Subscription based business models in corporate banking

The views and opinions expressed in this article belong to the author and do not necessarily reflect the views of Nordea.

Subscription based business models are becoming mainstream among many companies. This phenomena is no longer limited to the consumer market with the likes of Spotify offering their subscription streaming services, and is spreading across nearly all industry verticals.

Just think of Software-as-a-Service by TietoEVRY, the Rotation-for-Life programme by SKF, or Uptime-as-a-Service by Sandvik and Wärtsilä. In the finance industry, the insurance sector is a precursor with the development of personalised and usage-based schemes.

In this context, the subscription economy is defined as a model where customers pay a recurring fee to access a product or service. This fee is charged at regular intervals, either based on time periods (weekly, monthly, yearly), or calculated based on usage. Subscription is also associated with flexibility since it is often possible to upgrade, downgrade or suspend the service.

The main driver for companies to develop a subscription business model is that it allows them to build loyal, long-term relationships with their customers which in turn bring predictable revenues. This model is more sustainable than the traditional “product economy” that relies on one-time transactions. However, it requires a conscious transition from product-centric business models to customer-centric ones, from selling products to helping customers achieve an outcome.

Can banks get inspired by what their corporate customers are doing and what would a more subscription-based business model look like for a corporate bank?

The corporate banking business model is largely subscription based by nature

Banking is essentially a subscription business applying a combination of periodic fixed fees and a pay-per-use pricing model. We are just not used to calling it that way.

For instance, one can argue that you subscribe to your corporate bank account and pay a fee for that, and you also pay for how much you use it: how many payments you make from it and the interest rate on the negative balance. In fact, in the financial services business, everything is by definition immaterial and you never own anything. For example, you don’t own your account at your bank, you just “rent” it or subscribe to it.

The same goes for a loan: you don’t own the money since you need to give it back when you repay the loan. In essence, you subscribe to your loan and pay a periodic fee (the interest rate).

More specifically, some products are by nature already close to a subscription model.

Nordea AutoFX solution is a subscription offering in disguise

Nordea AutoFX and generally Nordea automated forex solutions (which includes exposure calculation, trade execution and trade reporting in the customer’s systems in an automatic way) are de-facto subscription offerings. There is no big upfront fee but instead a steady flow in a pay-as-you-go manner.

In fact, thanks to those automated FX solutions, Nordea is building loyal, long-term relationships with its customers. They are not based on one-time transactions but instead on strengthening the customer relationship with a recurring business flow. With it, the forex business shifts from a product centric business model to a customer centric one, from selling traditional FX products to helping customers to achieve an outcome.

Certain types of financing are also quasi subscriptions

Invoice discounting is another example of a subscription-like service. An invoice discounting facility is an ongoing solution without a stated maturity. In addition, the pricing is based on a recurring facility fee and pay-per-use payments (according to parameters such as the number, amount, credit risk and maturity of the invoices).

A Revolving Credit Facility has also elements of a subscription product: the customer is charged a commitment fee on a recurring basis and a pay-per-use fee (the base interest rate and credit margin on the drawn-down amount).

Yet, banks don’t recognise their business as a subscription-like model

Generally, the subscription economy is still in its infancy in the financial services industry which continues to be very much product-centric. It has been running by a similar playbook for decades with the goal to “sell” a product through a multitude of channels.

Corporate banks are no exception since they do not consciously identify their business as part of the subscription economy. As a result, corporate banks have so far only occasionally tried to apply the corresponding go-to-market, packaging and pricing strategies.

Banks think “products” and undercharge on the services they provide

In daily corporate banking, most products are rather commoditised with many pricing metrics dictated from the outside (interest rates, standard market practices, etc.) resulting in a lower control over the business model. The pricing of those commoditised products is not value-based (or value-centric) and it is for instance difficult to price-in the quality of services like the advisory value-add of the Cash Management or Trade Finance Sales Advisers. The same goes when Cash Management Service employees spend time answering recurrent customer requests. Pricing their competencies, capabilities and service level is oftentimes under developed amongst transaction banks.

Adopting a subscription mind-set involves shifting from the logic of selling products to that of offering subscription to services. It allows a move away from the commoditisation of the business model by bringing differentiation on the type and level of service provided.

What can corporate banks learn from modern subscription business models?

As a first step corporate banks could adopt some of the metrics used by subscription businesses. Currently, they often assess the value of customers according to their profitability over the past 12 months (Economic Profit, return on risk adjusted assets, etc.). It is therefore backward looking, taking into account what has been done but not the value of the customer relationship in the future.

In addition to those traditional profitability requirements, banks could consider using KPIs like ARR (Annual Recurring Revenues), Churn (loan refinancing, lost Request-for-Proposal for Cash Management), or CLV (Customer Lifetime Value). Corporate banks could try to estimate the total lifetime value of a customer e.g. by discounting the revenues that are based on existing contracts and applying a level of probability regarding future transactions and their possible income (in a risk adjusted manner for those that require a capital allocation).

Moving to a more subscription-based business model also requires a shift in the banks’ mind-set. In the subscription economy, the focus is on retaining existing subscribers, monitoring usage, accounting for recurring revenue and finding new ways to deliver ongoing value to customers which will build long term loyalty.

A first step for corporate banks would be to start identifying part of their existing business as “subscription-based”. By applying the corresponding go-to-market, packaging and pricing strategies, they would be able to better answer the needs of their corporate customers, gain more customer insights and release a higher income potential from their daily banking services.

For more information on the themes discussed in this blog, please write to Jean-Francois at jean-francois.tapprest [at] nordea.com (jean-francois[dot]tapprest[at]nordea[dot]com).