Should Banks Replace Annoying Fees With a Subscription Model?

Every financial marketer dreams of creating the customer experience equivalent of Netflix, Amazon Prime and Disney+ with their wildly successful subscription model. But can financial institutions adapt it to their culture and strategy? Better yet — can it replace the fees customers don't like?
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Subscription pricing began with the newspaper business, but now even the general public likely thinks of Netflix and Amazon Prime when they think of the term. Various studies have found that people have an average of five non-publishing subscriptions at any one time, often primarily digital media streaming services.

“What was really once reserved for magazines and door-to-door encyclopedia salespeople has really become the default way we consume media, order food, hail a ride and even buy retail products,” Jim Marous says in a Banking Transformed podcast. “In the digital world, subscriptions make our lives easier.”

Financial research firm Corporate Insight explains 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.

Bankers might ask what that has to do with them. Corporate Insight argues the banking world can greatly benefit from the advantages of a subscription-based strategy.

As consumers — particularly younger ones — get used to this kind of payment structure, the proliferation and staying power of the model will only increase,” the research firm points out in a blog post. “Now it is up to the financial services industry to decide whether to put in the work to succeed in the craze or risk being left behind.”

The Key to Loyalty?

Gen Z and Millennials are avid subscribers and hate fees. To keep these younger consumers from defecting to fintechs, banks should consider a subscription model.

The subscription model isn’t perfect. Amongst other issues (addressed further down), retail companies already in — and familiar with — the subscription business have started coining the term “subscription fatigue” to describe when customers tire of their many subscriptions and cancel those they don’t use often.

This term does apply primarily to streaming services, where the bulk of the subscription industry is concentrated. However, even in that sector, experts point out there are solutions which can reduce the fatigue.

Revolut and NuBank (and a slew of other digital banks, noted below) are already ahead of the curve with multi-tiered accounts based on membership or subscription models. Banks do of course have tiered account packages for checking and credit cards, but overall they still rely heavily on transaction fees overall.

What’s In It For Banks and Credit Unions?

“We officially live in a subscription consumed society,” Marous says. “What’s interesting is that it’s really a recurring, stable source of engagement that makes businesses better, be it financial institutions or other institutions.”

Legacy banks and credit unions are struggling to keep customers content in the digital banking world. As The Financial Brand pointed out in a previous article, “even satisfied customers who are happy to recommend their primary banking provider also have relationships with an average of 3.3 financial institutions.”

A Phoenix Synergistics survey found that that those who aren’t sticky with one institution have no qualms about leaving their current banking provider if they find a better deal somewhere else.

Fintechs and digital banks may have found the solution, however, as tech publication Protocol explains: Digital competitors have repackaged fees as subscriptions, a pill customers are more willing to swallow 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, according to Protocol.

“It may be a matter of semantics — What’s the difference between a subscription payment and a monthly fee? — but it works for modern consumers,” the publication states.

Learn More: How Smart Banks Are Retooling Overdraft Fees to Stay Competitive

The other upside of a subscription model is that it allows a financial institution to personalize the customer experience — another steadily growing trend.

“Subscription models can add a sense of personalization if firms use bundled services that can be grouped and tailored to clients’ specific needs and are cross-sold to provide greater value for the price paid,” Corporate Insight suggests.

The firm cites the Spotify-Hulu partnership as an example, noting customers can get individualized bundled products. “Indeed, bundling services and fostering multi-product relationships between clients and firms can ultimately help increase client retention.”

Opportunity for Growth:

Bundling financial services and partnering with fintechs is a great solution in banking subscription models.

Designing subscription models for a bank’s own product strategy isn’t the only way for a bank or credit union to cash in on the trend. Marous dove further into the topic with Joan Clark, Vice President of Product at Segmint, on the Banking Transformed podcast. Clark says one of the ways she sees banks and credit unions benefiting from subscription models is to group all of a consumers’ existing subscriptions onto one of their payment solutions.

She explains most consumers put subscription services — like video streaming — on their credit and debit cards. Yet, this isn’t common with other bills — like a cell phone, utility or insurance payment, which are, in effect, subscriptions.

“Those recurring payments can also be lumped into this type of behavior that we want to encourage more of for the institution,” Clark says, “because the more that a financial institution can capture that, the more likely that they’re going to be the primary financial institution for that consumer.”

From the consumers’ perspective, she points out, doing this is a great way to be sure payments are not overlooked. Plus, the consumer gets cashback or other rewards on those dollars.

Read More: Is a Netflix Subscription Model the Future of Financial Services?

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What Does a Banking Subscription Model Look Like?

Despite concerns about “subscription fatigue,” Clark says Segmint research found the model is expected by grow to $1.5 trillion by 2025.

Fintechs certainly initiated the financial jump into the subscription market. In 2015, digital personal finance bank Qapital launched its three-tiered subscription plan, which customers can choose between after a initial 30-day free trial: Basic ($3 per month), Complete ($6 per month) and Master ($12 per month). The Basic tier doesn’t have the debit card like the Complete and Master levels do, although there are other basic features (such as savings goal sharing capabilities and auto savings tools) that all three share.

Cornerstone Chief Research Officer Ron Shevlin says Acorns is another digital bank subscription service to keep an eye on.

“Increasingly, Acorns subscribers join at premium pricing tiers,” Shevlin wrote in a Forbes article. “Since July 2020, 61% of new subscribers have joined at the $3 tier and 14% at the $5 level. Just one in four new subscribers comes in at the lowest pricing tier.”

The options are endless. German digital bank N26 offers multiple tiers of personal and business accounts with scaled perks, depending on the type of account. Customers with a ‘free’ account only get access to a virtual debit card and preliminary banking services while customers with the ‘N26 Metal’ account get a metal debit card, trip insurance and unique rewards.

Similarly, Aspiration has its two plans: Aspiration (the customer pays what they find is fair) and Aspiration Plus ($7.99 per month or $5.99 per month if the year is paid in full). Customers with Aspiration Plus can get up to 5% APY on their savings, 10% cashback and an option to plant a tree with every card swipe.

Dig Deeper: What’s the Future for Checking Accounts?

Downsides of a Subscription Model in Banking

The benefits are clear, but there are also inevitable downsides of the subscription model for traditional institutions. Corporate Insight explains that, for starters, there is no guaranteed success.

“Of course, freemium services can help lure in prospects, but firms must successfully funnel users into paid accounts by making their value propositions clear — which can be easier said than done,” the firm states. “Also, the fact that subscription models offer pricing transparency does not necessarily mean that a flat fee is a better deal for the customer.”

Additionally, they must also compete with big tech companies who have already mastered the new model.

“Tech firms already have unparalleled scale, trust and existing customer relationships to build upon,” notes Corporate Insight. “Some have designs to get involved in the financial services industry, as seen by events such as the launch of the Apple Card. Big tech may be able to marry best-in-class digital experiences with subscription models, revolutionizing the financial service industry.”

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