Will Consumers Buy Mobile Banking Subscriptions?

The number of people using subscription services like Amazon Prime, Netflix, Spotify, Birchbox, Dollar Shave Club continues to soar. Can financial institutions take advantage of this new business model?

The retail marketplace is witnessing a monumental change in consumer buyer behaviors, as hundreds of millions of people are now paying to take advantage of subscription services. Firms like Amazon, Apple, Dollar Shave Club among others, are building or transforming their business models to generate sales, improve loyalty and generate additional revenue. The difference with subscription-based models is that they allow their customers the option to either pay as they go, or pay per subscription monthly, or via a long-term contract. The difference is flexibility.

According to the Economist, “80% of companies are seeing a change in how their customers want to access and pay for goods and services and 50% of these same companies are changing their pricing models as a result.” Yet in the banking industry, charging $5 a month for a debit card or overdraft protection is not so inspiring. How can the banking industry associate their fees with value, rather than penalties?

The key may be to learn from the best – those firms that have reimagined seemingly un-penetrable business models to become new, born-digital companies that leverage technology, social media and people’s mobile lifestyles to generate a steady stream of revenue in return for ongoing value.

Turning a Daily Bathroom Habit into a Subscription Business

Before Dollar Shave Club, online razor sales were nonexistent, and the razor business was dominated by huge companies like PNG’s Gillette. But when Dollar Shave Club launched in 2012, they sold 12,000 subscriptions in the first two days after launching their first video commercial. Today that video has over 22 million views.

1 - Bathroom minutesWith the Dollar Shave Club, subscribers pay a monthly fee of $1, $6 or $9, depending on their preference of razors that are delivered each month. It’s a simple concept, brought to life by brilliantly clear and memorable marketing, and a valuable service that makes customer’s lives just a little bit easier. While their clear target customer is 20-something males, they’re doing a great job of reaching women also, who now make up 20% of their subscriber base.

From Facebook targeting, email marketing and video sharing, to The Bathroom Minutes newsletter that accompanies the monthly razor shipment, Dollar Shave Club is transforming the once unexciting razor business. The California-based company reached 2.2 million subscribers in 2015, doubling in less than a year.

Companies like Gillette have since launched online shaving clubs to win back these customers — According to Fortune, Gillette now has 21% of the online shaving market, compared to Dollar Shaves Club’s 54%.

Viewing Subscriptions Bust Blockbuster

Consumers of all ages have become addicted to Netflix, the TV and movie streaming service that put major video rental businesses like Blockbuster out of business completely.

“A transactional customer might own dozens or even hundreds of movies,” says Robbie Baxter, author of The Membership Economy. “But Netflix has thousands — from different countries, genres and more — providing tremendous choice and the latest options. Access is so much bigger than ownership, and the subscription model ties customers to organizations in an ongoing relationship with an opportunity for benefits on both sides.”

Netflix now has 81 million total subscribers. There are 47 million users in the U.S., and 36% of U.S. homes subscribe to Netflix. While 79% of users are Millennials, Netflix’s popularity is growing with Gen Xers, at 38%, at Baby Boomers, at 26%. Why? Binge watching is fun, and commercials aren’t. And a new type of community is created amongst the viewers who can’t wait to talk about it with each other. It’s why all users watched a total of 42.5 billion hours in 2015.

“A membership organization builds a ‘neighborhood’ for its ideal customer,” says Baxter. “There’s a cost associated…so the promise of connection, community and ongoing value must be guaranteed.”

Amazon Reaches Prime Customers

It’s not just young upstarts that are claiming customers who desire to ‘pay over time’ for valuable benefits. Companies like Amazon are increasingly leveraging their enormous customer base to grow their subscription business model.

How did they add more value to customers’ already positive shopping experiences? The answer is Amazon Prime, now in 38% of American households, according to Fortune, and projected to be in 50% by 2020. The subscription service includes free two-day shipping, music streaming and TV and movie streaming as well as original Amazon content. The company is also experimenting with Prime Now, a service in major cities that allows customers to order items from the app and have them delivered within two hours … free with the Prime subscription.

Not only are Prime customers paying $99 a year to use these services, they’re spending more each year. According to Business Insider, Prime customers spend $1,100 a year on the site, while non-Prime customers spend $600. Amazon Prime members also have higher incomes than the average Amazon, Walmart and Target customers, according to Fortune. “Prime members have an average household income of $69,300, well above the income of Amazon shoppers in general. It is also 25% higher than Walmart shoppers’ average income and 4% of Target’s.”

Amazon raised the subscription fee in 2015 from $79 a year to $99, and in the grand scheme, nobody even blinked. Subscriptions have continued to increase by 53% year over year, according to GeekWire. Because customers are getting more and more value from their membership, they’re incredibly loyal to that relationship and dependent on its services.

“Some people sign up for the free streaming content but end up buying more products,” said Amazon CEO Jeff Bezos in an interview. Which summarizes Amazon’s entire strategy — include lots of different ways to get value in one membership, and people will want to sign up for it.

Mobile Millennials Love Subscriptions

Now reaching 80 million people, Millennials make up the largest generation in the U.S. For banks or any business to attract this emerging affluent and progressive age group, it’s important to understand how they buy. Largely Millennials, but also an increasingly growing non-Millennial digital consumer segment, demand digital access — convenient, relevant and valuable, with lots of options — versus ownership — being tied to one, likely expensive product or service. This is true for large ticket items as well as less expensive items.

Spotify is a music streaming service that now has 10 million paying subscribers and 40 million active users. Instead of owning digital music (as was initially the model for iTunes), Spotify customers subscribe to get access to music monthly. The service is so successful, Spotify has averaged one new subscriber every three seconds over the last year.

Similarly, with iPhone sales dropping, Apple wanted to grow revenue. So, the company now offers a subscription service that allows consumers to get a new iPhone annually, rather than purchasing the phone every two years, as most iPhone owners do today. This appeals to Millennials and digital consumers who always want the newest technology on the market.

Finally, with a Birchbox subscription, customers get a variety of high quality makeup samples every month. Ingredients for cooking meals are delivered to your door with a Blue Apron membership. And a new record is shipped every month with a VinylMePlease membership. And, like Dollar Shave Club, they all come with modern marketing techniques and clever ways to create a unique and personal customer experience.

It is also important to note that all of these models are made possible by digital technology with the ease of using the service on multiple devices. It’s the same type of technology investments financial institutions are increasingly making today to enhance their mobile offerings, but with a focus on adding value to the mobile experience through easy-to-use, well-designed functionality that consumers crave.

Can Banking Memberships Succeed?

Repeated attempts by the banking industry to charge subscription fees have been anything but inspiring. So far, the most visible examples are awkward attempts to charge fees for basic things that customers have been trained to recognize as free.

In September of 2011, Bank of America announced they would begin charging a $5 debit card fee for using a debit card for purchases. As could be anticipated (by almost everyone except possibly Bank of America), people were quick to protest, using Change.org, Facebook and Twitter to fight back. Bank of America cancelled the plan within 6 weeks, and other big banks quickly jumped off the fee bandwagon after witnessing the revolt.

In 2014, consumer advocates complained again when Bank of America began testing another debit card with a $4.95 fee. In this instance, the fee was to avoid overdraft services that consumers could seemingly get for free if they held other accounts.

With free checking being a central message within the banking industry for the past two decades, it is a mistake to think consumers can be assessed a fee for the same things that have been given away in the past. Without additional value added, it is more likely to appear that the banking industry is simply trying to find a way to make more money … not a good starting point.

“The answer lies in helping consumers gain wealth, regardless of their financial starting points,” said Jim Van Dyke in an interview with the American Banker. “Consumers want to have convenient and safe solutions for some of life’s most complex challenges. Financial services are a paramount need for everyone, and consumers need what bankers are in a unique position to offer.”

Van Dyke also comments on trust, one of the key elements of the membership model. “In order for bankers to profit from providing consumer-friendly services, consumers have to believe the bank is truly looking after their interests,” stated Van Dyke. “The millennial-focused fintech movement and a restoration of trust go hand in hand. Banks must bet their entire retail operation on the ability to improve customers’ overall financial lives with integrated service and technology that is founded on trust and transparency.”

The big banks have been experimenting with adding shopping features to the mobile commerce experience, like Bank of America’s AmeriDeals or U.S. Bank’s Peri, for quite some time. While they haven’t monetized these services, they’re certainly trying to find ways to go beyond just transactions to connect with their customers’ mobile lifestyles.

Community banks on the other hand, have set some trends in not only building value through nontraditional services in their product lineups, but have also figured out a way to create subscription revenue streams. First Financial Bank, for example, is based in Abilene, Texas and is one of the top performing banks in the country. They were most recently nominated for Bank Director’s FinXTech Awards because of their subscription checking account — where customers pay $7 a month to save money on services they’d be paying more for elsewhere. Services include cell phone protection, roadside assistance and identity theft protection. These customers can also save money with local shopping discounts, delivered via mobile. Since its launch, the account has been a significant contributor of customer-friendly fee income, as 35% of all customers are in the fee-based accounts.

As Robbie Baxter, author of “The Membership Economy” warns, this transition from ownership to membership is “the equivalent of the modern age industrial revolution.” By understanding these strategies and embracing the changes in consumer buying behaviors, financial institutions can also dream up new ways to create recurring value for their customers and new sources of predicable income.

Some brainstorming ideas around fee-based subscriptions could include the addition of enhanced financial benefits that could become part of a financial institution’s mobile banking application:

  • Same day availability of remote deposited checks
  • 30-second personal loans up to $1,000
  • Pre-approval of auto loans (with discounts on rate)
  • Bonus rate with digitally integrated savings gamification
  • Fee-free ATM transactions at other financial institutions

By adding a bar code or some other identifier on the mobile banking front page, a customer could potentially access and receive discounts/rewards such as:

  • Health club or community recreation facilities
  • Local merchants, including florists, hardware stores and restaurants

In the end, the success of membership subscription services in the banking industry will be dependent on the ability to integrate value within digital banking applications. Beyond merchant-funded rewards and add-on insurance products, can banking bring together different lifestyle services in a way that benefits the consumer and saves them money in the long run … like Amazon Prime, Netflix, Apple and Dollar Shave Club.

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