Honestly, there is a lot of room for improvement when it comes to banking fees. Bank of America’s schedule of fees for checking accounts is upwards of 21 pages, and most financial institutions have something similar.
There are transaction fees for items processed beyond certain limits, ATM fees, statement copies, excess deposit slips, IRA custodianship, health savings accounts, international transactions, check imaging, check copies, and dozens of other fees. Many banks even charge for commercial cash deposits. Think about that: fees to those that are delivering net value!
Why? There must be a better way.
If banks and credit unions don’t figure this out soon, you can bet fintechs will. And when they do, they will almost certainly simplify things by wrapping everything up in a subscription.
Traditional financial institutions are extremely dependent on fees. The average banking provider produces about 23% of its revenue in fee income, while “top-performing institutions” often surpass 27% or greater. This leaves banking providers in a very vulnerable position, with one-quarter of revenues hinging on variable economic conditions and the behaviors of an unpredictable customer base.
By comparison, consider Apple’s strategy. At one point, only 10% of Apple’s revenue was derived through recurring fees. Investors and analysts derided the tech giant for lacking steady streams of predictable, recurring income. Apple got the message, and immediately started charging for various subscription services — Apple Music, Apple Arcade, Apple TV+, iCloud, iPhone upgrades, etc. And boom! Their recurring revenue shot up to 23% of total revenues — just about the same as banks.
After shifting to this more stable revenue model, Apple’s price-to-earnings ratio doubled from a 15x multiple to 30x, and has topped 100x earnings. Companies like Microsoft, Google, Adobe, Salesforce, Walmart, Netflix, New York Times, Disney, Spotify, Panera, and hundreds of others have all found similar success by moving to subscription services. Consumers and investors alike love them, sending valuations through the roof.
What do fintechs and Fortune 500 companies know about subscriptions that financial institutions don’t? Why don’t banks and credit unions package checking account services into an annual membership?
Why Subscriptions Work for Financial Institutions
As with any subscription, the central argument centers around simplicity. Charging a recurring monthly flat fee instead of per-use fees minimizes the number of transactions. It’s convenient for the consumer, and lowers operational costs for the provider. But there’s much more to psychology underpinning the calculus.
People almost always overestimate usage, so the perceived value of a subscription is higher. Take gym memberships as an example. When someone signs up at a gym, they often think they will be working out five times a week. If they paid $10 a visit, it would cost them around $200 a month for 20 visits. But when the gym charges “only $150 per month” for a subscription, the consumer believes they are paying less — $7.50 per visit for 20 visits. Most people won’t go to the gym more than twice a week. If the gym charged $10 a visit, they would only get around $80 a month from eight visits. With a $150 monthly membership, they can average $18.75 per visit.
Arguably, a subscription model makes even more sense for financial institutions than it does for gym memberships. For financial institutions, the math is ridiculously better. Most households and businesses have multiple banking relationships. By combining various subscription packages, a financial institution could incentivize consumers and businesses with multiple services scattered across various providers to consolidate them all under one roof.
Financial institutions should consider moving to a flat annual subscription and create a variety of value-added services the same way that Amazon did with its Prime membership. Amazon Prime is perhaps one of the most significant strategic decisions in the history of business, which now includes more than 150 million subscribers and responsible for more than $100 billion of market capitalization. Not only is the ecommerce giant raking in over $22 billion in membership fees, the typical Prime member is more engaged, more loyal, and almost twice as profitable as non-Prime customers. Analysts even joke that someone’s probability of divorce is greater than their likelihood of breaking up with Amazon Prime.
If offering bundled banking subscriptions makes sense for anyone, it’s credit unions, who already have “members”. How big a stretch would it be for them to offer more robust “membership packages”?
The Compounding Advantages of Subscription Banking
Beyond the immediate convenience and increased revenues subscriptions yield, banks and credit unions can increase the number of products per customer/household. Greater engagement means greater relevance, further reducing customer defections and increasing customers’ lifetime value. In the process, bundling products makes people less interest-rate sensitive, further helping financial institution performance.
Example of a Business Banking Bundle:
- Multiple deposit accounts
- Treasury management
- Line of credit
- Free accounting software with integration
- Spending, savings and investment benchmarking
- Merchant services
- No transaction fees
- CPA, tax and accounting support
- VIP support
- Partnership discounts
- Cyber trust and security
- Advisory services
- Exclusive content
Many financial marketers falsely believe that they are doing their customers a favor by presenting a “menu of options” that allow people to “customize” their account. The opposite is true. Consumers have proven over the last several years that they actually want less choice. What consumers want is more confidence that the choice they’re making is a good one.
Simplicity is the key. Banking providers should get creative in taking their existing services and packaging them together. Do you really need to charge fees for a ATM replacement card? Stop payment fees? Wires transfers? Deposits?
Of course, financial institutions can’t stop there. Include wealth, mortgage, overdraft, treasury management, and other services into one annual subscription and watch performance increase.
Financial institutions can also get creative and add new artificial intelligent-driven advisory, benchmarking, payments, identity, cyber support, risk management, and escrow products. Banks could partner with CPA firms, law firms, tax, and other service providers like Intuit’s QuickBooks or Turbo Tax to expand their bundle and make the subscription more compelling.
A Leap of Faith or a Compelling Business Case?
Moving to a subscription model is scary. Calculating the potential impact of “lost transaction fees” is enough to freak out any CEO or CFO. However, with the right leadership, products, marketing, and a little faith, financial institutions can succeed.
Consider the foresight of Adobe. That company used to sell various software packages such as Photoshop and Illustrator for several hundred dollars each. They were the dominant leader in almost every product they sold. Most companies would have played defense and protected their position — why change?
Not Adobe. At the height of their success, they blew up their entire business model. Instead of transaction fees, Adobe switched to charge an average of $25 per month and threw in support and constant software updates. Investors and analysts initially hated the idea, and the stock dropped on lower revenues. But after a year of the “experiment,” the strategy panned out. Instead of using a diverse portfolio of tools from different providers, Adobe users became monogamous with Adobe and began using the company’s broader Creative Suite almost exclusively. Satisfaction scores went up, revenue went up … and their stock went up 11x.
Then there is Netflix. The more movies and shows they add to their subscription, and the more people use their subscription over time, in turn, the more Netflix learns about the customer, and the more relevant Netflix becomes. Similarly, a financial institution that gathers data beyond just loans and deposits, but payments, accounting, tax, M&A, and content, is going to be much more valuable to consumers … and on its balance sheet.
A recurring revenue stream of a package of financial services reduces operating costs, stabilizes earnings, increases engagement, increases products-per-customer, helps the customer experience, allows the capturing of greater data, and promotes more of a monogamous financial relationship. The strategy has much to desire and is a driving factor behind many trillion-dollar companies.
A recurring revenue stream from bundled banking services takes time and experimentation. The effort takes an investment, leadership, creativity, collaboration, and marketing execution. The goal should be to make it simpler for the consumer and reduce that pricing sheet from 40 pages to one and create economic incentives to have a single relationship. Most customers don’t want multiple banking relationships; they have numerous banking relationships because they feel they must, and the industry’s business model permits it without cost.