A majority of American consumers are active participants in the subscription economy. From video streaming services, to Amazon Prime delivery, to gym memberships, monthly boxes, and meal prep kits, convenience is the driving force behind consumers’ decision to subscribe. Even so, there are some challenges associated with subscriptions and the automatic, recurring charges they bring.
A rising number of consumers are choosing to subscribe
In recent years, the subscription economy has skyrocketed in popularity. In 2018, Forbes reported that the subscription e-commerce market has grown by over 100% every year for the past five years. It also found that “15% of online shoppers are signed up for one or more subscriptions to receive products on a recurring basis.”
In 2019, Business Wire cited a study that found subscription businesses grew their revenues five times faster than U.S. retail sales and S&P 500 company revenues in the seven-year period ending in 2018.
Video streaming subscriptions take the lead
By far the most popular type of subscription in the United States are video streaming platforms like Netflix, Hulu, and HBO Max. In fact, 70% of U.S households were subscribed to at least one streaming service in 2019, with an average of 3.4 subscriptions per streaming service user.
The success of Disney Plus, Disney’s streaming platform launched in November 2019, further shows the widespread popularity of streaming services. Disney Plus reported 26.5 million paying subscribers in its first fiscal quarter, with a whopping 10 million subscribers within a day of launching.
While video streaming services will remain key players in the U.S. subscription economy, they make up only a fraction of the recurring payment subscription options available to consumers.
Subscription options extend far beyond television
Other popular recurring subscriptions allow users to choose the frequency that they receive goods or services. These often come in the form of subscription boxes, which are a recurring delivery of a niche product or set of products.
One example is Ipsy, a company that charges users monthly or bi-monthly for a bag of sample-size makeup and beauty products. Some companies focus on food delivery. For example, deliveries from HelloFresh come with meal prep kits containing the ingredients and recipes needed to make home-cooked meals. HelloFresh subscribers choose how many meals they want per week and how many people will be eating.
Another major market is for clothing. Urban Outfitter’s Nuuly clothing rental subscription charges consumers a monthly fee for a box of store attire. At the end of the month, consumers send the set of rental clothing back, but have the option to purchase any article of clothing from the box. The same process repeats monthly. Stitch Fix has a similar subscription service, sending personalized boxes of clothing to subscribers every 2-3 weeks, every month, every other month, or every three months.
Other subscriptions send things like shaving products, cocktail kits, baked goods, DIY craft kits, craft coffee, dog toys, and chocolate samples. Beyond niche products, recurring subscriptions also includes services like gym memberships, Amazon Prime, and iCloud storage fees.
Real-time data will become more relevant as subscriptions evolve
Some subscription options already rely on real-time data to serve customers what they need when they need it. For example, there are now printers compatible with Amazon Dash Replenishment, a service where the printers use sensors to detect real-time ink levels, then trigger an automatic re-order when the ink supply is low.
Amazon Dash Replenishment is also compatible with several other data-enabled products that similarly trigger reorders when supplies are low. Cat and dog food, furnace air filters, coffee, toothpaste, and laundry detergent are just a handful of items on this list.
Going forward, subscription options’ use of real-time data will likely become even more sophisticated. Some smart fridges have already been enabled to use real-time data to detect food levels using internal cameras. In the future, consumers can expect this technology to include an automatic grocery re-order option that results in personalized groceries delivered right to their door.
Consumers spend more on subscriptions than they think
For most subscriptions, users simply need to enter a payment method and consent to future purchases. That card will then be charged on a recurring basis when the subscription auto-renews. These recurring payments are convenient, removing the burden of maintaining the membership from consumers’ shoulders.
At the same time, it has also brought challenges to those who struggle to manage these payments. While a single recurring payment may be easy to remember, many American consumers are juggling multiple recurring subscriptions— without sitting down to add up the total cost.
This has consequences. A survey of 2,500 Americans found that 84% of people underestimate what they’re actually spending on digital subscriptions per month. The same survey found that around 10% of millennial consumers spend over $200 every month on recurring subscriptions.
Financial institutions aim to increase subscription payment transparency
David Nelyubin, a research analyst at Mercator Advisory Group, expanded upon this topic, saying that “recurring payments, specifically subscriptions consisting of digital services, box of the month products, and service memberships, are becoming more popular among consumers. Such a variety of services has resulted in consumers struggling to manage them all.”
Financial institutions recognize the challenges consumers face while managing their subscription payments, and believe that a clear billing and cancellation policy is needed. In response, these “digital consumer banking providers are looking to solve this challenge in order to provide better service,” added Nelyubin.
For example, in October 2018, Visa and Mastercard’s Subscription Mandate took effect. The main objective of the mandate is to make the sign up, billing, and cancellation processes clearer for consumers regarding subscription payments. The mandate requires that merchants obtain cardholder consent to have their payment information stored for upcoming transactions.
Subscription charges are susceptible to friendly fraud
For many subscriptions, users have to intentionally go back and cancel their membership before the free trial period ends to avoid an automatic merchant charge. Not everyone realizes this when they sign up, though, leaving them with an unexpected bill at the end of the month.
This confusion frustrates cardholders who believe they were fraudulently charged. This, in turn, can lead to friendly fraud. Friendly fraud occurs when consumers make a legitimate purchase, receive the product or subscription, and then file a chargeback to get their money back.
Friendly fraud does not have to be intentional, and in the case of subscriptions, it often isn’t. In reality, confusion surrounding the subscription billing process often holds part of the blame. These chargebacks negatively impact consumers’ experiences and results in a financial loss for merchants.
According to Raymond Pucci, Director of Merchant Services at Mercator Advisory Group, “streaming services are especially susceptible to chargeback and friendly fraud due to the nature of the offer and purchase process, especially if customers are offered a trial subscription and don’t cancel before billing starts.”
In addition to helping consumers manage their own finances, clarity in merchants’ billing statements and communication with customers could reduce this high chargeback incidence. Additionally, added Pucci, “machine learning algorithms used to prevent fraud will likely improve as the number of streaming service users rises.”
The takeaway? Recurring payments come with convenience— but also challenges
The subscription economy is growing and will become more sophisticated as real-time data is leveraged to improve services. While the convenience of setting up recurring payments is undeniable, there are risks associated with recurring payments.
Subscription management can become overwhelming to consumers, and confusion regarding billing increases the risk of friendly fraud. Financial institutions like Mastercard and Visa have taken it upon themselves to counteract these concerns.