Advantages of Subscription-Based Banking

Commercial banks were first hesitant to adopt a subscription-based revenue model. This is because it was widely believed that such a revenue model would lead to a drop in revenue for the banks and hence would be unsustainable in the long run.

However, over the years, several studies have been conducted. The results of the studies show that subscription-based revenue models are unlikely to negatively impact the revenue or bottom line at a commercial bank. Instead, a positive impact is highly likely.

It is for this reason that the subscription-based revenue model for commercial banks is likely to become mainstream in the industry. This is because of the several advantages which are provided by this model. Some of the main advantages have been listed below in this article.

  1. Less Complicated Business Model: It needs to be understood that commercial banks have a very complicated revenue model. At the present moment, they provide a wide variety of services to their clients. Each of these services is billed differently.

    For instance, the usage fee which banks charge for credit cards is charged in a different way as compared to the transaction fee which is charged when a payment is made using the bank’s infrastructure. The bank as well as the corporate customer both have a hard time understanding and navigating this complex schedule of charges.

    A business model with fewer complications will give the customers a feeling of transparency and encourage them to do more business with the bank.

  2. Lower Operating Costs: The benefit of subscription-based commercial banking is that it simplifies the system. A simplified system helps create an aura of transparency. However, more importantly, simplified systems are cheaper to run!

    Right now, banks have to maintain a wide variety of systems in order to collect revenue and reconcile the same. However, if the bank were to move on to a subscription-based system, it would not be necessary to maintain these systems. This would lead to a lower operating cost which could add to the bottom line of the commercial bank. Hence, there are very tangible financial benefits to moving to a subscription-based model.

  3. Incentivizes Consolidation: Subscription-based banking is touted as being a major breakthrough in the field of commercial banking. This is because it incentivizes the customer to hold all their accounts in one bank.

    Right now, customers have their accounts in various banks. It is financially feasible for them to do so since they pay when they use the service. Hence, for them, the costs remain the same whether they use one single service provider or several service providers.

    On the other hand, if there is a subscription-based banking model, banks will try to make maximum utilization of a single subscription. Hence, they are likely to route all their business through one single bank. This helps the commercial bank extend their banking relationship without incurring huge marketing expenses which are typically associated with making cross sales.

  4. Product Bundling: As mentioned above, commercial banks spend a lot of money trying to cross-sell different products to the same customer. However, customers are less likely to purchase a banking product if they have to pay for it separately. On the other hand, if the price is already bundled into a common offering, then customers are likely to purchase it. Subscription-based banking allows banks to use the “supersizing” approach used by fast-food chains in order to increase the length and breadth of their business relationship with the client.

  5. Higher Customer Lifetime Value: Also, studies have shown that customers are less likely to switch their banks if they are billed using a subscription-based system. We now know that customers are likely to stay for a longer duration of time and are also likely to broaden their relationships. Also, the costs of acquiring the customers get lowered. Simply put, the subscription-based revenue model has the potential to drastically increase the customer lifetime value from the bank’s point of view.

  6. Predictable Cash Flow: A huge advantage of a subscription-based model is that the revenues in such cases are very predictable. The number of customers that a bank has remains more or less constant over the years. Also, the subscription fee charged to them is also unlikely to vary a lot. Hence, the revenue is likely to keep recurring on a month-on-month basis. This is very important for banks since their other source of income i.e. interest-based earnings are highly unpredictable and even seasonal.

    Predictable cash flow enables banks to plan their cash flow in a better manner. It allows them to take more risks with their lending activities since they have another source to fall back upon.

  7. Data Mining: When commercial banks resort to subscription-based business models, corporations tend to bring their entire business to a single bank. This provides the bank with many advantages. One such advantage is data mining.

    At the present moment, the transaction data of the corporate customer is scattered across several banks. However, when the relationship is consolidated, the bank has access to all the data. They can then take the help of data mining tools and software in order to identify patterns and develop financial products which can add value to the business of the customer.

The bottom line is that the subscription-based commercial banking revenue model seems like a compelling proposition, at least theoretically. Since this would be a tectonic shift in the way the industry operates, commercial banks want to ensure that they introduce such a revenue model only after due diligence. Hence, this revenue model is unlikely to be implemented in the near future. However, it is highly likely to make its way into the commercial banking business in the long run.


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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.


Commercial Banking