Subscription-Based Corporate Banking Business

Banking services in general and corporate banking, in particular, have witnessed a lot of innovation in the past few years. Innovations have touched almost every area of banking except the way the products and services are priced. The commercial banking pricing still seems to be anchored to old business models. However, since commercial banks are facing significant competition from fintech companies, they now need better business models which help them provide better service and induce customer loyalty.

In the past few years, newer revenue models have been proposed in the area of corporate banking. Subscription-based banking is one such innovation that has been proposed. As of now, it is not being adopted by commercial banks on a large scale. However, there are a lot of merits to applying this revenue model. Hence, it is likely to be adopted at a faster speed in the future.

In this article, we will have a closer look at the need for a subscription-based revenue model in commercial banking as well as the advantages of adopting such a model.

What is Subscription-Based Corporate Banking?

Subscription-based corporate banking is a revenue model which is relatively new in the banking industry. However, it is rapidly gaining acceptance from banking experts around the world. Traditionally, commercial banks have had a very complex pricing mechanism. For certain services, they charge an annual fee.

For instance, maintaining a checking account or issuing a corporate credit card. For usage of other products and services, they charge based on the number of transactions. For instance, banks charge a certain fee for every payment transaction that is routed via their network.

Similarly, there are a lot of different charges for check book issuance, bank statement issuance, early repayment of loans, and so on. The end result is a complicated and opaque schedule of charges that corporate customers find inconvenient to navigate.

Subscription-based banking is a revenue model wherein the commercial bank eliminates all these charges and replaces them with a fixed subscription fee. The subscription fee allows the bank to bundle together several products and services which are used by corporate clients and then charge a recurring fee for the same. Many corporate customers find this model to be beneficial because they no longer have to monitor the wide variety of charges that banks charge through their systems. The complex schedule of charges gets replaced by a predictable and easy-to-monitor subscription fee.

It needs to be understood that the subscription-based banking model only applies to the non-interest income which is earned by the banks. The subscription fee is not a replacement for interest-based loans. However, it also needs to be understood that many banks offer differential pricing wherein they offer relatively lower interest rates to corporations who subscribe to their services. Hence, corporations are able to obtain benefits even while borrowing and repaying the money.

Why is Subscription Banking Gaining Popularity?

Ever since the idea of subscription-based banking has been floated around, it has been subject to a lot of debate. However, there are many experts who believe that subscription-based banking revenue models are undoubtedly the future of the banking industry. Some of the factors which support this belief have been mentioned below:

  1. Customers Want Flexibility: It is important to understand the subscription-based banking model provides the customers with a lot of flexibility. They can choose the product bundle which most closely meets their requirements and then they can continue with business as usual without having to create a system to monitor the service charges charged by the bank against their actual usage. Corporations find it convenient to know that they will be charged the same service charge if their usage of services falls within the same range every month.

  2. Millennial Mindset: Millennials are the decision makers of the future. These millennials have grown up their entire life living with subscriptions. Millennials are psychologically more receptive to the idea of subscription fees. However, at the same time, they find bank charges to be annoying! In the business world, perception is the only reality and perception seems to be favoring the subscription-based revenue model. Hence, it is likely that this model will gain traction in the future.

  3. Product Bundling: The subscription-based banking model encourages the customers to procure all their banking services from the same bank. This creates a natural incentive for the customer to widen their relationship with the bank. This incentive is more effective than the services of marketing personnel who constantly try to cross-sell services to a bank. The future is likely to see commercial banks offering a subscription-based revenue model since they want their clients to provide them with the maximum business possible.

The bottom line is that subscription-based revenue models are here to stay. At the moment, traditional bankers are calling it unrealistic. However, over time, the industry is likely to be revolutionized just like Apple iTunes revolutionized the music industry.

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Commercial Banking