Sandeep Sood

Banking on the Subscription Economy

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By 2023, Gartner predicts that “75% of organizations selling direct to consumers will offer subscription services.” It’s easy to see why—recurring revenue is a no-brainer. At this point, it’s not if but when—and banks and credit card providers are starting to pay attention.

In a subscription economy, traditional business models based on one-time payments give way to partial or full subscription models with recurring payments. This is more than just magazines and movie streaming; we’re talking everything from dog food to cosmetics, enterprise software to consulting, and even bank services.

It’s hard to resist the convenience of subscriptions. Not only do they provide products and services on a predictable schedule, but flat-rate subscriptions make budgeting easy. Compared to the hassle of remembering to visit stores or websites to re-up on items or services, subscriptions are an obvious choice for busy customers. They’re also a challenge for debit and credit card providers.

Customer Relationships in a Subscription Economy

By creating built-in loyalty, subscriptions can make some businesses more competitive, so long as they can keep up with the accompanying rise in customer expectations.  Tacking subscriptions onto a business model isn’t a set-it-and-forget-it fix. It’s a fundamental shift in the consumer relationship.

“The threshold for the customer-brand relationship is higher now,” Upscribe CEO Dileepan Siva explains. “You’re asking customers to commit to spending with you every month, quarter, or year. This makes them a high-value customer who may become more loyal, but to do that you must continually engage and delight post-purchase.”

As resources like Upscribe help merchants successfully add subscriptions to their business model, once trusted brands of banks and credit card providers become less and less visible.

“Customers used to be reminded of their card provider each time they made a payment, whether by physically taking the card out for a purchase or selecting it on the payment screen when shopping online,” Siva points out. “With subscriptions, charges happen automatically in the background. Card providers lose an important touchpoint with their customers, eroding the brand relationship.”

A Lifeline for Banks and Card Providers: Virtual Cards

When customers spend less time directly interacting with cards, providers need to find ways to boost brand visibility and loyalty. Virtual cards offer solutions for consumers and businesses alike. In a subscription economy, they create advantages such as:

  • Simpler business purchasing. According to Mastercard, 67% of companies are satisfied with credit cards as a way to send B2B payments. The top reasons why? Ease and convenience, acceptance by most suppliers, and cost-effectiveness. Virtual cards provide all this and more. Users can set spending limits, and virtual cards easily integrate into accounting systems, making payment approval and release a snap.
  • Fraud prevention. Data breaches are increasingly common, posing a real risk for businesses and consumers alike. Virtual card tokens fight fraud by disguising a card holder’s information and expiring after use. In the case of virtual cards tied to a subscription, charges by any vendor other than the subscription provider are easily flagged, and the source of a data breach is easily identified if each subscription is assigned its own virtual card.
  • Subscription management. Customers and businesses can easily track and settle subscriptions by assigning a unique virtual card to each one and setting spending limits and deadlines. If a virtual card needs to be cancelled, doing so won’t affect other virtual cards on the account (whereas cancelling a physical credit card affects all subscriptions tied to that card). Additionally, virtual cards that can be set to a specific dollar amount (like a fixed recurring subscription fee) eliminate the possibility for under- or over-payment that would result in disputed charges.
  • More transaction details. Virtual cards and ACH are the two most common forms of vendor e-Payments. However, ACH transactions are limited to 80 characters of remittance information. Virtual cards, on the other hand, have no character limit. Custom remittance information makes it possible to reduce or even eliminate manual reconciliation.
  • Time-bound tokens. Virtual card tokens can expire after one use or after a set amount of time. A token that expires and regenerates monthly or quarterly prompts customers to reconfirm their subscription, creating another touchpoint for card providers and helping customers avoid paying for subscriptions they aren’t using.
  • Customized rewards. With virtual cards, it’s possible to offer customized reward options based on one or a set of tokens. It’s also possible for businesses using virtual cards for accounts payable to generate monthly revenue through cash rebate programs.

Virtual cards offer one avenue for banks and card providers looking to stay competitive. But they aren’t the only option.

Banks Can Flip the Script

In The Financial Brand, editor Bill Streeter points out that consumers are “primed” for opening checking accounts with Amazon—if accounts are bundled with services like smartphone insurance or roadside assistance. While that may seem concerning for traditional banks, the same consumer preference could apply to a monthly banking fee if it, too, included a subscription to services like Netflix, Amazon Prime, or smartphone insurance.

Clearly, consumers want simple ways to bundle their expenses and subscription fees. They’ll do so with whoever makes it easiest.

Challenger banks like Aion have already caught on. While Aion doesn’t offer smartphone insurance or Prime subscriptions, for about $22/month, customers can subscribe to a service called MoneyMax. MoneyMax searches for savings on loans, utility bills, and online shopping and doesn’t charge individual fees for moving, withdrawing (even from ATMs), investing, exchanging, borrowing, or saving funds. For subscribers, the flat fee is more desirable than racking up various fees each month.

N26, a German neobank also recently introduced a

subscription service for €4.90 that adds a slate of interesting features to its freemium model, including “Shared Spaces”, which enables people to save along with 10 other people.

With these offerings readily available to consumers, the tide of subscription banking is already rising. It likely won’t be long before businesses expect similar services from banks and card providers.

Subscription models enable a wide range of experimentation. Financial institutions can try perks that customers already expect, like enhanced rewards, and then move into more cutting edge services like the “Shared Spaces” approach from N26. The key is clear differentiation: customers should recognize a clear, engaging value proposition that deepens their relationship to the brand.

If You Can’t Beat ‘Em...

As consumers and businesses subscribe to their favorite products and services, the power of usage data and subscriber insights lies with the account provider. Rewards programs, virtual cards, and financial service subscriptions all offer ways for banks and credit card issuers to hedge against eroding brand relationships and survive and thrive in the new subscription economy.