The hidden subscription economy shaping the future of payments

The hidden subscription economy shaping the future of payments
(Image credit: Pixabay)

Consumers are increasingly demanding instant access to products and services. At the same time, companies are currently facing new challenges resulting from the global pandemic, with many looking for ways to diversify their business offering to survive. The combination of the two is spurring an uptick in demand for subscription services. According to the Zuora, Subscription Impact Report: Covid edition, 22.5% of companies saw their subscription growth rate accelerate. For example, in the streaming industry alone, Netflix added 10 million subscribers in the second quarter of this year, while the more recently launched Disney+ signed up 60 million subscribers in just nine months.

This phenomenon is growing past the traditional SaaS companies and beyond entertainment, into industries that just a decade ago might have made you think twice about their feasibility of offering subscriptions. Food boxes from Graze, or even the pet subscription service KONG Box, are just a couple of examples where consumer habits have changed in favor of this model. In fact, a report from Juniper Research shows that the global market for physical goods subscriptions is set to dramatically increase in value to more than $263 billion in 2025 – putting them on track to surpass the market for digital subscriptions by 2022.

Traditional companies are having to think outside of the box and ask themselves how they can future-proof their business model, leading many to think about how they can jump on the subscription movement. The impact is an ever-expanding subscription economy - cutting across a whole new range of industries - as well as a rapidly changing payments landscape that is adapting to this movement.

Subscriptions are keeping the wheels in motion for businesses

Barclaycard research shows that the UK’s growing subscription economy is worth £323m annually, and that 65% of UK homes are signed up to a regular subscription service, with an average of seven contracts per household. With these figures indicating promising results, it is hardly surprising that traditional businesses want to follow suit. Recently, Morrisons, the UK’s fourth largest grocer, joined the subscription movement that is sweeping across retail, by launching a weekly, fortnightly and monthly food box service. The initiative, it says, is in place to help those most in need during the pandemic, along with those sheltering at home or who would rather not visit a store.

Pret is another UK business that is on a mission to survive. Lockdown restrictions have meant that the number of workers coming into the city has yo-yoed throughout the last eight months, but ultimately, numbers of people heading into the capital remain low in comparison to this time last year. Pret’s new subscription service, called YourPret Barista, allows UK customers to receive as many as five barista drinks per day for £20 each month. It claims to be the UK’s first in-shop coffee subscription service and, on its go live date, the company saw 16,500 people sign up to the scheme by 3pm. The group reported that the pandemic had set sales back by 10 years, but in a new move to evolve into a “multi-channel business”, it hopes to be able to weather the storm.

These are just two examples of businesses that are diversifying to meet our changing lifestyles. There are also a number of other industries leveraging subscriptions that might raise some eyebrows – tyres, for example. GoCardless recently teamed up with Bridgestone to power the recurring payment collection of its new subscription service, MOBOX. The all-inclusive monthly subscription service offers consumers new tyres, alongside other vehicle-related services, starting at just £7 a month. This may seem unexpected, but tyres are a costly asset to purchase outright, and are also a massive health and safety risk if not changed regularly. This is yet another example of how the subscription model can provide customers with a better service, and businesses with a more future-proofed model.

The payments that power the subscription

A key benefit of subscription services is the convenience for the user, in that they do not have to spend time updating or buying new products. However, this convenience becomes immediately disrupted if a payment fails. The two biggest causes of payment failure are insufficient funds and debit or credit cards either expiring or getting lost/ stolen.

This is therefore helping to drive more innovation in recurring payments. For example, our Consumer Payment Preferences report found 48% of respondents were likely to choose Bank Debit to pay for traditional subscriptions and 45% for online. The increase in subscription-based businesses as a whole, then, could accelerate the decline in preference for using cards for recurring payments.

Additionally, payments are extremely high-leverage. It is common for businesses offering subscription services to accept a failure rate of 10% on cards or 5% on Bank Debit as the norm, but this can seriously impact cash flow, cost of recovery and customer relationships.

This is spurring the increase in payments intelligence tools that leverage data and machine learning to automate the recovery of failed payments based on the optimum strategy for each individual customer. Such technology has worked away in the background to keep the subscription economy ticking over, but it is now taking center stage as the payments industry looks to innovate and adapt.

Payments are a vital part of the subscription journey and can make all the difference in ensuring that customers have a frictionless experience. But this isn’t something businesses should have to worry about - it’s a distraction from improving their offering to their customers. Having a tech solution in place that automates this process and adapts to new demands, will ultimately help businesses continue to enhance their subscription services, with higher customer retention and less involuntary churn.

The future for subscriptions and recurring payments

The appeal of subscriptions in our day-to-day lives presents an attractive proposition for businesses looking to diversify and, ultimately, come out of the pandemic stronger. The closed shop fronts and the reduced customer numbers have given business owners some time to rethink how they operate moving forward. We’ve seen from the likes of Pret and Morrisons that being able to pivot quickly and adapt to new demands can have great benefits. This is likely only the beginning of a fast-growing, hidden subscription economy.

And this is impacting payments too. Over time, payments have adapted with the changing needs of the consumer, and often focused on one-time payment trends. However, the rise of the subscription business model is one of the driving forces that is spurring innovation across business and recurring payments. As businesses adapt to the expanding subscription economy, we can expect payments innovation to continue to grow with it.

  • Stephen Reidy, General Manager for the UK and Ireland at GoCardless.
Stephen Reidy

Stephen Reidy joined GoCardless in 2019 and is VP & General Manager for the UK and Ireland.