In business, the relationship between growth and profit is constant a balancing act. In the current challenging economic environment, the priority has pivoted from growth towards profit. For the foreseeable future, payment and fintech companies will need to refocus and prioritise initiatives that deliver sustainable and profitable growth. Let’s examine this in more detail.
Growth is essential for all businesses but it's easily taken for granted when confidence is high. Over the past decade, across payments and the fintech landscape, almost any evidence of growth has been rewarded. Much like the dot com era, it has been a land grab with emphasis placed on being a first mover. The predominant mindset was “growth at all costs”. Rapid customer acquisition equalled growth. Sign-ups, opened accounts, downloads and so forth, have been metrics that mattered.
Fast forward to 2021, and growth expectations soared even further in the post-COVID rebound. Investment capital flowed into the fintech sector and valuations peaked.
In 2022, we have seen an equally dramatic reversal in the market as the macroeconomic picture has worsened. A war in western Europe, an energy crisis, and underlying supply chain bottlenecks contributed to rising inflation, interest rates and ultimately a contraction in economic activity. The outlook has fundamentally changed with the fintech industry now being subjected to its first-ever recessionary environment.
Valuations have more or less collapsed, and investment capital, previously overflowing, has taken a considerable dip. Investors are no longer prepared to bet on the rising valuations of the whole sector and have instead gotten back to analysing the fundamentals of individual companies.
This long-awaited correction is likely to signal the beginning of a new phase in the development of the payment and fintech industry.
With the focus across capital markets shifting away from valuations based purely on growth prospects and pivoting to favouring companies where there is some certainty around profitability, fintech should take note that the era of reward for growth at any cost, has come to end. There is still lots of so-called ‘dry powder’ out there so investments are still being made. But Investors are now more cautious and selective.
For the foreseeable future, the ‘rising tide of the fintech market will not lift all boats. Companies will need to find their own path to sustainable profitable growth. Of course, growth becomes a major challenge in a deteriorating economic environment and coping with inflation to deliver profitable growth is especially tough.
Profitable Growth formula: Strategy and execution excellence
We continually study and observe the growth patterns of successful payment and fintech companies to understand how best to deliver sustainable profitable growth. What sets them apart is a more deliberate, systematic, and considered approach.
Overall, their growth formula combines developing the right growth strategy as well as developing the appropriate commercial capabilities to execute the strategy with excellence. Breaking the formula down further, we see 6 key components across growth strategy development and excellence in commercial execution.
Three Strategic Growth Pathways
So the first part of the growth formula is understanding the three types of strategic growth pathways that can be considered.
1. First, core business growth. Establishing a strong and optimized core business that can then support growth pathways into new areas.
2. Second, growth into adjacent areas. Organic growth pathways that focus on leveraging or stretching existing assets into new adjacent areas. These can be adjacent geographic markets or adjacent product areas and offerings. Adjacent growth is common across financial services and especially in the payments and fintech industries. Think about super apps like WeChatPay and challenger banks such as Revolut. These success stories are based on adding an ecosystem of new service offerings around a strong core.
3. Third, ‘transformational growth’ into entirely new areas. A growth pathway that focuses on ‘new-business building’ is often achieved through M&A activity, but increasingly through strategic partnerships too. Again, increasingly common in payments and fintech. Take the emerging area of embedded finance as an example. Companies like Shopify and Grab have collaborated with new partners such as payment provider Stripe to build entirely new payments and fintech businesses. Booking has developed a new fintech division with various new partners. In all cases ‘new-business building’ of this kind has delivered totally transformational growth above and beyond the core business of the company.
Achieving Excellence In Commercial Execution
The second part of the growth formula is understanding the three keys to achieve excellence in commercial execution.
1. First, functional capabilities for commercial execution. Execution is impossible without the right functional capabilities - especially on the commercial side. So strategic ambition must be supported by appropriate execution capabilities. You should ask yourself how appropriate your capabilities are to support the growth strategy and initiatives identified in the previous step. A good thing to do is to compare and benchmark your capabilities with peers and better still with recognized leaders in other industries. How do they stack up? Do you have the right level of experience and skill sets? Capability gaps can be addressed through coaching, more formalised training or through external talent acquisition. It goes without saying that we need to build a strong foundation layer of data and analytics. It can come from internal sources like the CRM or MIS data from transaction processing or other internal
2. Second, organization and operating model. You need to think about how best to organise and allocate resources internally. There are various common growth team models. The most frequent model is the cross-functional team with the autonomy to rapidly build, experiment and test ideas with customers. Depending on the success of the initial programme, the team can turn into a permanent team.
3. Third, mindset and commitment to growth. None of the above can really be achieved without a strong growth-oriented company culture and management mindset. This really is the foundation layer for everything else to be built on. Successful growth leaders live and breathe growth. They’ll typically have a clear and concise growth story that everyone in the company - from top to bottom - is aware of and understands. Full alignment and equal commitment to growth across the top team is of course essential too. ‘Customer centricity’ is another cultural orientation that growth companies also share. It is easy to pay lip service to understand your customer to identify their needs, pain points and so forth, but growth companies choose to go much further and place a deep understanding of their customers at the heart of every business decision they make. The culture is outward-looking, and decisions are made from the outside in, rather than from the inside out.
Value Creation Plan To Identify Low Hanging Fruit
Achieving sustainable profitable growth is always challenging, and with economic conditions as they are, it’s getting tougher. Our experience suggests a critical success factor includes a deliberate, systematic, and considered approach including building confidence from the outset with some form of diligence process over a reasonably short period to identify growth opportunities and value creation levers. This then becomes the basis for a clear value creation plan and roadmap.
It starts with an opportunity type scan to firstly identify and size the adjacent and transformational growth areas and secondly identify specific areas to optimize and drive core business growth. Ideally, they can do a systematic review of commercial execution capabilities.
There will almost certainly be quick wins or low-hanging fruit to immediately work on. Typically, in our experience, the most compelling quick wins are to be found in monetization and pricing decisions. From there other value-creation levers can be checked across marketing, sales, and distribution capabilities.
The process goes on to quantify the impact of each value creation lever identified in terms of revenue and margin improvement and assess the ease of implementation.
Finally, we develop a prioritisation roadmap which forms the basis of a clear value creation plan.
Building Confidence To Go For Growth
As the relationship between growth and profit continues to shift in the current macroeconomic environment, payment and fintech companies need to develop a more deliberate, systematic, and considered approach towards delivering sustainable profitable growth.
It requires a growth-focused mindset and goal-orientated commitment to growth across top management.
One of the best ways to achieve this is to build confidence through a short diligence process to identify opportunities
The output of this is a value creation plan and roadmap to define strategy and target priority commercial capabilities needed to support excellence in commercial execution.