Subscription economy – general and regulatory aspects (part two)

As introduced in the previous article ‘Subscription economy – general and regulatory aspects (part one)’, the subscription economy is a market growing globally across different industries, such as streaming platforms (Netflix or Spotify) or even financial services, healthcare, education, IT, etc. Even the food delivery company Deliveroo has announced the launch of a subscription service called Deliveroo Plus, offering unlimited free delivery to customers, for a fixed fee per month.

Consumers are changing their behaviour and they prefer the flexibility and access to customised products and services that allow them to feel part of the brand without the expensive upfront investment and ownership.

The subscription economy is not developing evenly in every market, which is a result of different factors – other ones than consumer behaviour – such as legislation, payments ecosystem development, and banking access. As we already tackled the EU region (and especially the UK) in the previous article mentioned above, this time the focus will be on other regions.

The US

The US have been propelling the subscription business model since this industry has started expanding, in 2010–2011, when companies such as Dollar Shave Club and Birchbox started to appear. By 2017, 70% of the global subscription companies were based in the US and they accounted for more than 11 million subscription shoppers.

Now, US-based companies are facing the challenge of executing subscription programmes in a legally compliant manner, and the state of California is leading the way. In this state, the regulation has got tougher for online subscription businesses. Currently, they must provide detailed information about the subscription process – such as the amount of the recurring charges, the length of the renewal period, and the cancellation policy – before and after the consumer agrees to it. They also need to receive consent before charging a customer’s account. Finally, the company must provide an easy-to-use mechanism for cancellations and clearly notify the customer if any changes occur to the subscription agreement. This type of legislation is expected to spread across different US states in the next few years, in parallel with the establishment of more subscription propositions.

LATAM

The LATAM subscription market is completely different from markets in other regions, as 80% of its population is unbanked and cash is still king. Therefore, recurring payments need to be addressed differently. Companies like Ropeo, Colombia-based fashion subscription service, have adapted to this situation. Their services are similar to those provided by Stitch Fix in the US – consumers receive a customised box of fashion items to try at home, and they can return the ones they don’t want. The difference is that when Ropeo comes back to pick these unwanted items, they will also collect their payment, in cash. Another option for its customers is to pay for their subscriptions at some selected retail outlets, such as grocery stores, pharmacies, or post offices.

In Brazil, around 55 million adults don’t have a bank account. To pay for products or services acquired online, consumers use what is called Boleto Bancário (estimated to account for 25% of all ecommerce payment transactions in Brazil), an official document regulated by the Central Bank of Brazil, sent by the merchant with a barcode in order to make cash payments at a bank branch or retail outlet. This payment method is being adopted by international companies that are present in Brazil, such as Netflix.

However, the Brazilian market is showing a shift towards online transactions. First Data recently acquired Software Express, a Brazil-based EFT (electronic funds transfer) manufacturer and software application developer, which provides solutions to more than 100,000 merchants in the country. With this acquisition, the two companies became leaders in electronic payments transactions, supporting all sizes of retail clients, card schemes, financial institutions, and telecoms.

APAC

Asia-Pacific is one of the most dynamic regions in the global economy, with an average growth of 5.8% in 2017, according to the United Nations. This growth is not supported only by domestic consumption, but also by external investment. International companies show a growing interest with regard to investing in this region, and that impacts on the subscription economy as well. Zuora, the leading cloud-based subscription management platform provider, has been operating in the Asia-Pacific for over 20 years, and now this is one of their fastest growing markets.

The subscription-based business model is widely accepted in countries like Australia and New Zealand, where 70% of the businesses are planning to shift to it in the next two to three years, according to Zuora and Ovum. In other markets, such as Japan, subscription boxes holding sweets and snacks, beauty products, or Kawaii items (‘cute’ items) are more popular, while there are also new services that appear. One example is Kinto, a car subscription service launched by Toyota. Meanwhile, video streaming subscription market is expected to pass the 300 million paid memberships in China by the end of 2019.

However, there are other countries, like India, where the legislation is slowing down the success of the subscription-based business model. In 2012, India introduced a mandatory additional factor of authentication for all card-not-present (CNP) transactions, which also specified that if a customer registers a complaint for transactions executed without two-factor authentication (2FA) after the stipulated date, the issuing bank would have to assume the chargeback. This regulation did not explicitly mention recurring payments, but since these are also CNP payments, the 2FA became a requirement for them as well.

In December 2016, in order to make things easier for cab aggregators (such as Uber and Ola), digital wallets, and ecommerce marketplaces, the Reserve Bank of India removed 2FA for low value CNP transactions (under USD 28.82). However, Indian banks and payment gateways still require 2FA to cover their risk of chargeback. Therefore, Indian merchants cannot offer a frictionless subscription service, as every transaction from Indian credit and debit cards require a 2FA from the subscriber. In order to offer recurring payment services, merchants have the option of signing for international gateways such as PayPal or Stripe (that charge in foreign currency). The drawback of this option is that the payments may not be made in real-time and the currency conversion costs twice as much.

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 (EDC), founded in 1978, is widely regarded as a trusted advisor to its clients, providing a full range of strategy consulting services, expertise and market insight, and M&A support.