Being purpose-led: Considerations for Financial Services firms – Customer and Provider Perspectives

In an earlier blog (titled: Being purpose-led: Considerations for Financial Services firms – What does it mean?), we explored what purpose-led means with a few examples. 

So far, the articulation of the (positive) impact of the aforementioned (earlier blog) financial service instances has been largely qualitative and subjective, making inferences and comparisons difficult to assess. One popular way of articulating has been the term “friction-less”, stressing on the convenience of accessing and using a product. But again, “friction” as a term has a wide spectrum of interpretations, from ease of use to ease of customization. Instead, we introduce a term “context-switch” to emphasize the motivation for and the ease of adoption of a financial outcome towards a positive impact, involving a switch from a consumer’s personal world to the service provider’s financial world.  We further elaborate on the extent of a context switch for each of the selected instances, first from a consumer/customer perspective:

 SinoPac flexible mortgage loan repayments

• The context switch from capacity to repay (based on lifestyle choices) to the actual repayments is eased significantly, with the ability to repay a lower or higher amount (within certain limits). This is in contrast to a pre-specified amount of repayment which requires a back and forth switch between mortgage repayment and adjustments to other lifestyle needs.

 Apple Card – Goldman Sachs Apple Collaboration

• The context switch in aggregating information on rewards while transacting using payment is eased significantly, with the information and insights available in the same mechanism as the payment.

 John Hancock Vitality Program with Apple Watch

• The context switch in influences of lifestyle to insurance premiums is eased significantly, without the need to communicate lifestyle choices to the provider.

 TransferWise (now called Wise) Payment Transfer Service

• Customer’s Context Switch: Balancing (liquidity) needs in a different geography with cost of transfer

Robinhood zero commission trading

Customer’s Context Switch: Balancing future (wealth through financial investment) objectives with cost of investing

WealthFront Portfolio Line of Credit

• Customer’s Context Switch: Balancing short term (liquidity) short-fall with long term (financial) surplus

In 4, 5 and 6, The context switch in cost to convenience trade-offs is eased significantly, with a low-cost option available without convenience overheads.

As the instances above reveal, context-switches from the consumer world into the financial world is a useful metric in assessing how (customer) purpose-led a financial service is, by focusing on the efforts needed by customers to use the financial outcomes for impact in their lives. This way, the metric provides a very specific, consistent and comparable way of articulating the value proposition of impact around a financial product/service offering.

Considerations in becoming purpose-led

The same (customer) context switches, when looked at from the financial service provider’s perspective, have implications on their business model:

SinoPac flexible mortgage loan repayments

• The traditional model of fixed repayment schedule eases the risk management and the securitization of the mortgage loan. Introducing the flexibility implies that the variations have to be monitored differently, with implications on ability to securitize the loan portfolios

Apple Card – Goldman Sachs Apple Collaboration

• The traditional model of “owning the customer relationship” has to be reimagined, with the trade-off in balancing a separate cost of acquisition with the opportunity in leveraging a large (mobile) customer base

John Hancock Vitality Program with Apple Watch

• The traditional model of actuarial probabilities has to be reimagined, by actively influencing (and measuring) the affecting factors of health and lifestyle.

TransferWise (now called Wise) Payment Transfer Service

• The traditional model of using correspondent networks for payments transfer is reimagined, by using a two-sided market business model, thus separating channel of payment from its function.

Robinhood zero commission trading

• The traditional model of charging customers for access to financial markets is reimagined, by using the customer order flow to charge interested order aggregators, passing on the benefit to customers through zero-commissions.

WealthFront Portfolio Line of Credit

• The traditional model of using isolated “ability to repay” backed by collaterals is reimagined, by combining investment goal planning with the ability to fulfil short term liquidity needs

In a next blog, we conclude with some thoughts on a useful guiding business model on being purpose-led for financial services firms.

Conclusions and Way Forward

In an earlier blog (titled: Being purpose-led: Considerations for Financial Services firms – Customer and Provider perspectives), we explored what purpose-led means with a few examples of Customer and Provider perspectives.

As can be seen from the implications discussed in the earlier blog, becoming purpose-led by recognizing the context-switches of their customers involves not just tweaking product interfaces but a deeper thought in absorbing such context-switches into the financial value chain. This raises important questions for financial service providers though – what are the boundaries of a financial service? What differentiates a financial service from other types of services in the consumer world? To what extent can financial services firms reimagine their involvement towards positive impact in their customer’s lives?

One useful model to guide the boundaries of purpose-led ambitions of financial services firms is Robert C Merton’s functional perspective of financial intermediation. Merton’s framework defines six key functions through which a financial system enables consumers, by enabling efficient allocation of their economic resources over time and under uncertainty. The functions and their corresponding guidance for purpose-led financial services firms could be seen as follows:

Payments system for the exchange of goods and services

• Guidance: Close integration of payment mechanisms with use of payments for lifestyle needs

Mechanism for pooling funds and sub-dividing ownership

• Guidance: Options to participate and share in economic growth  based on capacity

Transfer economic resources through time and across geographic regions & industries

• Guidance: Financial assets as means for transferring consumption across time

Manage uncertainty and control risk:

• Guidance: Financial assets as means of transferring consumption across outcomes

Price information that helps coordinate decentralized decision making

• Guidance: Price of financial instruments in markets as signals to help make consumption decisions in daily life

Ways to deal with asymmetric information and incentive problems in financial transactions

• Guidance: Help in dealing with issues of choice and financial monitoring of investments

From a financial services provider perspective, the above six functions provide a very useful, bounded view of how a financial system helps consumers, by emphasizing broadly all contexts of financial relevance in a consumer world (see figure 5). Using this model, Financial services providers can shift their propositions to focus on the function of their propositions rather than the structure and features of their products. The model also helps in identifying areas of complementary collaboration and competition with other financial as well as non-financial service providers.

Conclusion and Summary

To conclude, as financial services institutions look to becoming purpose-led and ecosystems driven, they need to identify key metrics to assess how purpose-led their offerings are (beyond just convenience and ease of use) and reimagine their offerings. To come up with such metrics though, they need a (bounded) model of how financial services enable consumers’ purposes through positive impact of financial outcomes. This blog suggests a useful metric of consumer context-switches for use in assessing how purpose-led an offering is. Further, as a guide for reimagination in designing/tweaking the offerings, this blog suggests using Merton’s functional framework of financial services, for innovation, ecosystem collaboration as well as keeping track of competition in financial services.