Subscription Services in Fintech: The Future of Finance?

The popularity of subscription-based services is currently experiencing significant growth. With increased time spent at home during recent health crises, individuals across the United States have been allocating a greater portion of their budgets to digital offerings designed to simplify daily life.

American consumers are now more reliant than ever on businesses such as Netflix, Instacart, and notably Amazon, which announced unprecedented revenue figures following its 2020 Prime Day sales occasion.

Recent research indicates that expenditure on subscription services has increased by over 300% since March, with approximately one-third of those surveyed reporting the acquisition of a new online subscription during periods of isolation.

However, a new challenge is emerging: Could the market be becoming too crowded? This concern extends beyond entertainment and meal delivery options—it’s a critical consideration for companies in the financial technology sector as well.

As the subscription model continues to gain traction as a viable business approach, fintech companies must evaluate whether adopting this strategy presents an acceptable level of risk.

Fintech Companies Should Observe the Growth of Subscription Services

A recent CompareCards survey revealed that approximately two-thirds of individuals who recently acquired a new streaming service did so primarily for entertainment purposes. However, this doesn't preclude opportunities for financial technology companies to establish a presence within this expanding market.

Bradley Leimer, a co-founder at the financial advisory company Unconventional Ventures, has noted an increasing number of fintechs investigating subscription-based business models. While the financial services sector hasn’t universally adopted this approach, it is “beginning to recognize its potential,” according to Leimer. With over 25 years of experience in the field, Leimer suggests that fintechs could benefit significantly from studying successful subscription services – assuming they focus on the appropriate aspects.

A key takeaway is the importance of openness. Subscription-based businesses have the chance to clearly communicate their associated costs, as well as the advantages they provide.

“In the context of subscriptions, greater clarity and transparency are always advantageous,” Leimer stated.

Acorns provides a clear illustration of this principle. The micro-investing application provides three distinct subscription tiers – lite, personal, and family – each accompanied by a detailed explanation of its included features. Notably, the company experienced growth of over 2 million users between March 2019 and March 2020, as reported by Forbes.

Leimer also emphasized that fintechs should analyze how subscription services foster collaboration. He cited Amazon as an example, where customers can integrate an HBO subscription with their Prime Video account, effectively combining two subscriptions into a single package. Leimer believes fintechs could benefit from adopting a similar strategy.

“There are numerous methods for a fintech company to generate revenue while simultaneously providing added value to its customers,” Leimer explained.

He referenced a case study from across the Atlantic. Monzo, an online bank based in the U.K., initiated a partnership with the meditation application Headspace in 2018. This collaborative offering enabled users to prioritize both their mental and financial health concurrently.

Furthermore, several fintechs are integrating multiple services into a unified platform, creating a comprehensive financial hub similar to Amazon Prime. Applications such as Steady and Stoovo, for instance, both provide a marketplace for users to locate part-time employment or supplemental income opportunities, while also offering tools for tax tracking, income budgeting, and overall financial management.

Biggest pros of subscription models

Can the achievements of a company such as Acorns be duplicated? If you are launching a new venture or modifying existing plans, there are numerous benefits to consider when adopting a subscription-based approach.

Notably, it establishes a steady and predictable income flow. Subscribers provide a foundation for expansion, enabling you to develop your user base while simultaneously offering a straightforward measure of achievement. It’s no coincidence, for instance, that Netflix’s share price frequently fluctuates in response to its new subscriber numbers.

Furthermore, consider Leimer’s observation regarding partnerships. Financial technology companies can broaden their services—and increase their revenue—by integrating them with those of other businesses. These “packages” are not exclusive to the financial sector.

For example, a number of attractive credit card promotions are specifically designed for individuals who already utilize other subscription services. Certain cards provide enhanced cashback rewards on streaming platforms, while others assist customers in saving money when ordering food online.

Leimer describes these partnerships as a “mutually beneficial relationship,” emphasizing that they are advantageous for all parties involved, including the customer, who receives a more attractive overall offering. However, Leimer cautioned that fintech companies should avoid excessive diversification. He stated that attempting to “serve every need for every person” could potentially create difficulties for a company.

The central idea is to integrate services that logically complement each other. A grocery delivery service paired with a cashback credit card? That appears to be an ideal combination. A fitness application and an online payment platform? That might be a less suitable pairing.

Biggest cons of subscription models

Naturally, subscription-based systems also present several challenges. The present subscription economy has revealed numerous problems recently, and financial technology businesses considering this approach should be aware of them.

A significant concern is the level of competition. The market is becoming increasingly crowded, a trend particularly evident in the streaming industry this year.

Quibi, a short-form video platform that secured $1.75 billion in funding, ceased operations after only six months. Simultaneously, HBO Max, debuting in May, acquired 8.6 million new subscribers within its initial four months. While seemingly substantial, this figure is lower than the number Disney+ gained in its first day.

Consumers in the United States are currently spending considerable amounts—sometimes hundreds of dollars monthly—on various subscription services. Consequently, motivating them to subscribe to another service can be difficult.

Fintech companies encounter a further obstacle, as Leimer highlighted. Customers generally expect financial services to be provided without charge, or at least to appear that way.

Leimer described this as a challenge related to “perceived value.” A common belief among many consumers is that their banks are offering savings simply because they are not directly “billed” a monthly fee. This reasoning overlooks indirect expenses, supplemental charges, penalties, and, as Leimer indicated, forfeited interest earnings.

“Individuals often fail to recognize they are likely losing several hundred dollars annually—not only through lost interest, which is considerable, but also through missing opportunities for more affordable services,” Leimer explained.

Altering this mindset presents a hurdle, but Leimer emphasized that openness can be a valuable method for shifting these perceptions. Businesses that clearly disclose their subscription expenses, he stated, can leverage this to their benefit.

Fintechs with successful subscription services

The direction fintech companies take in presenting their services will significantly influence the industry’s evolution. Subscription-based models have the potential to be a key component, provided they are implemented thoughtfully and in a manner relevant to the financial sector. Considering this, the following are examples of fintech companies that have effectively utilized subscription models:

Charles Schwab has achieved considerable success with its Intelligent Portfolios Premium service. Designed primarily for seasoned investors, this plan requires a one-time payment of $300, alongside a monthly fee of $30 for unrestricted access to guidance from a qualified financial advisor. The company’s July earnings report indicated a 30% increase in advisor-client appointments scheduled through this service over the previous year.

Robinhood, a widely used trading platform, has also introduced a premium subscription option alongside its standard services. Having acquired over three million new users within the first four months of 2020, Robinhood offers Robinhood Gold at a cost of $5 per month. This enhanced service provides users with access to more detailed data and financial insights, as well as the option to trade on margin using a credit line provided by the company.

Effective subscription models are emerging throughout the fintech landscape, but whether this signifies a future dominated by subscriptions remains uncertain. However, if companies can learn from the successes seen in the streaming industry, further positive outcomes are likely.