Banks need to start cashing in on the subscription economy

For consumers, casually checking their bank account and seeing a monthly maintenance fee or overdraft charge is a frustrating experience, and fees are a major factor in banks’ low satisfaction ratings.

The challenge for banks is that their efforts to reduce their fees aren’t making a significant dent in improving customer dissatisfaction, according to a recent J.D. Power study. And banks are caught in a financial bind: A study by the Consumer Financial Protection Bureau showed that overdraft and insufficient-fund penalties made up two-thirds of reported fee revenue. A wobbly earnings season for big banks has made cutting a key revenue source even trickier.

There’s a solution neobanks have found, which is part marketing and part product design: Recast fees as subscriptions, and market premium memberships as time- and worry-saving features with a predictable cost instead of surprise charges that disrupt customers’ financial plans.

One of the ways that neobanks have flipped the script on traditional banks is by luring in customers with subscriptions that offer perks on top of ways to avoid fees. It may be a matter of semantics — What’s the difference between a subscription payment and a monthly fee? — but it works for modern consumers.

Neobanks like Chime, Nubank and Revolut all offer subscription or membership plans in exchange for some of their services and reward programs. Because the subscriptions are optional, these firms still market their services as fee-free.

Paul McAdam, a senior director at J.D. Power, told Protocol that younger consumers are more attracted to the neobanks’ approach.

“There are really two drivers, and both of them are rooted in, from the customer's perception, the issue of unfairness,” McAdam said. “Unfairness around fees, monthly fees, punitive fees.” Besides better interest rates on deposits, neobank customers see their products as putting them in a position of more control over what they’re paying and when.

According to the J.D. Power study, 78% of survey respondents who paid a fee said they knew they would be charged it.

It does raise the question of why banks haven’t just rebranded fees as subscriptions. Instead of hitting customers with unknown and unexpected maintenance or overdraft fees, banks could use their broad relationships with customers to offer subscriptions that do more than just maintain accounts, potentially generating goodwill and occasionally delighting them with avoided fees and bonus perks.

McAdam theorizes that the banking industry just hasn’t been pushed to do it yet, calling the emerging neobank competition “a classic case of an industry being pushed to move by a new pricing model.”

There have been glimmers of this in the past: Citi once charged $125 a year for Women & Co., a membership-based personal financial planning service. Citi and Chase today have packages like Priority Checking and Sapphire Premium Checking with a monthly fee that’s waived for higher account balances. But those are targeted at higher0net-worth individuals, not the younger consumers flocking to neobank subscriptions.

Traditional banks are already undergoing a digital transformation. Bank of America reported that 53% of its consumer sales came from digital channels in the first quarter of this year. The question is whether it will start evolving its products alongside its distribution. Neobanks aren’t waiting to capitalize on the subscription economy.