By Ray Birch
MADISON, Wis.—Companies across all industries are offering subscription-based services, even Taco Bell, notes the Filene Research Institute, which has data suggesting such a model will work well for credit unions.
“The Dollar Shave Club is one of the more popular and one of the first movers in the subscription model,” explained Josh Sledge, senior director of incubation at the Filene Research Institute, during a recent Filene webinar. “You will pay a monthly fee and get shaving materials and other household items into your house on a regular basis. With Hertz, you can now subscribe to a car, which is different from the rental model, and have access to it over a course of time. And my favorite is Taco Bell has launched a subscription to tacos for $10 a month. You can get one taco a day for free.”
Sledge said those are just some of the more interesting examples of how the subscription model—which exploded during the pandemic with Netflix and Amazon leading the way--is sweeping its way across many industries, pointing to a broad shift within the economy.
Five Concepts Explored
The subscription-based model is one of five concepts Filene is examining in its new incubator project, “Remixing the Value Proposition.” The other four areas of the project address:
• Rethinking Physical Presence in a Digital Age
• Financial Health as a Strategy
• Credit Unions for Affordable Housing
• Expanding Partnership Banking
Sledge pointed out the financial landscape is changing and squeezing credit unions from both sides. On one side, large banks have been spending billions of dollars enhancing online and mobile banking offerings, driving customers to digital channels. On the other side, startups and Big Tech companies have poured into the market, offering new capabilities or new approaches to old experiences.
‘More Important Than Ever’
“It is more important now than ever before for credit unions to define their value proposition and figure out what makes them stand out from the pack,” he said. “This is really a recognition that the competitive landscape in financial services is changing fast…When you see so many changes in the overall environment for financial services, and in recognition that consumers’ expectations and the ways that they engage with their financial institutions are changing, the question then, is where do credit unions stand out and where do they really fit in? And what are those defensible positions we can start to take to help us really put our best foot forward?”
Sledge noted UBS predicts the subscription economy will grow to $1.5 trillion by 2025.
“That's more than twice the value when UBS measured back in 2020,” said Sledge.
The pandemic had a big effect on consumers’ desire for subscription-based services.
“During the health crisis people were either getting necessary items into their house or they were bored and looking for new hobbies and joining box-of-the-month clubs,” Sledge said. “You saw many more people diving into some of these subscription models.”
The Demographics
Sledge cited McKinsey research that shows consumers who are using e-commerce subscriptions are more likely to be between 25 and 44 years old and have incomes between $50,000 and $100,000.
“They also tend to live in urban environments, in particular, in the Northeast United States,” Sledge said. “But people like to subscribe for a number of reasons. These kinds of models want to bring lower costs and better value. The convenience benefit is obvious. You're getting things on a regular basis, things are happening automatically. And there's a good opportunity to increase personalization.”
Sledge cited examples of where fintechs and financial institutions have begun embracing the subscription model.
“On the digital banking side is Acorns, a digital bank offering some investing platforms,” Sledge said. “They have offered a tiers-based premium pricing model and saw that about only one in four would actually come in at the lowest pricing tier.”
Changing the Model
He explained Acorns then changed the model and offered a wider variety of services and packages, oftentimes, leaning more towards some of those higher-value opportunities.
“Howard Bank (acquired by First National Bank), a community bank in Baltimore, replaced their basic checking account with a essentially a package of goods that had a checking account at its core,” Sledge said. “They supplemented with things like ID theft coverage, roadside assistance and discounts. They found that many of their customers were younger people who oftentimes were having trouble with their cell phone. So, there's insurance there, as well. If you crack the screen it gets repaired. They really had good customer take-up with this.”
As another example, Sledge turned to the neobank MoneyLion.
“What's interesting here is it's a free account tied to their credit product—a small-dollar very low-interest-rate loan,” he explained. “You essentially have to be part of a premium tier that costs you $20 a month. So, for $20 a month you get access to this lower interest line of credit that you could use in an emergency. You can add features or product functionality.”
A Means of Standing Out
The subscription model is something that will help credit unions stand out in the cluttered financial services marketplace, suggested Sledge.
“There is a real opportunity to differentiate by customizing for your community and for your members,” he said. “As credit unions you are defined by a field of membership. You are bringing people together who are already in a community in some way, shape, or form. Think about how you can really customize that package to meet their needs and drive value. It provides more certainty and transparency, which we know—especially for underserved consumers—can be a real challenge.”