Shopify had a hell of a week (or should I say year?). You have probably read somewhere that Shopify is now becoming a FinTech company due to the launch of a couple of new products. But are they? A few years ago it was quite easy to identity Fintech players but the lines are getting blurry. The reason being is that more and more non-financial players are starting to offer financial services but are doing it without leaving their home turf. This is often described as “embedded finance“, where financial services get embedded into another vertical. This is likely to shake the industry up and keep banks busy for the years to come.
As you might know, Shopify provides infrastructure to e-commerce shops and is the trusted partner of thousands of e-commerce shops around the world (many small ones but even big corporates like Tesla and Google rely on some Shopify products). The company was founded in 2004, went public in 2015 and the stock price is on a crazy 200% rally in the last twelve months. But what happened last week? Shopify announced a bunch of new products. I will highlight four of them – the first two do not have a Fintech focus but the last two do:
A) Facebook Shop Integration
Facebook announced Facebook Shops that enables Facebook and Instagram Business users to create a shop inside their own social media presence. Especially in the current times, where many businesses depend on online sales but often only have a social media profile, this could be good move. This was a big announcement for Facebook, however, Shopify is just one of many partners (other partners are BigCommerce, Woo and more) and it is yet to see which partner will be able to benefit in what way. It sounds like, that businesses that have already a Shopify shop will benefit through an easy integration into Facebook Shop and can control their Facebook Shop through the Shopify plattform. If that’s the case, Shopify will likely not benefit that much from the cooperation, but also not be too afraid to lose business to Facebook (Techcrunch).
B) Shopify Fulfillment
This might be the biggest challenge of Shopify over the coming years. Shopify customers compete with the e-commerce giant Amazon. A lot of shoppers might prefer buying from a smaller Shopify-powered store but one of biggest reason why so many people keep using Amazon is the speedy delivery. Amazon has put the expectations to customers on a whole new level and is currently (nearly) without competition on that level. Shopify has announced in 2019 already its Shopify Fulfillment Network and committed 1 billion USD over five years into the product. The purpose is to predict demand, allocate inventory accordingly and route orders to the closest fulfillment center. Similar to what Amazon has built up in the last decade. Now Shopify has announced that merchants across the categories and sizes can apply for the program. Previously, only selected industries and size of merchants could test the early version which proved to be successful.
C) Shop pay installments
Shopify’s US merchant will be able to offer installment payments to their customers for purchases between 50 and 1000 USD. The consumer pays for the product in four equal installments but with zero percent interests. Furthermore, the merchant will receive the full amount immediately.
The installment payment option has received quite some attention in the recent years and many players are offering payment solution in this area – for example Fintech unicorn Klarna. Shopify described their efforts that especially in current times consumers are more interested in installment payments but Shopify wants to offer an alternative to taking on debt with high interest rates. Surely, this payment option will also increase the number of purchases for Shopify.
Shopify has not yet announced with whom they are partnering for this payment option, but rumors say it might be Affirm. Affirm is another big player in the “pay later” market and seems like a logical choice for Shopify. Additional rumors state, that Shopify also invested into Affirm which would put the partnership on a whole new level (Sources: Fintech Today Plus newsletter).
D) Shopify Balance
And now coming to the most crucial Fintech announcement by Shopify: Shopify announced their own bank account. This got a lot of attention and was taken as the main reason why people are putting Shopify into the Fintech area, however, this product launch is not a big surprise. Especially, after Shopify has said they discovered that a big part of their merchants are using a personal bank account for their online shop. Shopify Balance will be free of charge for merchants, no minimum balance is required and their shop’s revenue will be available on the account on the same days (VentureBeat). So far we do not know who will be the partner provider for offering this service, there are many rumors though. Since, Shopify and Stripe are already partnering so unlikely that they did not discuss a potential partnerships. But we will not know for sure until Shopify will eventually launch their product (there was no timeline provided by Shopify).
But does that make Shopify a Fintech player?
Shopify has clearly launched some great Fintech products that are likely to become very attractive over time (Follow Kaz on Twitter for more updates). It should be noted that these are not the first Fintech products launched by Shopify. Already in 2016, the company announced Shopify Capital – a financing product for its merchant.
I actually do not want to invest too much time into the question if Shopify is a Fintech player or not. There is no benefiting in answering this question as there are no consequence to it. However, we can be certain that we will see a lot of more companies entering the financial service space in a similar way as Shopify has done it. Not even Shopify is the first company to do so, Uber and many others have done it before.
There are a couple of reasons that these players want to offer financial products. Firstly, these companies are sitting on a lot of data and are looking for other ways to monetize it. This data enables them to offer better tailored products and likely better rates than any other player. Furthermore, a person that earns most of their money from Uber or Shopify will have various benefits of banking with them and therefore, these players can acquire these customers for a lot less money than other players. Secondly, financial service products are often beautifully sticky. Therefore, a player like Shopify is likely to keep their customers longer since changing a bank account can be quite a hassle. Changing the e-commerce infrastructure player is probably cumbersome too, and combined there are probably a lot of reasons to come into play for somebody to switch providers. Thirdly, due to the tighter relationship with their customers I assume that existing Shopify customers might do more business with Shopify than before. Having perfectly integrated financial products into their core offering will enable them to offer features that other financial service companies cannot (or don‘t want to) such as faster availability of funds, better lending rates etc. (See also Tech in Asia and Arcus for other examples on embedded finance players).
In summary, Shopify (and others) are not offering Fintech products just to please us Fintech nerds, but to improve their bottom line through increased revenue and lower churn. I am certain that we will see many more players offering such „embedded finance“ products. Currently, most of these players are in the SME / freelancer space since financial products are often tightly connecting to their core offering. But this is likely just a step, more players in other areas will follow. Expertise and functionality can be bought (see Shopify’s Fintech providers), the real asset is the access to a certain customer group and a great core offering. Likely, we will also see that these players do not stick with standard financial products such as cards and accounts, but also move (over time) further into the finance service space.
Embedded finance is here to stay. Exciting times.