Protocol | Fintech

Shopify wishes it didn’t have to be a bank. It didn’t have a choice.

Merchant loans, payments and other services have helped the online storefront provider grow explosively and compete with Amazon's vast, centralized marketplace.

Phone with Shopify app on screen

Shopify's merchant services include a host of financial options, including payments and lending.

Photo: Shopify

The pandemic supercharged Amazon's ecommerce machine — but the same phenomenon strengthened a rising rival, Shopify, which takes a very different approach to selling online.

The company positions itself as a counterpoint to Amazon by enabling smaller merchants to create their own stores and develop their own relationships with customers.

Financial services have become a big part of the company's business. By providing payment processing, point of sale systems and loans, Shopify is seeking to provide everything a small business owner needs to operate a business online. The goal is to become an all-in-one business dashboard for these merchants.

Shopify had revenue of $988.6 million in the first quarter, up 110% year-over-year. Its gross payments volume, a measure of gross merchandise volume processed in-house through Shopify Payments, was $17.3 billion in the first quarter, or 46% of GMV processed, up from 42% in the same period a year ago.

Merchant solutions revenue, which makes up the majority of Shopify's business and includes Shopify Payments, Shopify Shipping and Shopify Capital, grew 137% to $668 million in the first quarter.

We spoke with Kaz Nejatian, vice president of product for merchant services at Shopify, who manages about half of the Shopify product team, including banking services, billing, payments, taxes and foreign exchange.

This interview has been lightly edited for clarity.

How do you decide which fintech products to build yourself versus work with a partner?

This is the meta question we always ask. We care about the merchant experience and the merchant pain. And if we can solve it while partnering, we will. So the product we use is called Shopify Payments. We actually co-built that product with Stripe, it didn't exist before Shopify and Stripe built it together.

So we think something similar is true for our banking products. We have partners in the space, we have Stripe and a bunch of banks underneath them. So yes, we're partnering, but we're literally building that from the ground up.

We don't want to be In the finance space, it's just that banks refuse to deal with our merchants. If I could find banks that will serve our merchants, we'd get out of the business really fast. The problem is the institutional banking system is stacked against merchants.

How so?

We think the banking system is inherently unfair to small merchants, and especially unfair to small merchants who don't come from prestigious schools in big cities. The banking system probably works fine if your name is Mike. But it does not work fine if your name is Muhammad.

Shopify loaned $308.6 million in the first quarter, up from $162.4 million a year ago. Why has Shopify Capital become such a big part of your business?

When the pandemic hit, literally every single bank and online lender withdrew money and said, "Nope, we're not doing loans." That same day Shopify said, "We're doubling down, we're putting a couple hundred million more into the system today." The reason for that is we don't view our Capital business as a cash cow designed to make money off lending.

We view it as a way of making our merchants successful. If our merchants are successful, we're successful in the long run. So our time horizon on payback is different.

So the second thing is, we fund our merchants from $200 up to $1 million. One of our merchants, a T-shirt company [called] Cuts Clothing, has used Shopify Capital 10 times. We've funded them with $2,000, then tens of thousands of dollars, then hundreds of thousands of dollars. They got a $1 million round from us in 2020. These guys would have been laughed out of a bank.

We think of it as a runway extension model for our merchants to help them grow. And we don't look at things [that] banks look at, [like] business plans or credit scores or personal guarantees. We look at millions of data points on the Shopify platform to underwrite each merchant.

Merchants don't need to provide data?

The way Shopify Capital works is that we just underwrite you based on the data already in Shopify. We don't ask for any information. There's no application process. We predict what will happen with extra capital for the business. And if the business is better off with extra capital, we make an offer.

So the types of companies you would want to find would be different from competitors?

Yes, the majority of the reason we're in this business is because banks would reject our merchants over and over again. We have so many stories of minority entrepreneurs who've been rejected by a bank and then see, "Oh, I have an offer from Shopify!" Because merchants know they're ready to grow — and we know. And banks don't.

What's Shopify's goal in terms of payments?

There's just over 700 payment processors for Shopify. Shopify has been accepting cryptocurrency since 2014 — one of the first places to do it. Our general strategy here is we want our merchants to be able to sell to customers with their preferred payment method whenever possible. So we have our own Shopify Payments product, which is a credit card processor. We have Shop Pay, which is the highest converting payment wallet on the internet. We've shared that the Shop [app] now has tens of millions of users.

The single largest problem for our merchants today is usually from the parts of the world where payments on the internet are broken. This is why we invest so much of our time thinking about how we can expand payment processing options for our merchants.

So we have Shop Pay, which I think is the best payment on mobile. And we also have bank payments on Shopify, we allow alternative methods like installments, we have local pay methods in dozens of countries. And we're always working on adding more options into the system.

Why have your own app?

We think of Shop as a shopping destination that allows our merchants to establish deep relationships with their buyers. And the meta effect of Shop is that the future of commerce must be decentralized and led by brands, and not centralized and basic.

Like Amazon?

Look, I think centralized marketplaces have a place, but it's not a great thing for the world where brands can't build a relationship with the consumer, right?

And what centralized marketplaces have done is they've promoted a consumerist vision of the world where you can buy everything. But none of it has any value. None of it has any story behind it. And that's just not great for the world.

How many people are actually paying Shopify with crypto?

It's not high right now. It is some, it's not nothing. What we think is super interesting is the way crypto helps trust between merchants and buyers. And that's what we're working on. Think about provable ownership — how a merchant can transfer to a buyer a proof of ownership and authenticity. Like, this is internet-native, authentic ownership that allows creators to put their name on a tangible thing. And we think that's super interesting.

When you buy a T-shirt from Cuts, you want people to know it's from Cuts. It's an ethically-made, comfortable T-shirt made by a brand you respect. We think cryptocurrencies are a super interesting way to prove ownership. And that's something that shakes the foundations of "big is good."

What's the goal with your point of sale system?

The all new point of sale is available in the U.S. and Canada; we've launched in the U.K. and Ireland. It's not just a point of sale system. What it's designed to do is turn what would have been cashiers into salespeople, and to extend the relationship. So Allbirds, a Shopify merchant — when you buy something online and you can pick it up in store. If you live in New York, you just buy it at Allbirds and go pick it up. It's just down the street from you. You could also walk into a store, buy a thing, and say, "Hey, look, I'm going to go for dinner, could you just please ship this to my house because you have my address?"

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