Freemium 2.0: How to “Challenge the Challengers” for Consumer Loyalty by Recognizing Data as King

In the late 20th century, software companies such as IBM and AOL invented a new and effective business model called “Freemium,” in which they offer free basic products to attract users then charge them a premium for more advanced features. This model has helped fuel the growth of some of the world’s best known software products, from Dropbox to Spotify to Atlassian and even the New York Times.

For consumer banks seeking to answer competition from a growing cast of challengers―neo-banks, fintechs, and Big Tech companies alike—it may be time to put a new twist on that old idea. Many of these emerging players have found success by taking a new approach to the freemium model that prioritizes customer trust, loyalty, and data over short-term revenue. We call this approach “Freemium 2.0,” and believe that it holds the key to unlocking the next generation of customer acquisition, retention, and monetization for incumbent consumer banks and challengers alike.

What is Freemium 2.0?

An old Wall Street saying has it that “cash is king,” but across many markets today, data is king―a critical asset that can supercharge financial services companies’ cross-selling while informing product development and go-to-market strategies. And no data is more valuable to financial institutions than that which provides deep perspective on a consumer’s financial health, spending behaviors, and preferences. But with trust in institutions waning and data privacy laws giving consumers greater control over their personal information, financial institutions need to find new ways to motivate consumers to actively share their data.

This is where Freemium 2.0 comes in. The model is built around three key principles:

1. Lead with clear value: Provide the customer with something of clear value and utility for free—often something that other platforms previously offered at a premium.
2. Seek low marginal cost: Because Freemium utility is software-based, the unit economics to provide value are favorable. Once the service is built and deployed, the marginal cost to engage each additional consumer is effectively zero.
3. Drive engagement through repetition: World-class freemium services serve an important need that recurs frequently, e.g., file saving and sharing (Dropbox, Google Workspace), sending marketing emails (MailChimp, Constant Contact), and making and receiving digital payments (PayPal, Venmo).

Credit Karma (CK), one of the leading practitioners of Freemium 2.0, exemplifies these principles. The company created an online credit score tracker (an often-premium software product with high consumer utility and recurrence) and offered it for free to consumers, then leveraged the tracker to become a trusted advisor to millions of people making decisions about disability, divorce, death, family planning, new homes, and other critical issues. CK now boasts 110 million members, including 37 million who use it more than four times per month, who willingly provide it with a wealth of information about their habits, preferences, and needs—2,600 data points per member, to be precise. CK has used that information to create new products and services tailored to its customers, which have generated more than $1B in revenue and have earned CK a net promoter score (NPS) of 69, indicating that its customers are overwhelmingly happy with the company (an NPS above 50 is excellent).

It came as little surprise, then, when financial software giant Intuit—whose flagship product QuickBooks has long been a “Freemium 1.0” leader—acquired Credit Karma last year in a deal valued at $8.1B. As Intuit CEO Sasan Goodarzi noted, “Credit Karma set out to do exactly what we’re trying to do—they're just 10 years ahead of us. …What makes Credit Karma the most special is not just the scale of [their] customers…it’s their data.” Intuit has already leveraged this data to begin offering high-yield savings account and checking account products via Credit Karma, while QuickBooks recently rolled out Money by QuickBooks, a free cash management, payment, and account solution for SMBs.

In other words: Credit Karma is a case study in the value of a Freemium 2.0 model for driving exponential growth, cross-sell, and sticky, long-lasting customer relationships.