Subscriptions and finance: are you playing by the rules?

Ask any online consumer business how to increase sales volume and they will say (1) keep your purchase journey as 'frictionless' as possible; and (2) make your customers 'stick' and not feel compelled to shop around.

When it comes to frictionless journeys, the focus is often on the payment and checkout stage. Making consumers laboriously go through the checkout every time they visit you can result in bored customers abandoning their purchase; and, as new 'strong customer authentication' payments rules take hold, businesses are concerned that payment journeys are actually becoming worse, not better, as consumers find themselves having to provide one-time passwords.

In the meantime, consumers are becoming increasingly comfortable with making regular payments in return for a wide variety of services. Gone are the days when it was only utility bills that you would set up a regular payment for. Now, you can pay for a variety of entertainment services (amongst other things) in the same way. Subscription payments for digital content services, such as books, music and video streaming are the norm. So it is no surprise to see that businesses are using cloud-based technology to do away with consoles, discs and downloads, and consumers can now simply access games on the internet through payment of a regular subscription (the recent worldwide launch of google stadia being one high-profile example).

Subscriptions for goods

But what about businesses that want or need to continue to provide goods either with or without services? There are cultural shifts going on here too. We are seeing the question of ownership becoming increasingly challenged . Why own your phone, device or your car or even your house if you know you are going to upgrade in a few months' or years' time? Why not pay a subscription for it and then upgrade it after a while?

While that might make commercial sense, from a regulatory point of view, selling subscriptions for 'goods', as opposed to 'services', is not as easy as you might think in the UK.

It all comes down to the fact that when it comes to physical goods, unlike services, as a matter of law, someone always has to 'own' them. If a supplier 'owns' the goods but the consumer has 'possession' of them, then that relationship is characterised as one of 'bailment' or 'hire'. In the UK, if the arrangement is capable of subsisting for more than three months, that is a hire agreement regulated under the Consumer Credit Act 1974, and the business will be carrying on a regulated activity triggering a need to be FCA-authorised. As anyone will tell you, getting and being FCA-authorised is a whole new ball-game, so the business imperative has to make doing this really worthwhile.

Equally, if the consumer 'owns' the goods from day one, but makes regular payments for them afterwards, that arrangement will be categorised as the provision of credit. So, unless the business can fall within a statutory exemption, it will be a credit agreement regulated under the Consumer Credit Act 1974 and, again, absent an exemption being available, the business will need to be FCA-authorised.

In the past, there has been the 'fudge' option, of simply charging an uplifted subscription price for the services, 'giving' the goods to the consumer, and hoping for the best. However, regulators are likely to take a dim view of this (as demonstrated by action taken by Ofcom) after concerns that:

• many consumers were continuing to pay the same monthly price after the end of their minimum contract period, when the value of their handset had been 'paid off'; and
• there was a lack of transparency about the respective costs of the handset and the airtime, so customers could not tell how much they were paying for the different parts of their deal.

In fact, point of sale lenders and firms providing running-account credit for their own online catalogues, store cards or other credit lines for online purchase are coming under increased regulatory scrutiny. On 29 January 2020 the FCA published a portfolio strategy letter aimed at these firms and others operating in the retail finance space. The letter raises various concerns, including that many of these firms do not always adequately understand, or are not sufficiently focussed on, the interests of their credit customers and are poor at recognising consumer vulnerabilities and assessing affordability.

The FCA's retail finance strategy is set to cover the period to March 2021 and firms should be aware that the regulator may come knocking on their door to assess whether the CEO, other senior managers and the firm are taking reasonable steps to mitigate risk of harm and/or remedy harms that have occurred. It is clear from this letter that the FCA will not hesitate to act where consumers are being harmed as a result of firms falling below regulatory standards and expectations.

Enter the Fintechs

There are, of course, some finance providers who have not shied away from getting the necessary regulatory permissions, and others which have found ways of avoiding having to have them altogether. Some of these providers are highly innovative Fintechs, with sophisticated algorithms designed to work seamlessly within existing customer journeys. Most are offering some form of credit which 'feels' more like a subscription - see Microsoft's Xbox All Access, for example, which 'feels' like a subscription for a console and games access but is actually a revolving line of credit.

So what are the risks for an online business entering the fray and partnering with one of these finance providers? The first and most important question should always be whether or not you will be carrying on a regulated activity by 'introducing' the finance to your end-users. If the answer is yes, it may not be the end of the world. Your new partner might be willing to take responsibility for your regulatory compliance by making you its 'Appointed Representative'. If the answer is no, the situation is simpler, but make sure you do enough due diligence to get comfortable that this is the correct answer, as carrying on a regulated activity without the necessary authorisation is a criminal offence.

Next, make sure that you have a clear understanding of how the finance product works and that there is no danger of customers being misled, or nasty headlines coming out about 'millennials falling into problem debt' when they purchase your product.

Finally work out who gets the greater benefit, the finance provider, (for instance, through the acquisition of data or through finance charges) or you (through basket uplift and increased revenue). Don't pay a premium unless you have to!
 

This article is part of our Insights series:

What’s shaping the agenda for the interactive entertainment industry in 2020?

Read the series overview here, or view all games and interactive entertainment Insights here.