While the long-term outlook of the subscription economy is still bright, inflation and economic uncertainty will likely be the top challenges to businesses this year.
Further, recent reports suggest that “there has been a material decline in virtually all valuation and growth metrics for digital consumer subscription businesses.” Retail subscription businesses face additional challenges with supply chain issues and the rising costs of production.
This presents a particularly tricky dilemma. On the one hand, there is pressure to maintain pricing consistency as a way to reduce churn as subscribers cut non-essential expenses. On the other hand, in a business environment where profitability is typically valued, there can be pressure from stakeholders and investors to raise prices.
But there are other ways to reduce inflationary and pricing pressure.
Payment processing is a big, unnecessary cost center
Today, subscription businesses are paying 2% to 3% of each transaction in payment processing fees. At a hypothetical 50,000 transactions per month, with an average transaction value of $30 and fees of 2.5%, this equates to approximately $450,000 in costs on payment processing alone.
And that’s not all. In addition to processing costs, there are several other obvious and hidden costs associated with traditional payment processing, including involuntary churn (expiring cards, processing failures, etc.), and costs associated with mitigating this risk ( networking tokens, account updating solutions, etc.).
Why Open Banking-powered payments could be the answer
Open Banking is the concept that everyone benefits if banking, transaction and other financial data is accessible to third parties — under a high level of security and with the explicit permission of the account holders, of course.
For subscription businesses, it means their subscription customers would be able to authorize a recurring payment facilitated by their bank, which would then be deposited directly to the subscription company’s bank account. This is a much cheaper payment flow than what credit card companies offer.
Cheaper than traditional payment processing by 70% to 80%
Paying by bank offers several compelling advantages for subscription businesses and their customers alike:
- A vastly cheaper cost per transaction as transactions are made on the ACH not credit card rails.
- Lower fraud and higher security since the payment is authorized directly within the customer’s secure banking environment. ACH fraud is an order of magnitude smaller than credit card fraud.
- An improved customer experience, since customers are not required to manually input credit card numbers.
Reduced involuntary churn
Most credit cards expire every three years, which means somewhere between two and a half and three percent of customers’ cards to expire per month. Other issues such as hard declines (credit card payment failures that are permanent and cannot be retried) and hitting credit limits, further eat into the LTV of a customer. Credit cards are also frequently compromised, which means the customer is issued a new credit card, and they may decide to not renew the subscription (or simply forget to update the credit card number).
Open Banking-powered payments drastically mitigates all these issues. Bank accounts do not expire, so there is no chance of interruption and no need for expensive ancillary services such as account updaters or network tokens to rescue expired cards. Likewise, hard declines are not an issue. And finally, if a customer does have insufficient funds, smart decisioning can make this known instantly, meaning the transaction will be declined on the spot, without additional fees, and merchants will avoid associated NSF fees and time delays.
2023 is the year to protect customers, fight inflation, and grow subscriptions
As 2023 dawns there is likely to be a number of subscription businesses that will come under pressure, due to inflation, the macroeconomic situation and supply chain issues.
Payments are the linchpin of subscription businesses. Lowering costs while ensuring they happen smoothly in the background has multiple benefits, from improving the customer experience to protecting margins or enabling investment in growth. Those that innovate and optimize will have a far greater chance of surviving — and even thriving — in the challenging year ahead. They’ll also be set up to make outsized gains when the inevitable recovery comes.