Fintechs are going to Struggle
All companies struggle with one question — how to expand beyond the first product.
Answering this question is difficult, especially for fintech companies. This article is particularly focused on B2C fintech companies, but it applies equally to B2B. The differentiation between a good fintech company and a great one lies in the way they expand beyond their first product.
Each fintech startup starts with either a product-based approach or a user-focused approach. Product-based startups focus on addressing a consumer-centric value proposition as a whole, while customer-focused startups specialize in the consumer market.
Use case focused:
Piggyvest —Free Savings for everyone
Kuda —Free Online Banking
Paystack — Payments for businesses
Bamboo — Trade the Financial Market
Market focused:
Brass —Current account for fast-growing businesses in Nigeria
Abeg — P2P Payments for GenZ
Risevest — Investments for Busy Professionals
The distinction depends on whether the company is initially targeted at consumers across the spectrum or just one segment of a large potential market. It’s a soft distinction. For e.g. Abeg has a P2P use case but focuses on only Gen Z customers. Risevest can also be categorized as a trading app for Busy Professionals.
After their initial success, both kinds of companies eventually expand into multiple product lines. These new products were not quite “innovative”. They simply enhanced “monetization” while leveraging existing financial products. In most cases, it was extremely problematic to scale this product cross-selling. Only a few companies were fortunate to do so.
Cross-selling into a large customer base is a fundamental strategy for the expansion of the company’s footprint, it’s the way to conquer the world.
I used to be a firm believer in this strategy, every financial services company is a strong believer in this strategy. But does it work? I’m not sure anymore.
In order to construct my argument, I’d like to first consider types of purchases — impulse purchases, and considered purchases. As the label suggests, we don’t spend too much time thinking about impulse purchases, but we do spend a lot of time thinking about considered purchases.
Any financial product is not an impulse purchase. We don’t get a loan on impulse, we don’t buy investment products in an investment account on a whim — financial products are an exemplar of a thought-out purchase.
(in no particular order) The following is the foundation of the cross sell strategy:
- Customers are naturally inept about trying something new. The known(your company) is more attractive than the unknown (your competition)
- Since the financial products set is complex (financial products), customers like to know whom to trust. Since you already have a relationship with the customer for a product, they will seek you out to advise them on other products.
- People prefer to go to just one place for all their needs, thus reducing choice is good.
This seems logical and convincing, isn’t it? Cross-selling in business is a sound strategy.
What makes me doubt this?
There are two developments that are in my opinion that twist these assumptions on their head. The first is the trend of the Internet (mostly google) reducing search costs to nearly zero.
Since financial services are almost always seen as purchases, customers can easily overcome their initial inertia to find products that address their needs. Although we diagnosed the result correctly, we misunderstood the cause. We assumed that the customer had inertia but it was actually pre-google that searching took a great deal of time and effort.
Secondly, Since the advent of mobile phones and web-based software, consumers have grown comfortable dealing with multiple applications.
Since phones and browsers have become primary interfaces, we can thereby easily use multiple apps/webapps. Internet-native companies are equally adept at solving a niche very well, and have trained customers to use multiple apps/webapps. A lot of high-end niche apps/webapps from many different companies are used by the customer to solve his various needs.
This means that the underlying assumptions that a customer won’t look for alternatives and prefers to use a single piece of software for all their needs no longer apply.
And here is the primary justification why I feel I’m off the cross-sell train. For a considered acquisition where the search expense to discover alternatives is low, every product in your product set needs to be the finest product ever for that consumer need! And in addition, it has to be a fully vertically integrated product.
You can’t just have a banking product, a budgeting product, and an loans product. You have the best banking product, the best budgeting product, and the best loans product and they all have to work seamlessly together!
How many companies do you know that can achieve that? It’s difficult enough to get one product right, getting various products right at the same level is enormously hard! Having flawless performance on one product is tough enough, doing that on numerous products is exponentially hard. I don’t believe this strategy is executable!
Alright, you say developing best in class products for the entire vertical is hard, what about partnerships? Why not partner with companies who are great at the individual items to create a complete suite of best in class products that you can then cross sell? There are two critical problems with this approach.
Firstly, with partnerships, who controls the user becomes a tremendous point of friction. More time is squandered on structuring the agreement in a way that both partners feel a bit less bad than actually making a great integrated product for the customer.
Secondly, to create a seamless integrated bundle , several roadmaps across various companies have to align and execute. Getting alignment in a single company is hard, imagine doing that across multiple companies, each of which have their own priorities to grapple with.
The seamless bundle never comes to fruition. You end up getting a patch work of products that don’t come across a bundle to the end customer.
Let’s investigate this with a few instances in lending, payments, and neobanks:
#1 Carbon:
Carbon’s first product was a “ providing credit to Nigerian consumers.” They had all the right elements — a huge market , technology advantage, and a new business model. Banks either didn’t offer personal loans or did not want to offer them. So, Carbon moved in and scaled personal loans to millions of customers in a few years. Then they started offering payments, investments and personal finance management.
In theory, if you have a relationship with millions of customers for a personal loan, you can also help with their payments, investments and personal finance management. Right? Unfortunately, the market doesn’t work that way in fintech.
They tried a personal finance management app, still trying an online bank account. None of these products have taken off. The core acquisition and underwriting advantages haven’t translated into expansion into other products.
The overall dynamic changes for each financial product and the market is fairly efficient in offering that new product. This shift makes it difficult for fintech companies to scale multiple products.
#2 Paystack/Flutterwave: Payments companies such as Paystack and Flutterwave have been an exception where they were able to successfully offer other products. Because of where they sit in the ecosystem, they were able to offer multiple products and grow them slowly. Both companies have launched a ton of products to help SMBs and online businesses manage their financial lives better.
Flutterwave had to launch a completely new app to grow into B2C vertical. Barter has been a runaway success but in no way it was an extension of their existing B2B products.
#3 Renmoney successfully scaled their lending product but never found success with anything else.
#4 Neobanks:
Neobanks are the closest to a real consumer product in fintech. Everyone needs it, it has high engagement and retention. But I think many neobanks will also face challenges as they expand product offerings.
As they start offering loans, neobanks will face competition with established players for lending products. They may find success with maybe personal loans and credit cards but most lending products won’t be easy to scale.
The DNA of the company is also crucial, e.g. startups that are really good at acquiring banking customers may face challenges in a ruthlessly efficient lending market.
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