Amazon, Netflix…Banking. Would a Subscription-Based Model Fend Off Challenger Banks?

To keep up with customers’ demands banks need innovative business models that revolutionise the marketing, delivery and consumption of financial services while also delivering differentiation, competitive advantage and significant growth.

It is forecasted that mobile banking is set to be more popular than visiting a high street bank branch within two years. And as the banking industry continues its digital journey, Mark Grainger, VP Europe at Engage Hub, says consumers are coming to expect more control over their data, greater convenience, and “anytime, anywhere” accessibility.

Mobile-first consumers

So far, most banks worldwide have handled the mobile era in exactly the same way, simply shrinking down traditional bank accounts and putting them on a smartphone screen without offering real innovation or engagement.

But simply pouring millions into innovation hubs and piecemeal digitisation strategies isn’t going to deliver the kind of results that will win over those tempted by the challenger banks. Traditional banks need to shift gears and use the valuable information they already have to provide customers with seamless interactions across different channels.

At the same time, banks need to understand that the digital banking revolution is more than a mobile app. It’s about creating an entire experience. The implications of failing to facilitate a seamless cross-channel customer experience – one that lives up to growing customer expectations – is huge. Today, consumers have more choice than ever before, thanks to the rise of fintech start-ups and digital-only banks, and if they do not get the level of service they’ve come to expect, they will not hesitate to take their business elsewhere.

Subscription service model

Using a service model patterned after Amazon Prime or Netflix may seem odd to many retail banks, but challenger banks are already experimenting. Would consumers pay a subscription to get the same service they do with Amazon and Netflix? The answer is yes.

Revolut is already showing itself as a front runner in subscription-based banking. The challenger provides a ‘freemium’ model, which gives users a free UK current account and a free euro IBAN account that offers no fees on exchanging in 24 currencies, up to £5,000 a month. Revolut also provides monthly subscription plans with higher thresholds for no fees, as well as instant access to crypto-currencies, cash back, travel insurance, free medical insurance abroad, airport lounge access and priority support.

Research shows that in the UK 57% of people would be willing to pay an extra monthly fee for additional services from their banks. Most consumers – 45% – would like additional media services such as Netflix and Amazon while 40% prefer earned cashback and 37% would pay for overdraft facilities.

Considering that at present, 72% of customers don’t pay any monthly fees to their banks it’s fair to say that there is a great potential for financial institutions to leverage these services and elevate their game when it comes to competing against challenger banks and unconventional financial services.

Trust and value

Furthermore, traditional banks have a crucial asset compared to challenger financial institutions, and that is trust. Traditional banks have a much longer and seemingly more robust security record.

The paradox is that many people trust their primary financial provider but distrust the financial services industry overall. Therefore, banks that want to persuade their customers to adopt new models and pay a potential monthly fee have to prove that they have customers’ interest at heart.

One way to achieve this is through transparency. The financial services industry still lags behind other sectors when it comes to transparent policies, costs and customer data. This needs to change and they need to show that they are keeping pace with the market trends and customer expectations.

Another crucial aspect banks need to keep in mind when it comes to monthly subscriptions is the added value they would bring to customers. If they agree to additional costs, consumers will also expect extra benefits and not just the same things they used to get for free. Without additional value added, it will seem that banks are trying to simply make some extra money thus confirming customers’ distrust in financial institutions.

If they agree to additional costs, consumers will also expect extra benefits and not just the same things they used to get for free.

Bank of America, for example, learnt this lesson the hard way when they wanted to charge their customers a $5 fee for using their debit cards for purchases. The backlash was swift and strong, and the bank had to cancel the plan within six weeks.

To avoid such situations, banks need to focus on their customers’ financial health and create personalised and holistic value propositions that will provide a competitive edge against challenger banks and convince millennials that they can provide safe and innovative solutions for life’s complex challenges.

By understanding these strategies and embracing the changes in consumer buying behaviours, financial institutions will be able to create new ways to generate recurring value for their customers and new sources of predictable income.

Key skills

However, in order to transform their approach to digital transformation and subscription models banks will also need the right skills and capabilities.

A new CBI/TCS report highlights the UK’s rapidly accelerating digital talent gap as new technologies transform the way we live and work. Currently, the UK is losing out on £63bn a year as companies struggle to find people with digital skills. Areas of banking that need to be a focus for investment include the use of AI in customer profiling, money laundering detection and improving customer services. All of these investments require emerging technology to be implemented, and employees with the skills to manage it. Banks will need to implement training programmes, smart hiring strategies, and strategic digital transformation programmes to attract tech talent and implement a customer experience to rival challenger banks.

And whilst providing subscription services to their customers might require considerable resources and a significant shift in strategy and policies, engaging the new generation of digital-first customers is paramount if traditional banks want to remain relevant and fend off challenger financial institutions. Harnessing this opportunity will provide a critical competitive edge, inspire loyalty and make customers feel valued.

Many industries have already adopted this system and have reaped significant benefits already. It’s high time for traditional banks to challenge the current status quo as well and reap the benefits of a subscription model.

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