There is a reason why the retail banking industry inherently lacks true engagement with its customers. Because it is human nature for consumers to engage more with the brands that they love and that add utility to their daily lives. And because financial management itself is not fun and the money that consumers fork over to banks is typically driven by necessity (annual credit card fee) or penalty (overdraft), rather than out of preference.
For this reason, banks need to re-evaluate their revenue models, to make products and services more value-add, and therefore, the consumer’s procurement more voluntary. Banks need to learn from the brands that made their customers pay little to nothing upon enrollment, instead allowing an ‘opt-in’ or subscription to their services.
The Case for Transformation in Revenue Models
Profits, of course, are an obvious driver of this transformation in revenue models. Interest income just isn’t going to cut it in a day and age where third-party fintech companies can provide lower-cost solutions to deposit-taking, payments, consumer lending and financial guidance. Customer engagement – or more liberally-termed ‘reliance’ – is the key ingredient for alternative, fee-based revenue streams in financial services.
True value-added products come with subscription fees, which can and should be outside the traditional realm of financial services. So how exactly do banks ‘invent’ value-added services overnight, which can be packaged and lent to customers for a small monthly subscription fee?
Using Scale for a Subscription Package
With their extensive merchant relationships, banks have the ability to negotiate discounts on products or services for their customers. First Financial Bank in Abilene, Texas has taken this very approach in a subscription-based product offered to customers. But unlike the marketing efforts that offer customers varying discounts for using their bank’s payment card, subscription benefits must be non-promotional in nature to ensure that the bank can support these discounts over long stretches of time.
Good options for a subscription package include discounts on products and services that are likely to be consumed on a regular cadence, such as fuel, groceries, or gym memberships. Additionally, banks can negotiate preferential treatment or status-driven perks with travel providers. Banks will need to evaluate the economics of allowing customers to choose subscription options a la carte versus having the package’s benefits pre-set.
To crack a profit on any third party-based subscription benefits, banks must achieve significant scale. The deals that give way to these discounts are apt to include terms that are favorable to the merchant at first, with more generous prices to the bank only coming through a large traffic of new and repeat customers.
Using Data and Branch Networks for a Subscription Package
Most banks are still in the early stages of truly operationalizing customer data, meaning that they are a ways away from being able to monetize said data. As declared in just about every fintech blog that you’ll read, banks must view their large supplies of customer data as earning assets and make the investments necessary to profit.
This especially true for the subscription revenue model. Consumers will ultimately pay for personal financial management (PFM) insights, if they are relevant and propagate changes in spending or saving habits. If my bank can alert me to a deal on razor blades during my walk to CVS – because it knows exactly which products I purchase regularly, when I purchase them and in what quantity – I am happy to fork over a small monthly fee in exchange.
Bank customers can use the new-age branch model as a facet of their subscription products. Subscribing customers can get free coffee at the branch, charge their cellphones and have priority for speaking with financial advisors. In fact, just about every product or service offered in the branch can be segmented to reward subscribing customers.
Netflix, Spotify and Amazon with its Prime product are all success stories in subscription-based revenue. Banks can leverage assets that are innate to financial services — scale, data and branch networks – to adopt a similar model, rather than charging fees or penalties for custodial activities.