How to Scale a Startup by Diversifying Products

Fintech may be changing the lending industry, but the obstacles fintech founders face when introducing initial products to the market cause the vast majority of new startups to fail before they even get started. For the lucky few that do make it, growth, and scaling may provide opportunities to broaden their product offerings. However, these companies must tackle a crucial question: how to move past that first product.

Though the question seems straightforward, it can be difficult to address, particularly for fintech companies. 

The distinguishing factor between a good and a great fintech company lies in its ability to expand beyond its initial product. In this post, we’ll use real-world companies as case studies to better understand how and how not to expand your product offering. The focus below will be on B2C companies, but the insights presented are also relevant to B2B companies as well.

Product or Market: Where to Focus?

Every fintech company begins with a focus on either a specific use case or a customer segment. Product-oriented startups address a use case for the entire market, while market-focused startups concentrate on a distinct consumer group.

Let’s take a quick look at a couple of examples of each:

Product-focused:

• Lending Club: credit card refinancing loans
• Robinhood: commission-free trading

Market-focused:

• SoFi: student loan refinancing for super-prime clients
• Square: easy payment solutions for small businesses

A company’s classification depends on whether it targets a broad range of customers or a specific segment within a larger potential market.

This distinction is subtle. For instance, SoFi addressed the student loan use case but concentrated on super-prime clients only. Similarly, Robinhood’s trading app caters to specifically Millennial and Gen Z users.

However, both types of companies eventually diversify into multiple products following their initial success. These new products are typically not “innovative” but rather enhance “monetization” through established financial products.

Scaling these products via cross-selling is usually quite challenging, with only a few companies achieving success. We’ll examine this further using examples from the lending, payments, and neobanks sectors.

Why Startups Should Expand Their Offerings

Before we look at some case studies, let’s spend some time discussing the benefits to startups of offering more products. There are a few key reasons to start building that next product:

1. Diversification: Expanding product offerings allows startups to diversify their revenue streams, reducing reliance on a single product and mitigating risks associated with market fluctuations or changing consumer preferences.
2. Customer Retention: By offering a wider range of products, startups can better meet the evolving needs of their existing customers, increasing customer satisfaction and loyalty, and reducing churn rates.
3. Market Penetration: Introducing new products can help startups reach new customer segments or enter untapped markets, increasing their overall market share and positioning them for long-term growth.
4. Competitive Advantage: Expanding product offerings can give startups a competitive edge over their rivals, particularly if they can innovate and develop products that are unique, superior, or more cost-effective than those offered by competitors.
5. Economies of Scale: As startups grow their product line, they may be able to achieve economies of scale in areas such as production, marketing, and distribution. This can lead to cost savings and increased efficiency, ultimately improving the company’s bottom line.

As with any potential benefit in life, these work well on paper but don’t always play out with every new product introduction. Below, we’ll look at the companies mentioned above, as well as neobanks broadly, as case studies of the good, the bad, and the ugly of product expansion.  

Lending Club

Lending Club’s initial product, a loan for refinancing credit cards, had everything going for it: a vast market ($1T in outstanding card balances), technological advantages, and a unique business model. Traditional banks either didn’t provide personal loan products or offered them sparingly. As a result, Lending Club entered the market and scaled its personal loan product to millions of customers within a few years. They later ventured into auto loan refinancing.

One might assume that, with a relationship established with millions of personal loan customers, auto loan refinancing would be a natural next step. However, the fintech market doesn’t function that way.

Auto loans are secured by vehicles, so banks willingly provide these loans at competitive rates due to the collateral. Banks and credit unions account for 82% of auto loan originations. In contrast, personal loans are unsecured, causing banks and credit unions to be more cautious and less likely to offer them widely.

Lending Club couldn’t compete in the auto loan refinancing market for most of its customers. The refinancing market available to them was the small, high-risk segment that banks avoid. Lending Club’s expertise in one product area didn’t seamlessly translate to another product. Ultimately, this was insufficient to warrant the new product offering.

This analysis can be applied to any potential new product. The varying dynamics for each product constrain growth during product expansion. As the overall dynamic changes for each financial product, the market efficiently adapts to the new offering. This adaptation makes it challenging for fintech companies to scale multiple products.

SoFi

SoFi entered the market in 2011, providing student loan refinancing for super-prime customers with stable high-income jobs, high FICO scores, strong cash flow, and significant student debt. Over time, they introduced personal loans, mortgages, and other products, while student loan refinancing remained their core business.

When SoFi launched its mortgage product, it underestimated the competition, resulting in a rough journey. The mortgage market dynamics placed SoFi in direct competition with banks and other mortgage providers like Quicken Loans, who had lower capital costs and established advantages. SoFi couldn’t provide substantially better mortgages than the market, making it nearly impossible to compete.

To become competitive, SoFi shifted strategies and offered low down payments (only 5%-10% down) as an incentive. The company saw moderate success with personal loans, providing loans in areas where banks didn’t compete, which allowed them to capture high-value customers from other lenders. As part of their ongoing expansion, SoFi now offers bank accounts and acquired B2B payment processing company Galileo for $1.2B.

Affirm

Established in 2021, Affirm is a point-of-sale lender providing installment loans to consumers. However, like SoFi and Lending Club, the company has faced difficulties in achieving success with any other product.

Affirm has introduced a personal finance management app, loans through a dedicated app, and an online bank account, but none of these offerings have gained traction. Affirm encounters the same challenges as the other companies mentioned, as the acquisition and underwriting advantages that worked for its installment loan product haven’t translated to success in expanding into other products.

For example, to be truly competitive, the online bank account would require at least a technological advantage, and perhaps others as well. Affirm doesn’t inherently possess that advantage within its core product or business, so it’s up to the company to develop these advantages for the online bank account to succeed.

Stripe & Square

Now, let’s examine a couple of companies that have successfully expanded their product offerings. Stripe and Square stand out as rare examples of payment companies that have effectively introduced lending products.

Both companies have developed products aimed at assisting small and medium-sized businesses (SMBs) and online businesses in better managing their finances. For instance, Stripe is launching Banking-as-a-Service (BaaS) products, card issuing products, and numerous new verticals that differ from their core payment platform’s extensions. Conversely, Square had to introduce an entirely new app to expand into the B2C vertical. Although Cash App has been tremendously successful, it is in no way an extension of their existing B2B products.

The success of these companies can be attributed to their inherent advantages. Due to their positions within the ecosystem, they have been able to offer multiple products and gradually grow them.

Neobanks

Neobanks are among the most consumer-oriented products in the fintech sector. They are essential, with high engagement and retention rates. However, as they attempt to expand their product offerings, many neobanks may encounter challenges.

Much like Lending Club’s experience with auto loans, neobanks venturing into personal loans will face competition from established players in the lending market. They may achieve some success with personal loans and credit cards, but scaling most lending products could prove difficult.

This situation can be analyzed using Porter’s Five Forces framework: 

• new entrants
• Substitutes
• existing competitors
• supplier bargaining power
• buyer bargaining power

In fintech, a similar dynamic exists, encompassing multiple dimensions such as regulations, go-to-market strategies, business models, and more.

Putting It All Together

The truth about expanding product offerings is that the success and scale of the first product do not guarantee leverage for subsequent ones. Each new product must contend with different market dynamics, including new and existing competitors and substitutes.

Typically, the unique business models that work for the initial product do not transfer well to more traditional products, reducing the competitive edge for fintech companies. Consider the following example:

Product A targets a smaller market but is highly differentiated, resulting in no competition and minimal marketing needs. In contrast, Product B, which targets a larger market but is less differentiated, faces more competition and requires a greater marketing budget.

As demonstrated in these examples, as the market dynamics for a new product shift, the company may not be able to replicate its initial success. A single product’s traction cannot be assumed to apply to multiple financial products.

The company’s DNA also plays a crucial role. For instance, startups skilled in acquiring banking customers may struggle in the highly efficient lending market.

Founders should bear these factors in mind as they aim to expand their product offerings. There is a reason only a select few startups and companies successfully launch additional products.

Frank Gogol

A seasoned SEO expert, Frank has a long history of working with and for startups. Starting in mid-2018, Frank served as the SEO Strategist for Stilt, a fintech startup that provided fair loans for immigrants in the US and other underserved markets. While with the company, he scaled site traffic from zero to more than 1.5 million unique visits per month, driving the bulk of the company’s lead generation until it was acquired by J.G. Wentworth in December 2022. As employee #5 at Stilt, Frank was witness to, and part of, the successful building and sale of a fintech company, uniquely positioning him to create content for founders about all things startups.

See author's posts