Banking services in general and corporate banking, in particular, have witnessed a lot of innovation in the past few years. Innovations have touched almost every area of banking except the way the products and services are priced. The commercial banking pricing still seems to be anchored to old business models. However, since commercial banks are facing significant competition from fintech companies, they now need better business models which help them provide better service and induce customer loyalty.

In the past few years, newer revenue models have been proposed in the area of corporate banking. Subscription-based banking is one such innovation that has been proposed. As of now, it is not being adopted by commercial banks on a large scale. However, there are a lot of merits to applying this revenue model. Hence, it is likely to be adopted at a faster speed in the future.

In this article, we will have a closer look at the need for a subscription-based revenue model in commercial banking as well as the advantages of adopting such a model.

What is Subscription-Based Corporate Banking?

Subscription-based corporate banking is a revenue model which is relatively new in the banking industry. However, it is rapidly gaining acceptance from banking experts around the world. Traditionally, commercial banks have had a very complex pricing mechanism. For certain services, they charge an annual fee.

For instance, maintaining a checking account or issuing a corporate credit card. For usage of other products and services, they charge based on the number of transactions. For instance, banks charge a certain fee for every payment transaction that is routed via their network.

Similarly, there are a lot of different charges for check book issuance, bank statement issuance, early repayment of loans, and so on. The end result is a complicated and opaque schedule of charges that corporate customers find inconvenient to navigate.

Subscription-based banking is a revenue model wherein the commercial bank eliminates all these charges and replaces them with a fixed subscription fee. The subscription fee allows the bank to bundle together several products and services which are used by corporate clients and then charge a recurring fee for the same. Many corporate customers find this model to be beneficial because they no longer have to monitor the wide variety of charges that banks charge through their systems. The complex schedule of charges gets replaced by a predictable and easy-to-monitor subscription fee.

It needs to be understood that the subscription-based banking model only applies to the non-interest income which is earned by the banks. The subscription fee is not a replacement for interest-based loans. However, it also needs to be understood that many banks offer differential pricing wherein they offer relatively lower interest rates to corporations who subscribe to their services. Hence, corporations are able to obtain benefits even while borrowing and repaying the money.

Why is Subscription Banking Gaining Popularity?

Ever since the idea of subscription-based banking has been floated around, it has been subject to a lot of debate. However, there are many experts who believe that subscription-based banking revenue models are undoubtedly the future of the banking industry. Some of the factors which support this belief have been mentioned below:

1. Customers Want Flexibility: It is important to understand the subscription-based banking model provides the customers with a lot of flexibility. They can choose the product bundle which most closely meets their requirements and then they can continue with business as usual without having to create a system to monitor the service charges charged by the bank against their actual usage. Corporations find it convenient to know that they will be charged the same service charge if their usage of services falls within the same range every month.
2. Millennial Mindset: Millennials are the decision makers of the future. These millennials have grown up their entire life living with subscriptions. Millennials are psychologically more receptive to the idea of subscription fees. However, at the same time, they find bank charges to be annoying! In the business world, perception is the only reality and perception seems to be favoring the subscription-based revenue model. Hence, it is likely that this model will gain traction in the future.
3. Product Bundling: The subscription-based banking model encourages the customers to procure all their banking services from the same bank. This creates a natural incentive for the customer to widen their relationship with the bank. This incentive is more effective than the services of marketing personnel who constantly try to cross-sell services to a bank. The future is likely to see commercial banks offering a subscription-based revenue model since they want their clients to provide them with the maximum business possible.

Advantages of Subscription-Based Banking

1. Less Complicated Business Model: It needs to be understood that commercial banks have a very complicated revenue model. At the present moment, they provide a wide variety of services to their clients. Each of these services is billed differently.For instance, the usage fee which banks charge for credit cards is charged in a different way as compared to the transaction fee which is charged when a payment is made using the bank’s infrastructure. The bank as well as the corporate customer both have a hard time understanding and navigating this complex schedule of charges.

   A business model with fewer complications will give the customers a feeling of transparency and encourage them to do more business with the bank.

2. Lower Operating Costs: The benefit of subscription-based commercial banking is that it simplifies the system. A simplified system helps create an aura of transparency. However, more importantly, simplified systems are cheaper to run!Right now, banks have to maintain a wide variety of systems in order to collect revenue and reconcile the same. However, if the bank were to move on to a subscription-based system, it would not be necessary to maintain these systems. This would lead to a lower operating cost which could add to the bottom line of the commercial bank. Hence, there are very tangible financial benefits to moving to a subscription-based model.
3. Incentivizes Consolidation: Subscription-based banking is touted as being a major breakthrough in the field of commercial banking. This is because it incentivizes the customer to hold all their accounts in one bank.Right now, customers have their accounts in various banks. It is financially feasible for them to do so since they pay when they use the service. Hence, for them, the costs remain the same whether they use one single service provider or several service providers.

   On the other hand, if there is a subscription-based banking model, banks will try to make maximum utilization of a single subscription. Hence, they are likely to route all their business through one single bank. This helps the commercial bank extend their banking relationship without incurring huge marketing expenses which are typically associated with making cross sales.

4. Product Bundling: As mentioned above, commercial banks spend a lot of money trying to cross-sell different products to the same customer. However, customers are less likely to purchase a banking product if they have to pay for it separately. On the other hand, if the price is already bundled into a common offering, then customers are likely to purchase it. Subscription-based banking allows banks to use the “supersizing” approach used by fast-food chains in order to increase the length and breadth of their business relationship with the client.
5. Higher Customer Lifetime Value: Also, studies have shown that customers are less likely to switch their banks if they are billed using a subscription-based system. We now know that customers are likely to stay for a longer duration of time and are also likely to broaden their relationships. Also, the costs of acquiring the customers get lowered. Simply put, the subscription-based revenue model has the potential to drastically increase the customer lifetime value from the bank’s point of view.
6. Predictable Cash Flow: A huge advantage of a subscription-based model is that the revenues in such cases are very predictable. The number of customers that a bank has remains more or less constant over the years. Also, the subscription fee charged to them is also unlikely to vary a lot. Hence, the revenue is likely to keep recurring on a month-on-month basis. This is very important for banks since their other source of income i.e. interest-based earnings are highly unpredictable and even seasonal.Predictable cash flow enables banks to plan their cash flow in a better manner. It allows them to take more risks with their lending activities since they have another source to fall back upon.
7. Data Mining: When commercial banks resort to subscription-based business models, corporations tend to bring their entire business to a single bank. This provides the bank with many advantages. One such advantage is data mining.At the present moment, the transaction data of the corporate customer is scattered across several banks. However, when the relationship is consolidated, the bank has access to all the data. They can then take the help of data mining tools and software in order to identify patterns and develop financial products which can add value to the business of the customer.

Disadvantages of Subscription-Based Banking

In the previous articles, we have learned about what subscription-based banking is. We also know the various advantages that this revenue model brings for banks as well as for corporate customers. However, there are several commercial banking experts who believe that the subscription banking model also has its own fair share of problems. Hence, in order to have a well-rounded opinion on the topic, it is important to also be aware of the various shortcomings of subscription-based banking.

In this article, we will have a closer look at some of the disadvantages which are commonly associated with subscription-based banking.

1. Difficult to Onboard Customers: In a traditional banking relationship, the corporate customer typically starts by using free or lower-priced services offered by the commercial bank. Once the corporate customer is more comfortable partnering with the bank, then they start using higher order services. However, when it comes to subscription banking, commercial banks charge a significant sum from day one in the form of subscription fees. Hence, customers do not get the chance to ease into the banking model. Commercial banks have experienced great difficulty in trying to onboard customers over the years. This is one of the biggest drawbacks of the subscription-based model.
2. Freemium Model: In order to overcome the problem mentioned above, many commercial banks have started offering the freemium model. This means that there is a very basic set of banking services that are offered for free. Any value-added services are offered in return for a subscription.Here too, corporate customers are forced to subscribe to several of the bank’s services at one go when they decide to upgrade. As a result, many corporate customers are hesitant to upgrade from the freemium model. The conversion rates from the free to the premium subscription remain quite low.
3. Inability to Personalize Offers: Subscription-based banking is all about bundling services. Commercial banks observe the kind of services that are commonly utilized by similar corporations and then bundle them up to provide at a fixed price. Now, commercial banking is all about providing personalized service. Corporate customers expect more personalized service because of the large volumes of their transactions.Therefore, it often becomes difficult to convince customers to settle for an off-the-shelf product bundle instead of a customized bouquet of services. Many commercial banks have introduced varying degrees of personalization in the subscription-based model. However, it goes against the basic principle of having a few pre-determined subscriptions which the user gets to choose from.
4. Reduced Revenue: When a bank adopts a subscription-based revenue model, they are not only removing the complications in their fee structure, but they are completely modifying it. It is common for banks to offer services such as unlimited check payments as a part of a subscription model. In such cases, the banks often lose out on revenue since the number of payments being made or received starts increasing drastically after the subscription. The end result is that a better technological infrastructure has to be put in place in order to support the high volumes. This may lead to an increase in costs while simultaneously leading to a decrease in revenues at the same time.
5. High Customer Churn: Any subscription-based business model is vulnerable to a high degree of customer churn. Corporate banking does not seem to be any exception to the rule. Commercial banks have realized that if the business model is subscription based, it becomes very easy for the corporate customers to compare prices across various banks. The end result of this is a price war and if the commercial bank does not drop their rates, they are likely to witness a mass exodus of customers. Hence, it can be said that commercial banks which adopt a subscriber-based revenue model make themselves vulnerable to customer churn.
6. Constant Need to Upgrade: In the case of subscriber-based revenue models, corporate customers have a decision to make every month. They need to decide whether or not they must renew their services. Hence, for a commercial bank, it is very important to stay on top of their game. Unless they have the most technologically advanced systems and provide cutting-edge customer service, they always risk losing out their customers to other competitors.Commercial banks have to be on a constant course of self-improvement if they adopt this revenue model. However, having the need to continuously innovate may not necessarily be a bad thing.
7. Hidden Charges: Subscriber-based revenue models are infamous for having a lot of hidden charges. There are some unscrupulous banks that have created complex contracts with various charges that customers find difficult to keep track of. If the contract includes multiple charges, then the customers generally find it confusing and tend to avoid signing such a contract.

The bottom line is that subscription-based revenue models are here to stay. At the moment, traditional bankers are calling it unrealistic. However, over time, the industry is likely to be revolutionized just like Apple iTunes revolutionized the music industry.