Subscription services are on the rise. During the pandemic, Americans have been spending more time at home and more money on the digital products that make navigating our new normal easier.
More than ever, Americans’ lives are aided by companies like Netflix, Instacart and, of course, Amazon, which reported record-setting earnings from its 2020 Prime Day savings event.
A recent survey even found that spending on subscription services had more than tripled since March, with one in three respondents saying they’d purchased a new online subscription while quarantining.
Now, a new concern lingers: Is the market getting oversaturated? The question doesn’t just apply to streaming services and food delivery companies — it’s an issue financial technology businesses can’t afford to ignore.
As subscriptions become an increasingly alluring business model, fintechs will be forced to consider whether this proven strategy is worth the risk.
Fintechs should take note of subscription services
In the CompareCards survey, two-thirds of respondents said they purchased a new streaming service mainly for entertainment. Still, that doesn’t mean there isn’t room for fintechs to carve out their own space.
Bradley Leimer, co-founder of the financial consulting firm Unconventional Ventures, said he’s certainly seen more fintechs exploring subscription models. As Leimer explained, the financial services industry may have not fully embraced the idea, but it’s “starting to take notice.” Leimer, who has more than 25 years of experience in the industry, believes fintechs can learn a lot from subscription services — provided they’re willing to look in the right place.
One major lesson? Transparency. Subscription services give companies an opportunity to be upfront about their fees, as well as their benefits.
“When we talk about subscriptions, the more clear and more transparent we are, the better,” Leimer said.
Acorns is an easy case study. The microinvesting app offers three subscription levels — lite, personal and family — each with a clearly explained list of features. For what it’s worth, the company added more than 2 million users between March 2019 and March 2020, according to Forbes.
Leimer said fintechs should also take note of the way subscription services collaborate. For example, he pointed out how Amazon users can add an HBO subscription to their Prime Video account, essentially “bundling” two subscriptions into one. Fintechs, Leimer said, could stand to take a page out of that playbook.
“There are a lot of ways to sort of skin that cat — for a fintech company to generate income and for a customer to get value on top of that,” Leimer said.
Leimer pointed across the pond for an example. Monzo, a U.K.-based online bank, launched a partnership with the meditation app Headspace in 2018. The shared service allowed users to focus on their mental and financial well-being at the same time.
Then, there are fintechs that have learned to group multiple services into one interface, like an Amazon Prime for spending. Apps like Steady and Stoovo, for example, both offer a marketplace through which users can find part-time jobs or extra work — while also tracking their taxes, budgeting their incomes and managing their finances.
Biggest pros of subscription models
Is the success of a company like Acorns replicable? If you’re starting a new business or shifting strategies, there are plenty of reasons a subscription model could be a good option.
For one, it’s a consistent, reliable revenue stream. Subscribers give you a baseline for growth, allowing you to build on your users while also providing an easy metric for success. There’s a reason, for example, that Netflix’s stock tends to rise and fall based on its new subscriber metrics.
Then, there’s Leimer’s point about collaboration. Fintechs can stand to expand their offerings — and earnings — by tying their services into those of other companies. These “bundles” aren’t limited to the finance space, either.
Case in point: There are several great credit card offers that appeal specifically to customers with other popular subscriptions. Some cards offer additional cashback on their streaming services, while others help customers save when they use food delivery apps.
Leimer calls these collaborations a “symbiosis,” noting that they’re a win for both the companies involved and for the customer, who ultimately gets a more appealing product. Leimer did warn, however, that fintechs should be wary of overdoing it. The temptation to “be all things to all people,” he said, can get a company in trouble.
The key here is to combine services that make sense. Grocery delivery and a cashback card? That seems like a perfect fit. A running app and an online payment service? That might make less sense.
Biggest cons of subscription models
There are plenty of drawbacks too, of course. The current subscription market has seen plenty of issues in recent months, and fintech companies looking to adopt this model should take note.
Competition is an obvious issue. Oversaturation is only becoming more of a risk, especially considering what’s happened in the streaming space this year.
Quibi, the short-form video streaming service that had raised $1.75 billion in investments, shut down after just six months on the market. Meanwhile, HBO Max, which launched in May, earned just 8.6 million new subscribers in its first four months. That might sound like a lot, but it’s less than Disney+ brought in during its first 24 hours.
Americans are paying a lot — in some cases hundreds of dollars a month — for their subscription services. In theory, that only makes it harder to get them excited about adding a new one.
Fintechs face another issue, as well. As Leimer noted, consumers are used to their financial services being free, or at the very least, having the appearance of being free.
Leimer called this a “perception of value” problem. Many consumers believe their banks are saving them money simply because they aren’t being “charged” a monthly subscription. Of course, that logic doesn’t consider hidden costs, extra fees, penalties and, as Leimer points out, lost interest.
“What people don’t realize is that they’re probably spending a couple hundred dollars a year — not just in lost interest, which is huge, but in lost opportunity to have lower-cost services,” Leimer said.
Changing that perception is an issue, but, as Leimer noted, transparency can be a key tool in reversing those beliefs. Companies that are upfront about their subscription costs, he said, can use it to their advantage.
Fintechs with successful subscription services
Ultimately, the future of fintech will depend largely on how companies choose to frame their offerings. Subscriptions could play a huge role, but only if they’re used in a smart, applicable way that suits the industry. With that in mind, here are a few other fintechs that have successfully employed subscription models:
Charles Schwab has seen a major win with its Intelligent Portfolios Premium plan. The plan, which is mainly for experienced investors, costs a $300 one-time fee, plus $30 per month for access to unlimited guidance from a certified advisor. In a July earnings report, the company reported that advisor-client appointments booked through the service had grown by 30% during the past year.
Robinhood is another popular app that has added a premium subscription on top of its traditional user base. The trading app, which added more than three million new users through the first four months of 2020, offers Robinhood Gold for $5 a month. The elevated product gives users access to additional data and financial advice, plus the ability to invest on margin through a line of credit with the company.
Successful models are springing up across the industry, but does that mean subscriptions are the future of fintech? It’s hard to tell right now, but if companies can seize on the lessons of the streaming boom, there may be plenty more success to come.