What are subscription models?

At its most basic, a subscription model, in financial services or elsewhere, is a pricing structure that charges consumers a flat, recurring fee for a service or product. These fees can be charged according to almost any timeframe—weekly, monthly, quarterly, annually, etc. Despite the novelty of this business model in some industries, including financial services, it is not new, and it is unlikely to fade from the public consciousness any time soon. CI’s research teams have tracked a handful of examples in the financial service industry, as detailed below.

The growth of subscription models

Subscription models are currently as pervasive as they have ever been, changing the face of various consumer industries—video streaming, music, food, makeup, clothing, healthcare, software, cloud technology and education, to name just some examples. Subscription models have not only disrupted these industries, they have racked up millions of loyal customers for the companies that leverage them. For example, as of the end of 2021, Netflix stood at 222 million paid subscribers globally. Spotify had approximately 180 million subscribers, and Apple Music counted 60 million. With a large, growing customer base and a steady, well-set price comes the potential for a massive revenue stream—a Zuora report released in March 2019 found that companies using subscription models saw revenue increase about five times faster than S&P 500 company revenues.

Slowly but surely, subscription models have begun cropping up in the financial services industry too. Launched in the U.S. in 2015, personal-finance neo-bank Qapital offers users three subscription plan levels—Basic, Complete and Master—that provide access to various offerings such as the firm’s saving, spending, budgeting tools and its robo advisor services. In 2018, the fintech Meed partnered with Vast Bank to offer a subscription-based mobile banking platform that includes a checking and savings account, a debit card and a line of credit for $9.95 a month. The program went national in the U.S. in April 2019. Other fintech banking services like MoneyLion similarly offer subscription pricing for different levels of service. In the wealth management space, XY Planning Network, an advisory consortium founded in 2014 that specializes in young investors, offers clients a pool of fee-only advisors. Meanwhile, in March of 2019, Cetera enhanced its fee-for-service program to help advisors adopt subscription-based models. On the digital advice side, robo-advisor Facet Wealth currently offers subscription pricing, while Betterment provides five pay-for-service financial packages that allow clients to purchase one-time access to advisors to discuss certain goals, such as planning for college.

Despite these advances, adoption of subscription models drew limited notice in the financial services arena for a while—that is, until Charles Schwab became an early adopter. In April 2019, Charles Schwab made waves when it rebranded Schwab Intelligent Advisory to Schwab Intelligent Portfolios Premium and introduced a new subscription-based pricing model, charging clients a one-time $300 fee for an initial planning consultation and a flat $30 monthly advisory fee (collected quarterly at $90). With this move, Schwab became the first major brokerage firm to offer-flat fee pricing for its digital advice service.

On the heels of Schwab’s change, Bank of America’s Merrill Edge has announced that it is looking into the viability of the subscription model. Chances are that Merrill is not the only firm doing so, especially given Schwab’s reported success—according to the firm, Schwab Intelligent Portfolios Premium pulled in $1 billion in new AUM in just the first month post-rebrand, suggesting that subscription pricing in the financial services industry is in fact a viable, lucrative payment structure.

What is the target demographic?

Subscription models are popular among all demographics, but they have a particularly strong resonance among Millennials. A Vantiv and Socratic Technologies Survey found that, in total, 92% of Millennials actively use a subscription service of some type. Over 77% of Spotify subscribers fell into the Millennial demographic, and 88% of Millennials reportedly use some type of video streaming service.

Millennials are, of course, a widely targeted demographic of the financial services industry. By 2020, Millennials are expected to amass about $24 trillion in wealth globally, inherit another $30 trillion by 2050 in the U.S. alone and have approximately $600 billion in annual spending money. But while 92% of Millennials put their money into subscription services, only 57% invest their money in any form of brokerage service—self-directed or managed—and only 63% are saving.

Pros of subscription models

Subscription models, be it in financial services or elsewhere, offer a handful of features that help lure Millennials in. First, many subscription-based platforms, like Spotify, offer freemium versions of their services. While not intrinsic to the subscription model, freemium offerings are closely related and often work in tandem with subscriptions to get prospects in the door and then provide them with the option to subscribe as their needs and desires grow. On the banking side, CitiBank allows users to open an online account without purchasing any products with the firm. Some fintechs, like Personal Capital and Wealthfront, also offer a version of this, where they offer full access to their robust tools—such as Personal Capital’s Fee Analyzer and Wealthfront’s Path—to entice users to open a paid account.

Another benefit of subscription models that Millennials value is transparency. In theory, users know exactly what they are paying for at any given moment and do not have to worry about unexpected fees. Flexibility is another benefit, as clients can change services without much overhead. Finally, subscription models can also add a sense of personalization if firms use bundled services that can be grouped and tailored to clients’ specific needs and are cross-sold to provide greater value for the price paid. Spotify, for instance, partners with Hulu to offer a discount price. Fintech firms bundle services too; for example, Acorns’ Acorns Later and Acorns Spend programs target consumers with different needs. Indeed, bundling services and fostering multi-product relationships between clients and firms can ultimately help increase client retention.

Cons of subscription models

Of course, subscription models in financial services is no guarantee of success. While its benefits may help attract young consumers, it has its drawbacks, both for financial service firms and for consumers. Of course, freemium services can help lure in prospects, but firms must successfully funnel users into paid accounts by making their value propositions clear—which can be easier said than done. Also, the fact that subscription models offer pricing transparency does not necessarily mean that a flat fee is a better deal for the customer. For example, Schwab Intelligent Portfolio Premium customers that only invest the minimum requirement of $25,000 will be paying nearly 1.44% of AUM. In fact, investors would need an account balance of around $125,000 to make the $30 monthly fee as cost-effective as the previous AUM pricing model (28 bps). Ultimately, situations like this could generate pushback from customers if they look closely at what they are paying.

Moreover, although the flexibility to change services without overhead is beneficial to consumers, it can be a drawback for financial service firms that want to keep attrition rates low—which is to say, all of them. Making a service too flexible could force firms to focus on maximizing short-term fees rather than growing their relationships with consumers over time as their financial needs change.

Lastly, bundled services can add a sense of personalization, but of course, the effectiveness of bundling hinges on the quality of the experience. Subscription models are successful in part because they offer best-in-class experiences, particularly on the digital side. According to a Gallup study, 73% of Millennials reported that if given the choice, they would prefer a strong digital experience with their bank over a personal one. But that does not mean financial institutions can simply ignore the personalization element—Forrester found that Millennial customers were 1.6 times more likely to purchase something and 1.8 times more likely to recommend a brand if the company’s communication appeared “human.”

Overall, the place where financial institutions face the most risk—particularly retail banking and wealth management—is in the quality of the digital experiences they offer, according to a recent EY report. Indeed, consumers are used to the standard set by Big Tech companies that offer best-in-class UX infrastructure. Tech firms already have unparalleled scale, trust and existing customer relationships to build upon. Some have designs to get involved in the financial services industry, as seen by events such as the launch of the Apple Card. Big Tech may be able to marry best-in-class digital experiences with subscription models, revolutionizing the financial service industry. This is another area our research teams are keeping an eye on.

Pros and cons aside, subscription economies are granting consumers control over their purchasing in myriad ways. As consumers—particularly younger ones—get used to this kind of payment structure, the proliferation and staying power of the model will only increase. Now it is up to the financial services industry to decide whether to put in the work to succeed in the craze or risk being left behind. CI’s research teams are keeping an eye out to see where subscriptions models appear next.