Shopify and embedded fintech stack

Hardik Tiwari
Published in
7 min readSep 15, 2020


A lot has been written about Shopify’s potential as an Amazon alternate. Ben Thompson’s post on Shopify as a platform does a great job of justifying the growing value of Shopify in the commerce ecosystem. It is Shopify and not Walmart/Best Buy that is Amazon’s closest alternative and by far the easiest way for a seller to start selling online- more than 1,000,000 stores are already selling through Shopify.

Only Amazon takes in more money online than Shopify’s sites, which aggregately brought in more than $60 billion in 2019

However, Shopify is not building just e-commerce software. It is empowering the online sellers (or as Shopify terms it “arming the rebels”) with all the resources that they need to run their business. Shopify has launched a fulfillment network- providing sellers a highly optimized fulfillment infrastructure on demand, Shopify Shipping to help merchants ship faster, partnered with Facebook, and Google to power merchant stores on these social platforms. But Shopify’s biggest bet and its future revenues are positioned around offering fintech products to SMBs. Over the last 2 years, Shopify has embedded multiple products that serve the financial needs of SMB customers.

Investors have talked about the embedded finance opportunity- SaaS and consumer product companies embedding financial products in their existing products. Andreessen Horowitz and Bain Capital Ventures have insightful reads on the concept. Companies such as Uber, with the launch of their debit card, Grab with GrabPay, and Amazon with Amazon Pay have already piloted embedded finance products.

Financial functionality is becoming a native component of the stack (both technology stack and as a business model), which means there’s a growing opportunity for embedded fintech rather than pure fintech. In other words, we’re turning our attention to investing in companies that use financial technology as an ingredient versus a primary business model.

Shopify’s Fintech Stack

Shopify’s fintech stack includes the following products :

  1. Shopify Pay — This is Shopify’s checkout button for online stores. It offers an accelerated checkout option for customers by allowing customers to save credit card information, along with other data. Shop Pay is remarkably similar to Amazon Pay and Apple Pay. Sellers can enable Shop Pay just like you would any other options for third-party providers on your Shopify website.
  2. Shop Pay Installments — More recently, Shopify integrated Pay with Affirm to offer Pay later option at check out, which will let merchants offer their customers more payment choice and flexibility at checkout, helping merchants boost sales through increased cart size and higher conversion.
  3. Shopify Balance — gives merchants access to critical financial products to start, run, and grow their business, including the Shopify Balance Account, Shopify Balance Card, and rewards such as cashback and discounts on everyday business spending like shipping and marketing. The key hook is that as soon as a customer has paid on the e-commerce store a merchant would have that cash available immediately. This will be instant and without fees, unlike most business bank accounts that take days and charge fees.
  4. Shopify Capital — Providing loans ranging from $200 to $1 million to merchants. Shopify has already distributed over $1 Billion in loans. Since Shopify has access to all the sales (and subsequently CashFlow) data, their risk underwriting can be more accurate than traditional banking

Why is it valuable to Merchants?

By integrating merchant focussed fintech products (Balance + Capital) into the Shopify platform, Shopify solves the most critical problem that small businesses run into — managing CashFlows. Typically, it takes 3–4 days to receive money into an external bank account, once a transaction is processed on Shopify (or on any online store). However, through Shopify Balance + Payments combination, merchants on Shopify can receive their funds the same day as the transaction happens.

Secondly, through Capital, Shopify ensures that merchants can easily borrow funds they need for growth. Traditionally, merchants would either go to their bank to access a credit or to digtal lenders such as Kabbage to meet capital needs. Since Shopify has all the sales data of merchants, it can better predict the risk in providing loans to a merchant than traditional or digital lenders. Also, this underwriting is almost instantaneous since Shopify already has the required data. Thus making it easier for merchants to access capital and much safer for Shopify to lend.

Why is this incredibly valuable for Shopify?

Flywheel effects

Flywheel effects are simple reinforcing loops that build momentum, increasing the payoff of incremental effort. For businesses, it means building a set of interconnected products that improve the value of all connected products as one or multiple products grow. Shopify thinks about its core business as a flywheel. The illustration from Shopify’s Q4 investor deck defines Shopify’s flywheel model. As more merchants onboard, the Gross Merchandise Volume (GMV) generated through Shopify increases and more partners onboard on Shopify. With more partners, Shopify keeps improving as a platform and attracts more merchants.

Through its fintech products, Shopify is essentially accelerating the flywheel. Through better access to capital(through balance and capital), Shopify attracts more merchants to its platforms. Through Shop Pay installments, it incentivizes customers to buy more, increasing GMV per customer. All this creates higher value for merchants and reinforces Shopify as the best platform to set up an e-commerce business.

Always increasing ARPUs

Shopify’s initial revenue model was purely SaaS-based, i.e., charge a monthly recurring fee to merchants. This essentially meant that there were only 2 ways to grow — a. Get more merchants on Shopify, which is limited by the number of sellers that want to sell online b. Upgrading merchants to higher tier offerings, which is also limited to a $299/month ceiling.

However, over years, Shopify has added pay per use component to its revenue model — under merchant solutions. These are services, including fintech services- payments, balance, etc., for which Shopify charges merchants based on the number of transactions. Thus essentially linking Shopify’s revenue to the GMV sold through the Shopify platform. Thus, adding another revenue growth lever that is tied to the revenue growth of its merchants. Thus as merchants scale their operations, Shopify also increases its revenue from each merchant almost linearly, even if it doesn’t add new merchants or upgrades them to higher tiers.

In their latest quarter (Q1 2020), Shopify had revenues of $470 Mn. Subscription services accounted for 40% ($187.6 Mn) in revenue, while merchant services accounted for 60% of revenue;

Increased merchant stickiness

Since Shopify is the platform that merchants start (and run) their entire business on, it is easier for Shopify to retain customers across all its products. It has evolved as a platform to become the operating system for eCommerce SMBs.

If Shopify only offered e-commerce software, a retailer might choose to switch vendors if the price is right. But the retailer is also getting a $10,000 loan through Shopify and would not shift to better or lower-cost vendors. But with Shopify integrated into multiple aspects of a sellers business, the cost of migration is just too high.

Shopify is no more just an eCommerce tool to set up your website but the platform to run your business operations

Shopify’s Distribution Advantage

Shopify already has over a million sellers. It is the first platform that businesses go to when they think of selling online. All other operations that are required to run a business- come later, such as setting up logistics, receiving payments, creating invoices, getting loans. And these are the areas Shopify has been moving into. This greatly reduces the cost of acquisition for any new fintech product that Shopify launches. While traditional fintech players have to compete for acquisition, any Shopify product that is launched has access to millions of sellers on day one.

In summary, Shopify has been able to create a stronger value proposition for its merchants to use Shopify’s financial products than the other fintech alternatives (and maybe the banks as well). It already has a distribution and data advantage over existing fintech players and traditional financial platforms. With the commoditization of fintech products, the moat is shifting in the distribution capability. With this, a lot of other verticalized SaaS providers may begin to offer financial products to their customers. Likely, we will also see that these players do not only stick with standard financial products such as cards and accounts but also move (over time) further into the financial service space.

Embedded finance is here to grow.