Banking on the Subscription Economy

Consumers today subscribe to everything from grocery delivery to scented candles. The move to a subscription economy, however, may leave card providers invisible.

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.


Tom

Sandeep

Sandeep: Tell me a bit about the early part of your career.

Tom: I spent a decade helping to build start-ups focused on application and database software. This was where I learned how to sell and do business development. I was fortunate to be part of one company going public and another being sold to IBM.

Sandeep: What is something you learned during this time that helped you with consulting?

Tom: I began to appreciate how different customers achieved varying levels of success with the same foundational technology. This made me understand just how critical getting your team and process right can be.

Sandeep: This is something I only came to appreciate years into consulting, especially after the sale of my first consultancy to Capital One.I saw teams in different parts of the company trying to solve challenges like real-time messaging. Same corporate culture, same technology, same internal support mechanisms. Night and day outcomes.

Tom: We saw a lot of the same thing after selling our practice to EMC (sold to Dell in 2015). This is probably the thing I'm most proud of when it comes to the teams I've helped to build: the ability to perform well in a variety of contexts, sometimes in ways that inspires the client team to up their game as well.

Sandeep: Yes. It's particularly cool to see your team succeed in individual ways after an acquisition...consulting skills definitely translate into the corporate environment.

Tom: Totally. We have people who've stayed on at Dell and risen up the ranks, while others took the opportunity to become successful executives at other Fortune 100 companies....or to start their own agencies and startups.

Sandeep: We've both been around a while. My first consulting project was a Y2K thing for Cisco back in 1998. You've been around a little longer than that :). How do you think consulting has changed most during the past five years?

Tom: I think because there is so much infrastructure available now, consulting has become more delivery and outcome-oriented. A better blend of strategic and tactical. Public Cloud has also enabled velocity to increase at a pace unfathomable 5 years ago.

Sandeep: What has stayed the same?

Tom: It's still mostly about people. People who thrive on change and are focused on their personal and professional development. I love that this has not and will not change...it's what I love about consulting.

Sandeep: I know you're adjusting your work style to COVID. You're still a dude who clearly prefers to drive an hour for a socially-distanced hike or outdoor meeting over Zoom any day of the week :) But personal styles aside, what is specifically compelling about a remote agency during the era of COVID?

Tom: Kunai has been remote for years, which gives them an inherent advantage. There is something about the communication and management styles that just works in a way that other organizations are still figuring out.

Sandeep: Yeah, I think what a lot of people fail to realize is that remote work isn't just office work over Zoom. it's an entirely new paradigm. There needs to be an understanding for asynchronous efficiency...and this just takes time and effort to develop. How do you approach remote work and family? What are you learning about separating work and personal time?

Tom: No matter what the form of interaction, Focus. Be present. Quality over quantity. The best weeks are the weeks where I proactively schedule work and personal time. Neil (Kunai's Head of Delivery) shared a great quote with me "With discipline comes freedom." When I am proactively addressing the majority of my professional and personal commitments, I find I earn a little flexibility. A little freedom.

Sandeep: Tell us about a business hero of yours that I may not have heard of before.

Tom: Paul O'Neill is someone you may not know. His work in both the public and the private sector created a profound impact

Sandeep: We are both over forty years old :). How have you learned how to work smarter during the past decade or so? What do you wish you knew about consulting when you were 25 that you know now?

Tom: Consultants want to make lasting change. Lasting change is often not the act of a single person. Today I work much harder bringing others along on the journey.

Sandeep: Last question. What are you doing here? :) Why join a small consulting company this late in your career when you could have a cushy job somewhere else?

Tom: I love a good challenge personally and professionally. When I turned 40, I decided I would run a 10K every Thanksgiving weekend and try to have my finishing time be less than my age. With the exception of one year where I did not run due to a health issue, I have met the goal. I also recently completed the Leadville 100 Mountain Bike race. So, I guess I'm here because I'm a glutton for punishment :) Jokes aside, our customers have a job to do and I intend to put Kunai in a position to execute flawlessly on their behalf. I love committing jointly to audacious goals for our customers and our business.

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