As Subscription Habits Evolve, Payment Growth Opportunities Remain

By John Patton, Co-op Senior Payments Advisor

The growth in subscription services—covering everything from streaming media to meal kits—has been one of the hottest spending trends of the past few years.

Over 8 in 10 American households have at least one subscription, a factor that has helped drive growth in the sector at a rate of 4.6 times that of the S&P 500 as a whole.

Yet, several factors have conspired to slow this pace of growth considerably.

Pandemic-era behaviors that drove the rapid growth of subscription services, including the rise of eCommerce and increasing time spent at home, are proving less “sticky” than anticipated as consumers gradually shift back to more traditional in-person modes of shopping and working.

Moreover, economic factors including rapidly rising inflation, higher interest rates and recent job layoffs across the tech sector are driving consumers to scale back their household budgets, with subscriptions among the first categories of purchases to get the axe.

According to the November 2022 Subscription Commerce Conversion Index from PYMTS and sticky.io, 87 percent of consumers say their incomes have not increased fast enough to match rising prices, leading two-thirds of consumers to cut down on nonessential retail spending.

Forty-three percent of current retail subscription holders express uncertainty about renewing their plans, even as the average number of subscriptions per household has already declined 29 percent from July to September 2022. Among the most vulnerable categories of subscription services are health and beauty, clothes and accessories, food and beverage, toys and entertainment, and pet supplies. The only category that demonstrated growth was streaming entertainment, which increased by 6.5 percent.

Despite the current reset, subscriptions offer credit unions an excellent opportunity to grow interchange revenue, expand credit and debit portfolios and enhance overall member experience through increased interactions. In fact, subscription services and credit unions have a lot of similarities. To enjoy long-term, sustained growth and success, both rely on “MERS”: Members, Engagement, Retention and Stickiness—factors that are dependent on delivering an outstanding, consistent experience to subscribers/members.

What are subscriptions?

Subscriptions are often confused with other types of payment transactions, such as card on file. In a card on file transaction, the consumer registers their credit or debit card number with a merchant they use regularly. The merchant stores the card information within its payment system, ensuring future sales transactions are seamless and convenient for the customer.

In a card on file scenario, the merchant does not store the three-digit card verification code (CVC) found on the back of the card, so the customer must re-authorize each new transaction at the time of purchase. For this reason, card on file is not designed for recurring transactions.

As with card on file, subscription-based transactions require the customer to register their card information with the merchant. However, with a subscription the customer authorizes the merchant to auto charge the same debit or credit card on a regular, recurring basis (for example, weekly, monthly, or quarterly).

It’s important to note that subscriptions differ from recurring telephone, utility and cable company billings. These specialized recurring payments have their own separate merchant classification code (MCC).

Subscriptions benefit merchants and consumers

It’s easy to see why retailers love the subscription model, and are increasingly offering this option to their customers.

For one, subscriptions are a source of steady, residual revenue. Rules dictate that it is the cardholder’s responsibility to cancel a subscription, which means that the merchant can continue charging the card according to the initial agreement without having to inform the customer each time. The result is that customers rarely cancel their subscriptions, allowing the merchant to capitalize on a steady stream of revenue indefinitely.

Given their increasing popularity, subscriptions offer a clear benefit to consumers, as well. The “set it and forget it” aspect of modern card-based subscription services is extremely convenient. Subscribers can simply register the card one time, and rest easy knowing a small monthly payment will be automatically charged to their card each month or year.

Credit unions have an important role to play

Subscriptions programs present credit unions with a unique value proposition. First, they offer recurring interchange revenues for both credit and debit portfolios (although credit interchange is higher than debit).

A 2022 survey from C&R Research found that consumers spend an average of $219 on subscriptions each month, a figure that is 2.5X the amount they think they spend. At current credit interchange rates, this translates to roughly $52 in non-interest income per year, per member.

And because of the sticky nature of subscription services, credit unions can attain strong, steady portfolio growth with little to no ongoing marketing costs beyond the initial promotional campaign!

Most importantly, subscriptions (along with card on file programs) are a great way to cement the PFR with your members. Once a payment method is registered with a merchant, it is rarely removed. Subscriptions serve as a vital building block for establishing long-term, loyal member relationships, with payments squarely at the center.

Optimize your portfolio with a subscription strategy

Credit unions have an opportunity to grow their payment portfolio and build in recurring interchange revenue by focusing on subscriptions. Here’s how:

• Dive deep into your member data: The member data you already have is a treasure trove of opportunity! Co-op’s SmartGrowth consultants advise conducting a deep analysis of your current member spending behaviors. Begin by identifying those accounts that already have one or more active subscriptions. Since these members are already comfortable with the subscription model, they are ideal candidates to target for additional sign-ups.
  
  We also recommend focusing on specific merchant category codes that are popular for subscription services, along with up-and-coming subscription merchant categories, like medical services and pharmacies, which are likely to be the next wave in subscriptions post-COVID.
   
• Reward your members: If your credit union already has a credit rewards program, it is easy to add special incentives for cardholders to register with subscription services. One way is to offer extra dollars back for subscriptions that renew on an annual basis.
  
  Alternatively, since credit earns a higher interchange rate, you may wish to offer an incentive for members to switch their current subscriptions from debit to credit.
   
• Incent local merchants: Subscriptions are also a great way to establish relationships with local businesses and grow your business services program. For example, you can encourage your local coffee shop to allow customers to register their credit union cards on file with their store. Your credit union can offer incentives to both the merchant and the individual members based on the number of subscriptions signed up by the business.
   
• Promote through targeted marketing: As you dig into the data and plan your targeted marketing campaigns to boost subscription sign-ups, focus on your credit union’s unique benefits and the trusted relationship you have with your members. For instance, if the member tends to pay their credit balances in full each month, encourage them to use credit over debit in subscriptions as a prudent money management tool.

Credit unions serve a unique role for their members, who count on them to provide objective, caring advice on how to manage their financial lives. With this established level of trust, credit unions can be a guiding light as their members enjoy the convenience of subscriptions, while helping them to manage these services safely and wisely.

To help build a subscription strategy that will support your members and help you optimize your payment portfolio, contact Co-op’s SmartGrowth Consultants, who will work with you to analyze your member card data and identify new opportunities for growth.