Diversification is the hottest topic in fintech.
In recent weeks, we've had Funding Options moving into energy comparison, Starling moving into buy-to-let lending and Revolut dipping its sizeable toe into travel booking.
But what drives these moves, and how likely are these young businesses to succeed in the unpredictable, high stakes game of diversification?
The reasons for diversifying might seem quite obvious: find a new revenue stream, differentiate from the competition, grow market share, but turning these reasons into long term sustainable success can be elusive. The corporate road is littered with diversification attempts that haven't come off. Strategic assets which everyone believed could be leveraged, didn’t prove transportable after all.
The main strategic asset that all three of our fintech businesses will be hoping to leverage will be their distribution. Each has an established database of customers and cross-selling will be the name of the game (new products to existing markets in good ol' Ansoff parlance).
The appetite of customers for the new offerings, however, is less predictable. Will businesses who choose Funding Options to help them find finance be receptive to using it to find a new energy supplier? Will customers see the step from commission free foreign exchange to travel booking being as short as Revolut does? Time will tell.
Customers don't always see the diversification logic in the same way as the business. An article in Harvard Business Review references cement manufacturer, Blue Circle, which once went on a diversification spree to leverage its brand in construction. A Blue Circle executive is quoted as saying : "Our move into lawn mowers was based on the logic that you need a lawn mower for your garden—which, after all, is next to your house.” Not surprisingly, the foray didn’t work.
Very often, diversification comes about because of opportunity rather than long term strategy and there are few more fertile places than the agile world of fintech for opportunities to be identified and seized upon. Myriad referral partnerships already exist, and some of these may evolve into mergers and acquisitions in time.
Partnerships are infinitely easier to agree than the lengthy process of acquisition yet, ironically, the absence of complexity in forming a partnership can often be its undoing. Early enthusiasm quickly fades when the floodgates fail to open and the low stakes mean the partnership is allowed to whither on the vine rather than be thrust onto life-support.
Which leads us nicely into the question of commitment. Most of these arrangements are more about being players than winners in the chosen markets. Does Funding Options want to dominate energy switching in B2B or merely get a small slice of the pie? The same can be asked of Starling and Revolut. If they are going to be winners, they will need to beat the existing players at their own game, which will likely involve considerable investment and management resource.
And so to the circle of life. As new diversifications are born, others die. In recent weeks we've had examples of diversifiers into the finance space retreating back to their core offerings. Tesco and Marks and Spencer have both announced that their current account offerings are to be withdrawn. This perhaps shows that the biggest risk of all is when a diversification starts detracting from the core business and proposition - and the biggest challenge is acting decisively when it happens.
Diversifications are brave. Diversification are entrepreneurial, but in the immortal words of Kenny Rogers, you’ve got know when to hold ‘em and know when to fold ‘em!