Paper & Blocks

Finance is a means to an end, not an end in itself.

This is hard to remember sometimes when you have your head down working in the industry.

The financial system exists to move, store and transform value for its various users. It is the circulatory system enabling most forms of economic activity across the world today. So, on a macro level, finance exists to facilitate economic activity.

When it comes to the micro level, personal finance exists to facilitate our personal endeavours. We create value in the world through our professions, we capture that value in the form of financial assets, we store that value with trusted institutions (banks and wealth managers), and we use that value to meet our needs and wants from the necessities of food and shelter to the self-actualizing accomplishments of travel and education.

If there was a job-to-be-done for finance, it would be to facilitate our lifestyle.

Facilitation Requires Context

So, if finance’s role is a facilitator, then the thing it is facilitating should be what the industry’s value equation is built around. Any time we speak of innovation in [retail] financial services, it should ultimately tie back to helping people make progress on a personal level.

A better payment card would not just help me spend my money, but help me spend it wisely.

A better investment product would not just help me grow my capital, but help me maintain my lifestyle into the future.

A better insurance policy would not just help offset my risks, but would help me actively mitigate them.

Every financial product can be broken down this way: the function + the outcome.

Funny enough, the functions of financial products rarely change. My bank deposits serve the same function that bank deposits did 100 years ago. Only the form factor, level of protection, and methods of access have changed around it.

Where most innovation takes place in financial services today is around the outcome. How can a static set of functions be manipulated to improve outcomes?

It requires context.

An Example: Embedded Finance

To make this more tangible, let’s jump into an example.

This idea thread started for me when thinking about the impact embedded finance was going to have on the industry. Embedded finance is a situation where a financial service is ‘embedded’ into the customer journey of another non-financial product or service. When you take an Uber, your payment is embedded in the app’s experience saving you time and effort each ride. When you purchase a Peloton, your ability to apply for financing is embedded in the company’s checkout experience. Offline, when you apply for a mortgage, your ability to protect your family by obtaining insurance coverage is likely baked into your bank’s mortgage application and fulfillment process.

In each of these examples, there is a ‘life’ element (getting from here-to-there, staying in shape, finding a place to live) and a financial element. The ‘embedded’ nature means that the financial element is seamlessly integrated with the life element with the intent to improve outcomes for the customer (time and energy on the Uber ride, getting fit today instead of tomorrow on the Peloton purchase, obtaining protection on the mortgage example).

What makes this powerful is that the financial service is placed in the right context for the customer to be able to make the progress they seek. It appears at the right place at the right time and then disappears into the background.

That is why embedded finance has experienced such rapid growth over the past decade: it uses context to improve outcomes for financial products that carry the same old function they always have.

Forms of Context

Embedded finance relies on a particular form of context: location. It identifies people who are in a specific place aiming to accomplish a specific goal and offers an option to facilitate those objectives on the spot. In other words, it is ‘embedding’ a financial service in a particular context (‘location’).

But there is more than one form of context. Generally speaking, context is the set of circumstances that surround a particular situation. In this conversation, those circumstances are the time, places, actions, preferences, traits, and affiliations that make up our personal ‘situations’.

• Time: Where/how we spend our time and attention.
• Location: Where we are located, physically and mentally.
• Actions/Behaviour: What activities we decide to undertake and how we decide to behave while undertaking them.
• Preferences/Goals: How we prefer to align ourselves against a set of objectives or tastes.
• Character/Traits: How our tendencies influence the way we operate.
• Affiliations/Associates: The groups or tribes we associate ourselves with.
• Financial Health: The financial circumstances that surround us.

While this list is not even close to comprehensive, it covers some of the various forms of context that are useful in personal finance, each of which offers an opportunity to create better financial products/services.

A Contra-example: Crypto

What do you get when you build a financial system that lacks the ability to facilitate your personal pursuits?

You get crypto.

Crypto is not very useful right now on a broad scale because it does not enable the average person to do things in their daily life. For that average person, it is quite hard to figure out how to get started with a wallet and make their first crypto asset purchase. Once a wallet has a balance, it is even more difficult to use that balance in the real world. Living your life 100% on-chain is still challenging, due to both the limited general acceptance of crypto by the broader public and the high-friction experiences that still surround services that enable it. Sure, there are products out there like bitcoin mortgages or payment cards that bring ‘crypto as a real-world option’ one step closer, but for now, they remain confined to a small niche who want to try to go ‘full crypto’.

Where crypto is incredibly useful is in the crypto ecosystem itself. If you have on-chain assets, there is an entire financial system complete with a replication of nearly every modern financial product for you to use. Not only that, your on-chain identity and the assets you hold provide a wealth of information about you that can be useful in creating context-aware financial services. Yet, for now, these benefits remain somewhat trapped within the walls of the crypto ecosystem.

Context as a Strategy

Context as a strategy requires the following equation to return a true result:

Financial Function + Personal Context = Improved Outcome

The objective here is to get the context right in order to deliver the appropriate service to appropriate customer at the appropriate time. This means knowing who the customer is (preferences, goals, traits, affiliations), what they are doing (location, actions) and when they are doing it (time). This can typically provide a differentiator or a distribution advantage, either of which is a strategic motivation for pursing context as a strategy. Examples include:

• Embedded Finance: While already discussed above, embedded finance creates a distribution advantage by knowing who the customer is (fitness enthusiast), what they are doing (buying a Peleton) and when they are doing it (today, not tomorrow). It is a very strong example of using ‘context’ strategically to create a distribution advantage for a financial services company.
• Financial Advice: Funny enough, another topic that I’ve written about at length here, is also a strategy that involves heavy use of context. Companies that are differentiating through the financial advice they provide know who their customer is (financial circumstances, risk tolerance, lifestyle preferences), what they are doing (working, spending, saving) and when they are doing it (ongoing). Context is what allows financial advisors to deliver advice and identify financial needs for their clients—and the better the context, the better the advice will be.
• Loyalty and Rewards: Context is a two-way street for today’s top loyalty programs. From PC Optimum to Scene+, these programs are used as both a funnel to collect contextual information about a customer (location, shopping behaviours, preferences) and as a vehicle to leverage that context to offer relevant and timely rewards.

Context as a Capability

Beyond placing context as the focal point of a strategy, it can instead be used as an enabler. The ability to add context to improve any financial product or the customer journeys around it means that context is an important capability that can be leveraged across the financial services industry.

Some examples include:

• Alternative Lending: Today’s financial system has been constructed around traditional credit scoring methodologies from a handful of providers. Falling outside their criteria (for thin-file or no-file customers) means a large number of Canadians are either underserved or unable to access credit, despite their potential likelihood to repay. The ability to assess creditworthiness is simply an exercise in gathering context about an individual, which means those that have the ability to gather the necessary contextual information can develop their own credit scoring criteria. U.S. lender Upstart Financial, for example, takes into account 1,000+ data points inside and outside a consumer’s credit report and includes things like the person’s college, area of study and employment history. 
• Connected Insurance: Connected insurance is built on the idea that insurers can create a nice alignment of incentives with their customers by offering them rewards for low-risk behaviour. In order to assess the low-risk behavior, additional context is required. For auto insurers, this added context can be the inclusion of a telematics program. Desjardin’s Ajusto, for example, rewards users for their safe driving behaviour with lower premiums that they track through permissioned access to smartphone data. Similarly, on the life insurance front, Manulife Vitality rewards its life insurance customers with lower premiums and a variety of other benefits in order for living healthier lifestyles by relying on contextual data from Apple Health and Google Fit.
• Open Banking: Do financial institutions have a specific ‘open banking’ strategy? Not likely. Rather, open banking is looked at as a new capability to enable product development. After all, the permissioned sharing of third-party financial data is a goldmine of contextual information for financial product developers to work with. This data can even be leveraged in some of the examples already mentioned, from financial advice to alternative lending.

Context as an Ethos

Once you start thinking about context as the bridge between a financial product’s function and the personal pursuits it enables, you start realizing that context can be used to some extent across all financial products today. In fact, the ability to use context to improve existing financial services experiences is also known by another name: personalization.

Context as an ethos is about striving to create the most relevant, personalized and meaningful customer experiences possible. This ethos flows through today’s technology leaders like Netflix and Amazon, who can predict what you want to watch or buy better than you can yourself. This approach is not a strategy in itself, but rather a default mode of operation.

Context is Everything

If there was a job-to-be-done for finance, it would be to facilitate our lifestyle. To be successful at doing so requires a great deal of context.

Funny enough, this is nothing new! In fact, context used to matter in banking more than any other industry. Decades ago, in the early 20^th century when banks were local and community-based, financial services were heavily relationship-driven. Bankers depended on getting to know their clients on a much more personal level to be able to assess their trustworthiness, particularly if lending entered the conversation. This Great Gatsby era of banking had context and personalization front and center, despite the fact that it was being delivered in an analog format.

As banking ‘industrialized’, it became less personal and more rigid and structured. Banks batched their customers into segments, relied on standardized credit scoring methods (FICO), and scaled from local streetcorners to global money centers. Today, changes in technology offer up the opportunity to bring back the personalized banking days from the past. From embedded finance to open banking to all of the other ways technology can be used to improve customer outcomes, there is little doubt context will factor heavily into financial product evolution in the years ahead.