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Expert opinion

Subscription economy – general and regulatory aspects (part one)

Friday 12 April 2019 | 08:00 AM CET

Mark Beresford, Director of Edgar, Dunn & Company, elaborates on general and regulatory aspects of subscription economy and SCA\'s impact on recurring transactions across Europe


Recurring or subscription payments are not new in the financial services industry. For instance, standing orders and direct debits are recurring payments. Direct debit payments are processed through the Automated Clearing House (ACH) network in the US and, across Europe, through the equivalent clearing houses at a country level. Europe even has the SEPA Direct Debit, a pan- European clearing and settlement network for SEPA Direct Debits. Every day utility bills, rents, gym memberships, and other regular payments are processed over tens of thousands of financial institutions across the US and Europe.

However, there seems to be a relatively new trend in terminology that is creeping into the payments industry, used mainly by the payment service provider community. The term is ‘subscription economy’. It refers to the business of offering subscriptions to consumers and to some companies who need certain products regularly (convenience commerce) or want to discover or try something new (discovery commerce). Their entire business relies on a subscription business model, such as video streaming (Netflix) and music (Spotify). Other companies use subscription models as a supplement to their core product sales businesses, such as Amazon Prime, whereby incorporating a subscription service into their ecommerce business model. Subscription models are starting to appear everywhere and more frequently across a wider range of businesses – file storage (Google Drive, Dropbox), fashion (Stitch Fix, Chapar), car industry (Kinto, Flexed), music (Spotify, Apple Music), fitness (Peloton), food (Blue Apron, Carnivore Club), personal software applications (Microsoft 365) etc.

As millennials shift away from car ownership, Toyota understands that it cannot continue down the same path to sustain growth. It launched Kinto, the subscription service that allows customers to drive automobiles such as the flagship Lexus for several months or switch to a sports utility vehicle. Insurance, maintenance fees, and taxes will be included in the monthly fixed price. This is effectively a leased car, and a leased car is nothing new. However, a lease may have a minimum term of three years before you return the car, whereas Kinto is aligned to be more appealing to millennials, with a far more flexible proposition, and yet all-inclusive access to a car.

Perhaps the ‘reality is ownership’ is dead. In the new subscription economy, young consumers want accessibility. It is true: customers have changed. Customer expectations have changed. They’re looking for new ways to engage with businesses and businesses are looking at new ways of offering their products and services in a more accessible way. These include placing the consumer – or better said, subscriber – at the centre of an ecosystem of services that are personalised and catering to the need to grow along with the subscribers’ changing requirements. Consumers today have a new set of expectations. They want outcomes, not ownership. They want a good experience, customisation, not generalisation. Constant improvement, not planned obsolescence.

But what about the payment?

As previously mentioned, recurring or subscription payments in the financial services industry are not new. However, what is new is the source of the funds. There has been a shift from the bank account, where regular direct debit payments are the source of funds, to the credit card. Recurring payments or subscriptions are initiated by the merchant, not by the shopper; therefore, they are different from card-on-file payments, which are always initiated by the payer, the shopper. Following this reasoning, Uber is not part of the subscription economy; it isn’t a recurring payment, it is customer-initiated. Other personal transport models exist, such as city bike sharing scheme, which are not recurring payments; they are based on demand and usage. Riders will rent a city bike – and there is a wide selection: Bluegogo, Mobike, ofo, YouBike, Lime-E etc – and pay based on the miles travelled. Everything is charged to the card-on-file using the customer’s mobile app and the geo-location technology to provide the bicycle’s location.

Impact of European regulations (after 14 September 2019)

Because the customer isn’t involved in the second and all the subsequent payments in a recurring payment or subscription, security is an issue and it’s about to get more complex in Europe. Recurring transactions with a fixed amount will be exempt from Strong Customer Authentication (SCA) after the first transaction when the recurring payment/subscription is created. Only this initial transaction will require SCA. However, if the amount changes, SCA will be required for every new amount. Most subscription payments will not need SCA since most of them are merchant-initiated and the amount of the recurring payment is the same.

Not fully harmonised in the UK

In the UK, the Financial Conduct Authority (FCA) – the local competent authority – has clarified that for merchant-initiated recurring card transactions SCA will only be required when the payer sets up and initiates the first of a series of payments and won’t be required for the following transactions. This is entirely aligned with the European Banking Authority’s (EBA) and the European Commission’s point of view.

The FCA goes further to clarify additional merchant responsibilities, such as to ensure that the recurring payment sets out clearly the amount that will be taken in each transaction. Furthermore, merchants should provide the range within which the recurring amount may vary. In other words, in the UK, according to the FCA, it appears that a recurring card payment transaction, that may vary each time the payment occurs, does not require SCA after the first cardholder-initiated payment. One thing is clear, in Europe, when a payer creates, amends, or initiates for the first time a series of recurring transactions, then SCA is required.

This editorial was first published in the Monetisation of Digital Business Models 2019 – Insights into Billing and Recurring Payments Report. The Report presents the key trends and developments in monetisation of business models, subscription economy, and billing and recurring payments.

About Mark Beresford

Mark Beresford has over 20 years of consulting experience in the financial services and payments industry. He is a Director at Edgar, Dunn & Company (EDC), based at their London office, where he supports a variety of payment providers and retail clients all around the world.


About Edgar, Dunn & Company

Edgar, Dunn & Company is an independent global payments consultancy, widely regarded as a trusted adviser since 1978, providing a full range of strategy consulting services, expertise, and market insight to a broad range of international clients including industry associations, issuers, acquirers, financial institutions, payment providers, etc.