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Are Subscription Models the Future of Financial Services?

Due to the digitalization of the entertainment industry on the consumer end, streaming services such as Netflix, Amazon Prime, and Hulu now offer customers thousands of movies and TV shows. Moreover, services such as Apple Music and Spotify provide people with access to a near infinite library of music for a monthly subscription of less than the price of one album.

While music and movies may be the most widely used digital-based subscriptions, similar models have been adopted across many other industries, from news and gaming to retail and health.

Perhaps the one area where subscription-style models are not the norm is in banking and financial services. While some financial institutions already have various offerings based on recurring monthly or annual charges, there is still plenty of room for further development.

Subscription models in the finance sector

In the banking sector, subscription-based services have existed for the last few years, with neo-banks such as Qapital, Revolut, and BankMobile offering various plans for a monthly fee, while investment and brokerage apps such as Cetera and Acorns provide similar tiered services.

Subscription models are also being used in the financial services and wealth management sectors, led by Charles Schwab, who charges a flat monthly fee for clients of the Schwab Intelligent Portfolios Premium.

However, variations in subscription models for checking accounts and personal financial management have not yet become commonplace. Due to the increasing digitalization of individual banking, this could be an area that experiences growth in the coming years.

What subscription-based banking could entail

Streaming services such as Netflix and Apple Music have contributed to reshaping consumer habits and expectations. Nowadays, customers expect nothing less than solid value for their money, and with many people subscribing to multiple monthly services, any such model implemented in banking services will need to go above and beyond to satisfy potential subscribers.

So, what products and services would a bank need to include in order for a subscription model to work?

Customers Bancorp CEO Jay Sidhu believes Amazon Prime, which provides a range of services under one subscription model, including free delivery and Prime Video, could be used as a template. Sidhu suggests that for a $15 a month fee, a bank could provide additional services such as guaranteed higher interest rates for savings accounts, no overdraft fees, and discounts on products such as cell phones and personal insurance.

“Focusing on maximization of short-term fees is not a sustainable model [in banking]”, Sidhu told S&P Global Market Intelligence. “Building a sustainable model means you have to make it customer-centric and add value so that you’re improving the customer’s life.”

However, other experts do not believe such features would go far enough to convince consumers to pay monthly fees. Instead, a subscription model would only find a place in the banking sector once there is technologically driven change in the industry.

Reframing financial services

The 2019 Ernst & Young NextWave Consumer Financial Services report outlines how financial services firms have changed very little in the services and products they offer. While they are leveraging digitalization to expand convenience, access, and engagement, the actual features are much the same as retail banks.

“Very few firms have changed anything fundamental about their value propositions,” the report wrote. “Outside of general marketing campaigns and brand refreshes, the industry has changed little. The business model is still driven by products.”

The report states that banking will need to undergo a similar tech-powered transformation experienced by ecommerce (led by Amazon) and streaming services (led by Netflix) that will reframe the financial services sector and allow for a subscription model in order to benefit customers.

Yang Shim and Nikhil Lele, the authors of the report, predict that such a transformation will evolve over the next five years, not only in retail banking, but also in the insurance and wealth management sectors. When that occurs, banks will be better placed to bundle together various financial services, including checking accounts, and wealth management and financial health services, under one subscription model.

“Consumer financial services firms will need to shift their strategies to differentiate on trust, financial health and bundled offerings that transcend product-centric selling and present more holistic and personalized value propositions,” the EY report states.

The benefits of subscription models

If subscription-focused banking becomes common in the near future, there could be a number of benefits for consumers. Firstly, it will give customers greater control, allowing them to unbundle products they don’t need for a more personalized banking experience. It will also provide greater transparency and provide customers with greater ownership over their personal financial data.

By offering a more personalized banking experience, customers will have a completely personalized financial health platform, which will provide greater clarity in terms of financial planning and saving goals.

Moreover, a sliding subscription model that encompasses all the banking features an individual requires will provide value for a service that is currently lacking in the banking sector. As the EY report says: “Consumer finance will become the next subscription model, unbundling products and re-bundling personalized and holistic value propositions based on life events.”

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