The product expansion conundrum for fintech startups

It is difficult to start a fintech company. But it's even more difficult to scale and offer multiple products. In this post, I discuss the dynamics and frameworks for product expansion in fintech.

All companies struggle with one question - how to expand beyond the first product.

It’s a simple question on the surface but a challenging one to answer - especially for fintech companies. I am focusing on B2C fintech companies but this equally applies to B2B. The difference between a good fintech company and a great one lies in how they expand beyond their first product.

All fintech companies start with a focus on either a use case or a consumer segment. The product-focused startups solve a use case for everyone in the market while consumer segment startups go deep on a consumer segment (within certain parameters.)

Below are a few examples:

Use case focused:
Lending Club - loans to refinance credit cards
Affirm - loans for online point of sale
Stripe - payments for online businesses
Robinhood - commission free trades

Market focused:
Kabbage - loans for small businesses who are not approved by banks
SoFi - student loan refinancing for super-prime customers
Square - simple payments for small businesses
Earnin - cash advances for paycheck to paycheck workers

The categorization depends on whether the company is initially targeting customers across the spectrum or just one segment of a larger potential market. It’s a soft distinction. For e.g. SoFi had a student loan use case but focused on only super-prime customers. Robinhood can also be categorized as a trading app for the younger generation.

But both types of companies inevitably expand into multiple products after their initial success. Generally, these new products are not “innovative”. They improve “monetization” with proven financial products. In most cases, it is extremely difficult to scale this product cross-selling. Only a few companies have been successful in doing so.

Let’s explore this with a few examples in lending, payments, and neobanks:

#1 Lending Club:
Lending Club’s first product was a “loan for refinancing credit cards.” They had all the right elements - a huge market ($1T in outstanding card balances), technology advantage, and a new business model. Banks either didn’t offer personal loans or did not want to offer them. So, Lending Club moved in and scaled personal loans to millions of customers in a few years. Then they started offering auto loan refinancing.

In theory, if you have a relationship with millions of customers for a personal loan, you can also refinance their auto loans. Right? Unfortunately, the market doesn’t work that way in fintech.

Below is an exhibit of Lending Club’s total originations by category (Source).

The “Other” category still contributes only 5% - 10% of the overall origination volume. This category is auto loan refinancing.

Why are auto loans still not contributing material origination volume?
The problem is that the market dynamic for auto loans completely changes and the advantages of personal loans don’t apply anymore.

Because auto loans are secured by a car, banks are happy to offer these loans at competitive rates. Banks and credit unions originate 82% of auto loans. This is different from personal loans because banks/credit unions don’t like to originate these loans (even to their existing customers).

Lending Club couldn’t be competitive with refinancing for most of its customers. They could potentially refinance only for a small high-risk segment that banks don’t want to touch. But that’s not big enough.

Lending Club’s strength on one product did not fundamentally transfer to a new product. We can do this exercise for each potential new product.

This different dynamic for each product limits growth for product expansion.

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 SoFi:
SoFi started in 2011 by offering student loan refinancing to the super-prime customers. Their target segment had a stable job, high income, high FICO, good cash flow, and a lot of student debt. They added personal loans, mortgages, and other products over time. But student loan refinancing is still their bread and butter.

As SoFi pushed into mortgages, they underestimated the competition. The ride hasn’t been as smooth. The dynamic of the mortgage market brought in competition from banks and other mortgage players like Quicken loans (who have a lower cost of capital and established advantages for this product). And it was difficult to compete because SoFi couldn’t offer materially better mortgages than the market.

Eventually, SoFi offered a really low downpayment as the hook (only 5%-10% down). They were also mildly successful with personal loans where banks didn’t compete and they could steal the cream of the crop from other lenders. In a bid to expand, SoFi is now offering bank accounts and also bought Galileo, a B2B payment processing company for $1.2B. It remains to be seen how well they do here.

#3 Affirm is another example - they have been really successful as a point of sale lender but haven’t found success in any other product. They tried a personal finance management app, loans through a captive app, and still trying an online bank account. None of these products took off. The core acquisition and underwriting advantages haven’t translated into expansion into other products.

#4 Robinhood is an $11.7B+ company that started with commission-free trades. They are known for great design, ease of use, and zero cost trades. Recently, they expanded into offering a cash account. I think the cash account hasn’t seen much traction. By that I mean people are not depositing paychecks or using their card. I don’t have numbers to prove this but I have not seen or heard anyone using their debit card. I suspect it will not be tricky to gain traction even moving forward.

#5 Kabbage successfully scaled their lending product but never found success with anything else. They eventually sold for American Express (because of COVID-19).

#6 Stripe/Square: Payments companies such as Stripe and Square have been an exception where they were able to successfully offer lending 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.

Stripe is launching BaaS products, card issuing products, and many new verticals that are different than extensions of their payment platform.

Square had to launch a completely new app to grow into B2C vertical. Cash App has been a runaway success but in no way it was an extension of their existing B2B products.

#7 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.

We can also think about this dynamic in terms of Porter’s Five Forces:

• New entrants

• Alternatives

• Existing competitors

• Bargaining power of suppliers

• Bargaining power of buyers

In fintech, we can think of a similar dynamic with a lot of dimensions including regulations, go to market, business model, etc.

Every new product has to compete in a different market dynamic. There are new competitors, existing competitors, and substitutes for every product expansion. The scale and success of the first product don’t provide leverage for the next one.

Generally, unique business models for the first product also don’t carry over to more traditional products, which lowers the advantage for fintech companies.

Here’s a bad version of my radar chart explaining this dynamic with just 4 dimensions:
- Product A has a smaller target market but it is highly differentiated, so the company faces no competition and requires little to no marketing
- When the company expands to Product B (that is not as differentiated) but it has a bigger market size - it means a lot of competition and a larger marketing spend (higher marketing spend also be thought of how unique go-to-market is)

As we saw with multiple fintech companies, as the market dynamic for a new product changes, it may not replicate initial success. We can’t extrapolate traction with one product across multiple financial products.

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.

I will follow up with another post next week on how can companies think about product expansion.

Always happy to discuss more. Please subscribe if you liked it and would like to receive future essays.

Thanks to Mengxi, Aaron, Lindsay, and Chapman for providing feedback on this essay.