Introduction
Subscription Model in the financial market has become a growing trend in the last few years that has impacted industries and changed the face of business consumer contact. Such a business model in which clients make regular payments for their access to a specific product or service is now the backbone of many organisations.
With more and more industries going from using one off products or services to offering a continuous service it is important to know how the subscription based model functions why this model has gained such popularity and what concerning and promising aspects it may contain. In this feature article we take the covers off this all pervading spectre in the financial industry as we delve into the workings of this business model and its implications to both business and the end user.
How Subscription Models Help in Business?
The subscription model of operating a business is one whereby customers continuously make payments in the form of a weekly monthly quarterly or annual fee and are granted unlimited access to a certain service. Originally related to the media which included magazines newspapers etc the model has spread into other fields including software production entertainment and even serving the financial industry.
Emergence of Subscription Model in Finance
To be more precise the subscription model is not novel to the financial industry. The insurance and asset management industries are the ones that use recurring payments most of the time in financial institutions. However new demands in services and the growing popularity of digitised services all affected the way this model is used.
In this context subscription services became one of the key industry trends as it started to appear that more and more players whether it be Fintech neobanks or traditional financial institutions started offering different services and products on a subscription basis whether it be investment recommendations budgeting services or additional/ premium account functionalities.
Types of Subscription
This model of operation of the subscription model is suitable for any segment of operation in finance. It works in a manner that depends on the kind of service and the consumer. Now I will highlight the main financial sectors in which the adoption of subscription models has been effectively experimented.
Banking Services
In the case of implementation in banking the best example of the subscription model is the provision of premium accounts. Basic banking services like current accounts or savings accounts may either be offered at low charges or might be included in the no frill packages that few banks offer these days the trend is towards offering the so called premium packages. Such accounts may be given out at a token fee which may be on a monthly or annual basis.
Also the concept of monthly fees has been embraced by the so called newly emerging digital banks or neo banks such as Revolut or Monzo which introduced tiered plans and subscription models. These plans offer customers extra benefits including international transfer of money higher withdrawal capacity and access to budgeting facilities in lieu of a monthly charge.
Insurance
Insurance up to date has been on a sales model where policyholders make periodic payments (premiums) in return for protection. However new Insurtech companies have adopted this model because they look at it from a more customer centric approach that is more flexible.
For instance there are novel products such as on demand insurance services in which consumers can purchase insurance services for particular periods or objects for example temporary travelling or over the counter insurance services as opposed to prolonged Insurance policies.
Investment Management
In the field of investment management subscription has become a trend especially since the introduction of the robo advisors element. Wealthfront Betterment and Robinhood are some of the emerging players in the investment management industry that make their clients pay fees in the form of monthly or annual charges. They mainly consist of portfolio management tools for financial planning and access to educational materials.
Generally in fund management services clients are charged based on a certain percentage of assets under Management (AUM). Nonetheless the subscription model is uniform in its pricing scheme thus beneficial to consumers. It is cheaper for individuals with comparatively small investments.
Accounting and Others
The following have been made since the emergence of Fintech by providing software as a service to people and companies through subscription. Accounting application and subscription based accounting software such as QuickBooks have received a lot of admiration. These services come as paid services and normally they have a multilevel structure that depends on the ability of the client to pay for more features.
The fittest delivery model is utilised in this area since it enables software consumers to access frequent updates and enhancements as a result of changes in the financial market.
Benefits of the Subscription Model
The subscription model has many advantages and applications in today’s business world for both the business and the consumer. Such benefits are most apparent in finance since it is a recurring service that has seen an increase in the need for customised flexible services.
Predictable Revenue Streams
In turn for financial institutions one of the chief benefits of transitioning into a subscription model is that it provides for more predictable revenues. Also subscription revenues are relatively easy to forecast allowing companies to make better long term strategies for investing their money. This is especially the case within an industry such as finance within which other sources of income such as trading fees or investments could become less stable due to the fluctuations in the market.
Enhanced Customer Relationships
This concept ensures that businesses have close ties with the consumers and hence makes subscription models ideal for implementation. This way contrary to having a one time sale companies can continuously maintain a relationship with the consumers providing services and added value in the process. Such a relationship can enhance customer loyalty and consequently reduce the churn rate.
From the perspective of financial institutions the subscription model allows for proactively catering to certain financial services such as investment consulting services or insurance services. These offerings can also be used to gain customers trust and thus become an advantage over other companies.
Scalability
It is quite easy to apply this model and expand it since most of the target services are in the online financial services niche. Also in the case of investment management services once the firm has established the necessary infrastructure to offer the service the cost of expanding the service to more people is relatively minimal. Construction of such models brings the main benefit of the use of each of the technologies for fintech companies the ability to scale quickly without additional investment in fixed assets.
Consumer Convenience
From the consumers point of view the subscription plan has additional advantages associated with comfort and freedom. In essence rather than investing a significant amount of money in one go consumers can transact small amounts in the realisation of a service. Moreover the subscription model involves facilities that help consumers control their payments such as automated billing services.
Here in finance it can be translated to means of increased accessibility of qualitative financial services like financial planning or portfolio management that could be unattainable for the client with lower income or at least with smaller investment potential.
Challenges of the Subscription Model
There are many advantages to the subscription model however having such a model also comes with certain difficulties. To make the subscription model effective financial institutions and Fintech companies have to overcome multiple challenges.
Customer Retention
However one of the greatest drawbacks of the subscription model is the ability to manage the customers. Subscribers can easily end their subscriptions if they are receiving less value to fit their needs. This places pressure on the business entities to update their products and prove their worth in customers subscriptions.
In such environments where a consumer has a huge number of similar services to choose from it becomes crucial for organisations to set a benchmark high for delivering service customer experience and more.
Regulation and Compliance Issues
The financial services sector is in most cases a highly regulated sector and any company offering subscription based services needs regulations. This can be very unpalatable for players in the Fintech segment given that most of them do not boast of the kind of resources some of these traditional banking institutions have. Some of the regulatory challenges may pertain to matters such as data and privacy AML/KYC and others.
Compliance with these regulations is at the same time expensive and time consuming particularly in growth regions that subscription based financial services are entering.
Pricing Strategy
Pricing models for subscription based financial services are generally challenging. If the subscription fee is set too high then consumers may not be able to see why they should continue to pay for the service. On the other hand if the fee is set a bit low this would compromise the company’s capability to meet the expenses to offer services and make a profit.
While pricing in financial services is well worked and highly accused it is extremely significant to hit the most suitable balance to make the subscription model profitable. Managers bear the responsibility of determining the right price and to do so they have to consider costs value and the target audience.
Competitive Pressure
It is however important to realise that with the rising uptake of the subscription model in the financial industry the level of competition has also been pushed up. Fintech actors are beginning to offer new forms of services and solutions that are disrupting the incumbency of traditional financial actors. This competition can reduce subscription costs and allow companies to include more services in the offer that may be uneconomical in most cases.
Under such conditions the firms need to adopt strategies that would enable them to set their product apart from similar products in the market and prove their added value to the consumers. This could require the use of new and advanced equipment enhancing the customers interface or providing services other than what is expected by clients from the rival organisations.
Successful Subscription Models
This kind of business model has been adopted and applied to the financial sector efficiently by several firms resulting in high growth and customer acceptance. In this section we discuss and analyse examples of companies that have successfully adopted the subscription model to revolutionise conventional client financial systems.
Revolut
Revolut is a financial application that works as a bank and has a fee or rather a monthly subscription for the use of a premium or a metal account. Customers can choose from various packages and have various privileges depending on the package they choose which includes overseas medical Insurance increase daily ATM withdrawal limit and the ability to trade in cryptocurrency. The company has expanded very fast with an array of services which are either free or paid services to be specific.
Revolut has been benefiting from its subscription strategy because it gets a predictable amount of cash inflow and enthusiastically gets users who are willing to pay for additional services. This has assisted Revolut in growing its users and it is currently one of the most popular global neobanks.
Betterment
Betterment is a robo advisor that invests money into stocks and other securities on behalf of the client based on subscription services. Users provide a commission primarily through the value of managed assets with an opportunity to get an upgraded plan that provides access to human and financial consultants. The above model helps customers to acquire professional investment management at a lower price than other financial advisors.
Hence providing the service at a subscription means that more people can now afford to manage their investments which applies especially to young people whose investment portfolio is small. The success of this company therefore proves that through subscription financial services will always be in demand.
QuickBooks
One of the most popular accounting software recently switched to the subscription model with its recent cloud based version QuickBooks Online. Self Employed persons and firms can work on different levels of the service. While the services of tallying payrolls filing taxes and issuing invoices are available to users they come with higher subscription rates. This model enables the user to always have the latest updates and new options and not to buy new software versions.
The subscription model has been good for QuickBooks as it has ensured that the company receives steady revenues and is also in a position to expand its market for customers. Furthermore the model is open to making changes frequently depending on the customers demand for certain services and the customer can choose a higher or a lower plan according to the situation.
Subscription Based Business Model
It will be appealing to note that the subscription model is expected to expand in the financial industry as consumers have pushed towards more customizable adaptive and cheap products. The following are some of the trends that point to the fact that subscription based financial services are likely to develop in the years to come.
Increasing Personalization
In the future with the advancement of technology in this area both financial institutes and Fintech companies will be able to deliver more customised subscription services. AI and data analytics will be helpful in this aspect enabling firms to understand their customers designs better and deliver offerings that will meet their needs. For instance investment management could employ the utilisation of AI to give subscribers portfolios that are each fixed according to risk level and objectives.
Here personalization shall be an important competitive factor in the subscription model because consumers are willing to pay for services they know best fit their needs.
Improving the Outreach of Financial Services
This can be seen in the ability of the subscription model to enhance the provision of the same carrying out among others and they are cost effective. Hence financial institutions can provide such services to the segment that cannot afford traditional financial services such as investment services or insurance. This could go a long way in improving the level of financial inclusion and doing away with financial exclusion.
For instance microinsurance industries which are based on subscription models could offer insurance products to low income earners who cannot afford conventional insurance products. Likewise digitally based subscription financial education interfaces may assist consumers in refining their decision making processes with regard to purchase and consumption.
Traditional Financial Institutions
Because subscription is not limited it is clear that as the subscription model continues to grow we will experience more partnerships between Fintech and financial institutions. Several conventional banking and insurance institutions have started using the subscription based model to address new fintech market entrants. Thus by engaging with fintech companies these institutions can better utilise technology to provide more customer oriented and thus qualitatively different services.
This integration could result in the appearance of new composite subscriptions in which the consumer is able to access a combination of newage digital as well as conventional financial services. For instance a customer may enroll in a service that offers them an opportunity to use a budgeting application as well as meet a conventional financial planner.
Ways of Subscription for ESG
The increased emphasis on ESG investing and impact investing may also bring the creation of subscription based financial services that consider the needs of the newly formed socially conscious consumer base. For instance investment platforms can provide fees for services in the form of packages where the subscriber can work towards portfolio creation based on their principles like environmentally friendly or socially responsible companies.
Since more and more people are interested in ESG and impact investing services the subscription model could serve as long term access to such services.
Conclusion
Thus the monthly or annual subscription model has become crucial for the financial services industry and has changed the real and perceived ways in which users can engage with financial products. As it allows for effective client relations predicts revenue and offers flexible and efficient solutions the subscription model has gained popularity among modern fintechs as well as among traditional financial institutions.
However it also has limitations the model is based on issues like campus retention of customers adhering to regulations and coping with the pressure from competitors. The idea is that firms have to be innovative and create value for consumers to continue paying for their services in the current cut throat financial situation.