Fintech & the ‘subscription economy’: Have people had enough?

This week, there was a story that might have escaped your attention. Amid a war of words from the contenders to be the UK’s next Prime Minster who went on to campaign footing, Italy’s leader Mario Draghi offering to step down and London prepping to sizzle in a potential 40 degree heatwave. 

It does concern heat though, and the ever-expanding ‘subscription economy’. And the seats of BMW cars. In short, the German car giant will offer its customers the option of turning on seats and steering wheel heating for a £10-15 monthly subscripton fee where previously it came as an additional extra paid for when buying the car in the first place. 

It is a move, and a clever one at that, that will enrage many who may deservedly feel that every aspect of their lives is being turned into a subscription of some kind. 

Offering goods and services via a subscription is by no means new. It may even be hundreds of years old but the ever expanding adoption of this, particularly during the digitalisation of the economy in recent years is new. 

Digital services have a low marginal cost meaning the subscription economy is a scale game and one that can be immensely profitable.

You can see why companies like it. Regular, repeating revenues are investors’ dreams. They can be accurately modelled, provide valuable data, nudged up in line with inflation and further optimised to profit maximise. Often consumers are ‘sticky’ too meaning they don’t get round to cancel things. 

Anecdotally, I can admit to forgetting to end one or two streaming services in my time to my own consternation six months down the line when I realise I have wasted a decent amount of money on watching just a few TV shows. 

During my first and only bout with covid in December, I remember adding a subscription to a well known platform to watch an episode of Jonathan Creek only to find last week that the platform continued to have taken £5.99 each month for more than half a year following my post covid brain-fog. In other words I was a 'sticky' customer i.e I forgot.

Fintech has actually come up with a clever solution to this problem with the subscription economy that I like.

Revolut and a number of other companies’ ‘disposable’ virtual cards operate just like any other Visa or Mastercard card but have the added benefit that they are temporary and therefore not only help protect you online but also can counter the issue of runaway subscriptions. By adding in a bit of friction, by having to resubscribe when the virtual card has expired, you can ask yourself if this is what you actually want or whether it's time to cancel.

With the cost of living crisis in full swing, the solution is a neat one. The only problem is, of course, in a suitably ironic fashion you have to subscribe to Revolut’s only premium package which comes in at £5.99 per month to use its virtual cards.

The Netflix Effect

With the UK’s neobanks - the likes of Revolut,Starling and Monzo all set to report their latest numbers in the coming weeks via their annual reports we will get an important update on the use of a subscription model on these companies' strategy of offering a premium tier. 

Monzo added 100,000 paying subscribers in the first six months of its launch in 2020 for example. Today it now has 430,000 paying subscribers across its Plus, Premium and business plans according to its latest report which has just been released. This has played an important part in driving its revenue up 90 per cent.

The success of the subscription economy will be hugely important for neo banks and other fintechs in the coming years who have seen impressive growth in their revenues helping them edge their way to a sustainable financial footing. 

It could, however, also go into reverse as Netflix has shown earlier this year. The trend might not be a one-way bet.

The subscription economy makes sense, and for fintech it is becoming big business, but with pressure on million of UK households and rising it is set to face its toughest test.