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Digital payments

The precarious rise of subscription payments

ByMichael Moeser
July 22, 2020 11:35 AM

The COVID-19-induced shock to the world’s largest economy has created a rush of interest in the subscription industry, as millions of captive consumers with almost nowhere to go and plenty of time — and for those employed, plenty of unspent money — on their hands.

Since fewer people are flying, visiting hotels and going to restaurants, consumer entertainment needs are being severely underserved. The see-saw battle of states and cities reopening and then closing, as in cases of California and Texas, has only exacerbated the situation.

The net result is that as more Americans seek to satiate their shopping and entertainment needs, and with fewer options available to them, the subscription industry is stepping up in ways that could not have been predicted at that start of 2020.

But despite this spike in customer demand, the subscription industry, in particular streaming services, is experiencing a very high churn rate due to subscriber fatigue.

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Given the high number of consumers working from home, especially those with school age children, it should come as no surprise that one-in-three Americans signed up for a new subscription service in the first few weeks of the shelter-in-place lockdown in the U.S., starting in mid-March with the national emergency declaration.

According to data from a CompareCards April 2020 survey on subscription market shares, Americans purchased a wide array of different subscription services with no single area being dominant. The most popular subscriptions, based on shares of recently purchased ones, was for a streaming service such as Netflix or Hulu at 17% share, followed by Amazon Prime at a 15% share level, and then food/delivery services such as Instacart at a 12% share level.

The survey found that the two biggest drivers behind Americans subscribing to a new product or service was to entertain themselves at 67% and to entertain their children at home at 41%. The third biggest reason for signing up for a new subscription service was to reduce the need to leave the house to purchase necessities such as food and drink, coming in at 39% of those surveyed.

As an example of how this boom in demand has affected individual companies, one needs to look no further than Disney. At the end of December the Disney+ service had 26.5 million paid subscribers. This grew to 33.5 million by March 28, and then Disney announced almost two weeks later on April 8 that Disney+ had reached 50 million subscribers. By May 4, Disney reported 54.5 million Disney+ subscribers. Hulu, which is also owned by Disney, reported 32.1 million subscribers as of March 28, 2020, up from 25.2 million one year earlier.
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Nearly 60% of parents with children under the age of 18 signed up for a new subscription of some kind in the first few weeks of the national emergency. According to the CompareCards April 2020 survey about 35% of the new subscriptions by parents of children under 18 were for streaming services, followed by 33% buying Amazon Prime and one quarter (25%) signing up for a food delivery service.

In exploring new subscriptions by generation, Baby Boomers stood out as the least likely group to sign up for new services, with just 10% of those surveyed saying they had signed up recently. In contrast, over half (51%) of Gen Xers recently signed up for a subscription service.

Streaming services have been a big driver of new subscriptions among the middle-aged generations. Almost one-third (31%) of Gen X respondents added a streaming subscription during the first few weeks of the crisis, in comparison to only 22% of millennials and just 17% of Gen Z respondents who added such a service.
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By May, a new trend was becoming evident in the subscription industry — subscriber fatigue. In the Deloitte Digital Media Trends Survey, which was fielded in May 2020, it was apparent that churn was becoming a major factor as companies were rapidly onboarding and offboarding customers at an alarming rate.

Almost a third of consumers (32%) had added a new streaming video service or added one while canceling another since mid-March. Further, when looking at cancellations since mid-March, 14% had either cancelled a service outright with no replacement (5%) or cancelled a service and picked up a competitor’s service instead (9%). All-on-all, almost four-in-ten U.S. consumers (37%) had made a change to a video streaming service in the first two months of the pandemic hitting the country’s shores.

If that rate continues unabated, by September the video streaming industry could cycle through the entire U.S. population. Similarly, the music streaming, gaming and audio book services have all experienced churn since mid-March, albeit at a lower rate, and the majority of those changes to services were additions.
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Probably the biggest challenge for driving incremental growth in the subscription industry, particularly for digital services, is the sharing of accounts and passwords from paying customers with non-paying customers such as family members.

Based on data from a Bankrate.com survey of subscription services 42% of consumers have borrowed a password or shared an account from a paying subscriber to access subscriber-only content. The top category for password sharing was for video streaming services at 35%, with the youngest consumers being the largest transgressors.

About 66% of Gen Z and 64% of millennials reported using someone else’s subscription service, compared to just 34% of Gen Xers and 26% of baby boomers doing so. Among adults, the most common people they borrow passwords from are friends (29%), significant others (29%), parents (28%) and siblings (26%).
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While churn may be the bane of the subscription industry, it’s also likely that it’s priced into the business model and is a result of how the various services attract consumers.

Based on data from the Deloitte Digital Media Trends Survey, which was fielded in May 2020, the top two reasons consumers cancel subscription services are related to cost – it’s too expensive (36%) and the free trial or discount promotion has ended (35%).

However, it’s the third cancellation reason that could come to haunt streaming services over the next few months – consumed content (24%). During the lockdowns, adults are consuming streaming services at a higher rate than when they had other entertainment options. So with little to do, there may be more binge watching going on than had occurred pre-pandemic. In other words, content is being consumed at a faster pace than can be produced.
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Outside of subscriber fatigue and high cost, another major factor leading to service disruption is when the recurring payment for a subscription fails. This forces the service to follow up with the consumer in order to obtain a new payment or cancel the service outright.

According to the GoCardless Payment Success Index Report, the top failed payment methods for recurring payments are digital wallets (11.53%) and payment cards (7.89%).

“Understanding how successful your payments operation is can be key to your company’s overall success,” said Siamac Rezaiezadeh, Head of Product Marketing at GoCardless, a recurring billing platform. “We see that 20% to 40% of churn is due to recurring payment failure. It’s a huge number. A lot of people view payment failure as an inevitable cost of doing business. It doesn’t have to be that way.”

The main reasons payments will fail is that the customer doesn’t have enough money in an account or line of credit (about 20%), the account is closed or card expired (about 35%) and that the payment request is not honored by the bank or credit card (about 35%), Rezaiezadeh noted. The “do not honor” denial can sometimes be due to the customer having restricted the account from being used.
Michael Moeser
Senior Content Strategist, Arizent
Digital payments Coronavirus Online payments Payment processing
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