14] Twint is aiming in a similar direction, where discount offers can be purchased directly in the app in the “mega deals” section.[15] Outside the EU and Switzerland, there are also much broader offers from banks, such as Sperbank, which offers various services, from travel to telecommunications and warehousing worldwide. However, this should be seen against the background that it is majority-owned by the Russian state.[16]

The German Volksbanken are focusing on regional offerings. With the help of VR Star, access to a regional ecosystem is being created. Here, all relevant players such as event organizers or producers of local specialties in the region are to be networked and thus enable people to discover the region in a new way.[17] Another player in this context is Beyond Business Solutions, which offers German regional banks a platform solution that can be used to develop and implement regional platforms.[18] In Switzerland, the energy-efficient refurbishment of real estate is supported by cantonal banks with the myky platform, which connects banks with energy suppliers and insurers.[19] It is in this context our final term – contextual banking – comes to mind.

An example in this context could be the possibility of installment options or “buy now pay later” offers when purchasing a piece of furniture in e-commerce or at the point of sale. The integration of open banking services (proof of creditworthiness by querying account information) further increases the degree of individualization, as customers with a high credit rating receive a lower interest rate for postponement of payment. If the short-term loan is also offered “white-labeled” directly by Ikea or Media Markt, we are again talking about embedded finance.[21] The customer ends up with a customized offer that gives them the greatest possible flexibility when it comes to “paying” (contextual banking) and is seamlessly integrated into the third-party company’s value chain (embedded finance).

In summary, it can be said that banking is becoming increasingly modularized through open banking, embedded finance and ultimately contextual banking and is being integrated directly into the individual areas of bank customers’ lives. Access to the relevant data, the corresponding technological infrastructure and the cultural mindset are the prerequisites for a gradual opening up. The latter should not be underestimated, as banks that have been characterized by vertical value creation for the last 100 years now have to rethink their approach step by step in the direction of horizontal value creation, together with partners.

Sources

[1] McMakler (mcmakler) – Profile | Pinterest
[2] Construction financing ✓ Your personal loan for the property of your dreams (mcmakler.de)
[3] Prof. Dr. Rainer Alt – Author and expert | Gabler Banklexikon (gabler-banklexikon.de)
[4] UBS Start Business: Insurance | UBS Switzerland
[5] Contovista: Data-driven banking with AI, WeltSparen | The platform for financial investments in Europe
[6] https://www.solarisgroup.com/de/
[7] Banking-as-a-Service (BaaS) providers: The market overview (it-finanzmagazin.de)
[8] https://www.samsung.com/de/apps/samsung-pay/faq/splitpay/
[9] SaaS cloud banking platform | Mambu
[10] Open Banking | MoneyToday
[11] Embedded finance – real trend or hot air? (bankenverband.de)
[12] Bouvier, P. Exploring Banking as a Platform (BaaP) Model, Finiculture. (2016)
[13] frankly. | Your digital pillar 3a
[14] Cashback up to 15% when shopping – ING
[15] Super deals exclusively for TWINT app users
[16] Sberbank: Russia’s largest bank pays out record dividend this year despite 80 percent drop in profits – manager magazin (manager-magazin.de)
[17] VR Star – your home in an app (vr-star.de)
[18] Beyond Business Solutions – We network regions (bbs-eco.de)
[19] myky – the intelligent partner for your home
[20] Exploring the world of “Contextual Banking”: driving business success by enhancing customer experience (db.com)
[21] Exploring the world of “Contextual Banking”: driving business success by enhancing customer experience (db.com)
[22] Cembra digitalisiert Sparprodukte mit Finstar-Technologie – Hypothekarbank Lenzburg AG (hbl.ch)

Stefanie Auge-Dickhut
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