Subscriptions in banking: The payment preference for payment services?

How often do you pay for payment?

You probably had to read that sentence at least twice, right? Don’t worry, it’s because you have just entered another dimension in the world of subscriptions.

While in our previous blog post, we described what the concept of subscription is about when making your purchases compared to free loyalty programs, what if the payment method you use for your purchases becomes the subscription itself?

This is about pricing models and is also referred to by the term subscription-based banking. What is it about, what’s in it for us consumers and the financial institutions? What developments do we see in the financial world already?

Let’s find out!

Subscription or single price?

First, let’s get an understanding of subscription-based and single price models.

Both models fit any product. For example, buying kitchen towels in a supermarket is obviously single price, and subscribing to monthly deliveries of kitchen towels on Amazon is a subscription.

However, not necessarily both options fit every product or company all the time. Where does each of them work out?

Single price model

When looking for simplicity, we find the single price model. Knowing we can own a product or service without further transactions after purchase is comforting.

Secondly, it avoids complicated tiered payment plans, often done in subscription modeling. For example, a magazine might have 12 for 12 issues at €1 per issue, and 20 for 24, at €0.83 per issue. This creates additional complexity and may confuse us as potential customers.

Subscription-based model

One of the biggest advantages of subscription-based models, on the other hand, is that the pricing is often more inviting for a customer. For instance, in the automobile industry, payments are taken in affordable installments.

Another benefit of subscriptions is that they create an ongoing relationship between the company and the consumer. This encourages brand loyalty but also means that it can be done without consumer/product disruption when the product is distributed, be it a physical export or a software update.

That said, there have been plenty of cases when we as consumers have been disappointed and canceled our subscriptions after a product was changed or updated.

Two observations explain this fact: companies need to change to innovate, and customers fear change.^[1]

Welcome to the ‘Subscription Economy’

So, the subscription model is labeled as less simple and requires more preparation. It should be laid out transparently so that it’s verified to meet our needs as customers, and no misunderstanding and confusion occur.

The market has taken up that challenge as the ‘Subscription Economy’ is currently gaining a lot in popularity. We as customers gladly pay a fee for our chosen product or service at regular intervals, whether that’s weekly, monthly, annually, or a pay-as-you-go option. Famous examples are Netflix, Spotify, and the like.

The figures prove it: the ‘Subscription Economy’ has grown 435% over the last nine years, which is five to eight times faster than traditional businesses.^[2]

Unlike its predecessor, the ‘Product Economy’, which relies on one-off transactions to drive revenue for suppliers, subscription business models are created with the goal to generate lifetime customer value focusing on the outcome as a solution for the customer instead of on product ownership.

How do we see this focus on customer value with subscription-based banking within the financial industry, i.e. when we pay for our payment services as a subscription to the banks or financial institutions as its suppliers?

Subscription-based banking

First, there’s another question we need to tackle: What single bank fees do we consumers dislike paying the most?

This has been well-documented in a Magnify Money/Lending Tree study ^[3]: The most detested fees include bank ATM fees, overdraft fees, and bank account maintenance fees.

And that's where subscription-based banking comes in.

Here’s how it works: Banks can charge a flat monthly fee instead of those annoying multiple, per-use fees, which makes things easier for us customers when it comes to predicting our expenses, while operational costs are reduced in the process for the banks.[4]

This may seem nothing new compared to what banks are already offering nowadays as some sort of subscription, but it’s the mindset behind it that makes the difference here and in this time of the ‘Subscription Economy’ trend.

After all, this trend shifts the focus onto customer-centric pricing and for that purpose, the door is open for financial institutions to enter with their subscription offerings focusing on validating customer needs and helping them to achieve their goals.

In reality, though, unlike in other sectors, the finance industry is slower in replacing the product-centric pricing strategy with that new approach. In fact, it has been mainly subject to still a lot of debate so far.

Let’s look at the following arguments in favor of subscription-based banking revenue models within that debate as many experts believe they are undoubtedly the future of the banking industry.

Customers favor flexibility

The subscription-based banking model provides customers with a lot of flexibility.

They can choose the product bundle which most closely meets their requirements and then they can continue with business as usual without having to monitor the service charges charged by the bank against their actual usage.

Customers find it convenient to know that they will be charged the same service charge if their usage of services falls within the same range every month.

The Millennial mindset

Millennials are the decision-makers of the future. These millennials have grown up their entire life living with subscriptions. Millennials are psychologically more receptive to the idea of subscription fees.

Proof of this is a study by financial research firm Corporate Insight that illustrates that Gen Z and Millennials, in particular, have quickly adopted the subscription habit. At least nine out of ten Millennials use a subscription service of one kind or another. Gen Z, on the other hand, spends the most on subscription services, averaging about $377 per month, according to a WeThrift survey. ^[4]

As for bank fees, Millennials and Gen Z find them annoying too. In the business world, perception is the only reality and perception seems to be favoring the subscription-based revenue model.

As consumers — particularly younger ones — get used to this kind of payment structure, the expansion and power of the model will only increase. Hence, it’s likely that this subscription model will gain traction in the future.

Bundled subscription banking benefits

Let’s dive a little further into the bundled benefits of the subscription-based banking model.

A monthly fee instead of per-use fees could give us customers with multiple banking relationships a more compelling reason to consolidate our accounts with the bank of our preference.

For the banks, this is really a recurring, stable source of engagement and it’s believed to be a major benefit of the subscription-based banking model.

On top of that, banks can benefit from subscription models by grouping all consumers’ existing subscriptions into one of their payment solutions. In fact, most consumers put subscription services - like video streaming - on their credit and debit cards. Yet, this isn’t common with other bills - like telecom, utility, or insurance payments, which are also subscriptions. Those recurring payments can also be grouped into this type of behavior, because the more that a financial institution can capture that, the more likely that we will choose that institution as our primary provider.

And this is a great way to be sure neither we nor the bank overlook any payments. Plus, we as consumers can get rewards on those payments.

Personalization leading to preference

That includes a rewarding experience: via a subscription model the financial institution can personalize the customer experience — another steadily growing trend.

This personalization can be achieved when financial institutions use bundled services, tailored to the customer’s specific needs and cross-sold to provide greater value for the price paid, ultimately helping to increase customer retention.

Challenges of subscription-based banking

Back to that open door. As mentioned earlier, the adoption of subscription models in the financial industry is slower and surely not happening overnight. For those traditional institutions that start exploring the model, success is not guaranteed and inevitably, challenges appear on the horizon.

One of these challenges is that legacy banks are struggling to keep customers satisfied in the increasingly digital banking world. An article by the Financial Brand points out that even satisfied customers who are happy to recommend their primary banking provider also have relationships with an average of 3.3 financial institutions.^[4]

Furthermore, a survey [4] found that those who aren’t loyal to one institution only, have no doubts about leaving their current banking provider if they find a better deal somewhere else.

Validated value for money

Freemium services – basic services free of charge before charging for advanced services – can help attract new customers, but it’s crucial that financial institutions first make their value proposition crystal clear to funnel users successfully and steadily into paid accounts. This can be easier said than done.

Also, the fact that subscription models offer pricing transparency does not necessarily mean that a flat fee is a fit for the customer. As stated earlier, preparation is needed as well as verification if the subscription matches our needs as a customer.

Competition filling the room

Digital banks are already entering the subscription space and are repackaging fees as subscriptions, which customers are more willing to accept in the digital age. These subscriptions are often designed as ‘market premium memberships’ that package time- and worry-saving features with a predictable cost instead of surprise charges. ^[4]

Another group – the big tech companies like Apple – already have made a big entrance through that open door and have mastered the new model. They have unparalleled scale, trust, and existing customer relationships to build upon according to Corporate Insight. ^[4] Big tech may be able to combine best-in-class digital experiences with subscription models, revolutionizing the financial service industry.

The developments in the financial world

We can conclude that amongst the legacy financial institutions, no revolution is happening just yet while the subscription economy trend cannot be ignored.

Subscription models are becoming mainstream, going way beyond the usual suspects in the consumer space such as Netflix and Spotify. The financial industry, however, is lagging behind in its development to adopt and offer successful subscription models.

Moving into the ‘Subscription Economy’ isn’t just about building a recurring revenue business; it’s about building a relationship with the subscriber. It requires a conscious transition from product-centric business models to customer-centric ones and from selling products to helping customers achieve an outcome.

Digital banks are already making steps in that direction with their subscription offer of time- and worry-saving features with a predictable cost. Time will tell when the rest follows.

Ultimately, the pricing model is all about how a financial institution reaches its targeted customers and builds on further engagement. The more meaningful this is for the customer, the more it will be successful.

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Banner photo by Karolina Grabowska on Pexels.com

^[1] Subscription vs. single price, which payment model works best | Real Business

^[2] Corporate Banking Ebook | Zuora.com

^[3] Subscription Banking – Is It Time For Your Institution? | pcbb.com

^[4] Should Banks Replace Annoying Fees With a Subscription Model? | thefinancialbrand.com