May 23, 2022

Observations from the Fintech Snark Tank May 23, 2022, getty According to a recent article in Tech Crunch : “Investors have decided that consumer fintech businesses are not SaaS companies, meaning fintech revenues should not be valued as if they were annual recurring revenue (ARR). The point matters because a host of consumer fintech startups have raised capital, spent and been valued in recent years as if they are SaaS companies. This may have been an error.” The article points to the recent devaluations of Robinhood and Coinbase as proof points. Don’t throw the baby out with the bath water, however. The annual recurring revenue (ARR) on fintech subscriptions is alive and well. The Fintech Subscription Model Across a range of financial management activities, more consumers use fintech providers than use traditional banks and credit unions. And a little more than 10% of consumers pay fintechs to receive or access the service. Use of fintechs for personal financial management Source: Cornerstone Advisors Fintechs fees are often positioned as a subscription charge. Acorns, for example, says “rather than surprise fees, we bundle our products into simple, transparent subscription tiers that support your financial wellness.” Dave (a fintech, not the name of some random guy) charges a monthly “membership” fee to access the company’s account monitoring and notification services, budgeting feature, and to maintain an active connection to members’ external bank accounts through third-party services. At Acorns, the percentage of customers that are daily users is higher among the premium pricing tiers and in the first six months after subscribing; investors selecting the premium pricing option grow their account balances significantly faster than customers in the lower pricing tiers. Acorn customer engagement by subscription tier Source: Acorns Increasingly, Acorns subscribers join at premium pricing tiers. Since July 2020, 61% of new subscribers have joined at the $3 tier and 14% at the $5 level. Just one in four new subscribers comes in at the lowest pricing tier. Americans Spend $13 Billion on Fintech Subscriptions Across the fintech industry, subscription charges and membership fees add up. Among consumers between the ages of 21 and 55, 40% pay to receive or subscribe to fintech services each month, with half spending $10 or more. Monthly spend on fintech subscriptions Source: Cornerstone Advisors By generation, 47% of Gen Zers and 44% of Millennials pay to access fintech services each month. On average, Gen Zers and Millennials spend about than $6.25 per month to access fintech services, with Gen Xers spending roughly $4.75. On an annual basis, Gen Zers spend $4.45 billion each year on fintech subscriptions, Millennials spend $4.73 billion, and Gen Xers spend $3.29 billion. Add in the Baby Boomers, and fintechs generate $13.3 billion in annual revenue from fees and subscription charges in the US. Annual spend on fintech by generation Source: Cornerstone Advisors An article in Protocol asserted: “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. It raises the question of why banks haven’t just rebranded fees as subscriptions instead of hitting customers with unknown and unexpected maintenance or overdraft fees.” First, a response to the “unknown and unexpected fees” assertion. A recent study I conducted at Cornerstone Advisors (to be published shortly) found that eight in 10 Americans say their primary checking account provider adequately discloses its fees to them. There are differences by age group, however. suggesting that over time, as consumers become more experienced in the world of financial services, they learn more about existing fees and understand that they’re not really “hidden.” So much for that false “unknown and unexpected” assertion. The other part of the hypothetical question is a good one, though: why haven’t banks rebranded fees as subscriptions? The answer: It’s not that easy. Many consumers have between 10 and 20 different types of subscriptions and most consumers—particularly those over the age of 30—have had a checking account for decades. They’re accustomed to paying (or seeing) fees—not subscription charges—and simply rebranding a fee as a subscription charge isn’t going to fool anyone. According to a new report from Cornerstone Advisors, banks must create new value in their checking account offerings in order to create subscription charges: “To maintain deposit account profitability, community-based institutions need to offset a declining revenue stream without resorting to punitive fees. The solution: bundling value-added services that consumers already have or say they want into checking account offerings and mobile banking apps.” This process of bundling value-added, third-party services into checking account packages is an example of what Cornerstone calls embedded fintech . A financial institution with 100,000 checking accounts could generate nearly $750,000 in incremental revenue in the first year of an embedded fintech strategy. With embedded fintech subscription adoption growing to 50% of checking accounts over five years, total subscription revenue could grow by more than 700%. For a complimentary copy of the report Creating a Fintech Subscription Engine: How Embedded Fintech Can Help Banks and Credit Unions Combat the Revenue Recession, click here or on the cover image. Creating a fintech subscription engine Source: Cornerstone Advisors