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May 24, 2020

Business Model Innovation – Shopify Balance

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Shopify’s eCommerce business alone has turned it into Canada’s most valuable company (by market cap), worth more than even the banks (based on trading on this date). Now they are innovating the business model and serving SMEs via a fintech banking model.

What is Shopify Balance?

A business ‘banking’ Balance Account for merchants, a Shopify Balance Card, and Rewards based on what they spend. Unlike most Fintech Challenger Banks, there are no monthly fees or minimum balances.

Shopify Balance – Shopify’s new Merchant Bank launching later this year in the US

Shopify Balance will launch later this year in the US.

In effect, it is a hybrid between a business bank account and a payments platform. But compared to other NeoBanks, it offers several advantages to merchants.

In its own research (a survey of 649 U.S. merchants), Shopify found that two in five merchants are currently using their personal bank accounts and cards for business.

Venture Beat

How Does it Work?

When it rolls out in the US, merchants will have a Shopify Balance account where they will be able to access their funds the moment they are earned through store sales. There are no deposits or lending products not correlated to eCommerce. Shopify deals with the front-end of the banking experience, while a 3rd party handles the back-end infrastructure.

An unnamed third party will provide the infrastructure to handle transactions in the background so merchants get their money immediately

VENTURE BEAT

Shopify’s expertise in software design and functionality means that users of Shopify Balance will get access to tools that help with admin of cashflow, expense tracking and other features. In that way, there is an accounting element to the product.

Their Shopify Balance Card functions like a typical business bank account card, allowing users to make payments online/offline and withdraw cash at ATMs. Rewards for these purchases/transactions show Shopify’s intent to build this Fintech branch of the business into something that more closely resembles a bank.

Who Uses It?

Shopify has more than 1 million merchants (SMEs) on their platform as of Q4 2019. The launch of Shopify Balance later in 2020 will be limited to US-based merchants who can sign up on the waiting list.

“We think legacy banks serve the largest corporations really well,” Nejatian said. “But small businesses or independent entrepreneurs can’t get access to the services they want, and the services they can access are insanely expensive.”

Banking Dive

As Shopify estimates that 40% of its own merchants are using their own personal accounts, it is likely that there will be a high interest in Shopify Balance from US merchants. In 2019, Shopify had 31% of the eCommerce platform market share in the US; that means that there are 100s of thousands of possible customers for Shopify Balance coming out of the gates.

Furthermore, Shopify has also recently launched their own Shop App (personal shopping assistant) for consumers to buy products from independent Shopify merchants directly through their platform. Part of the new rollout of financial services is the Shop Pay Installments, which will let consumers pay for merchant products in installments. As this will likely help create more consumer demand, Shopify may also use this to lure more merchants into Shopify Balance.

Shop Pay Installments

All told, there is a strong incentive for retail SMEs of all sizes to use Shopify Balance; however, the devil is always in the details on these products, and we still don’t know too many details about the full product yet.

Customer Acquisition

Part of what makes this offering so intriguing is that the ecosystem of potential customers already exists, so Shopify Balance feels like a natural extension of the current platform rather than a new product that they have to spend $10s of Millions of dollars marketing in order to get critical mass. There CAC (Customer Acquisition Cost) could be much lower than competing platforms in the SME Neobank space.

Compared to other companies in the Challenger Bank market, Shopify Balance will be unique in its ability to dominate a niche (eCommerce merchants) in a single market (USA) and then potentially scale-it up; either into other niches or other markets. Because their core business is eCommerce software, they may deploy several different possible strategies to get Balance customers.

Competition

We have talked about Challenger Banks in the past. Right now the retail side of their business model (consumer subscription model) is under pressure and they are looking towards Business Accounts as their new major revenue stream.

…with just under half of SMEs revealing that they are looking to change business account providers in the next twelve months.

RealWire

One of the global leaders, Revolut, is expecting Business revenue to eclipse consumer revenue this year. They are also in the process of an application for a US Banking License along with Monzo.

Revolut will increase its number of business clients by four or five times by 2020, reaching well over a million.

Euromoney

Among the top Challenger Banks – Revolut, N26, Monzo, and others – all are looking to enter the US market in the years ahead with a full Banking License, and all see Business Accounts as a profit-making center. The competition will be fierce.

Within the payments industry, they will see competition from the likes of Square and Paypal, who are coming from the payments side and looking to get a bigger slice of merchant market share on the financial-services side. Square was conditionally approved by the FDIC for a US Banking license earlier this year.

The new bank anticipates opening next year. It will be a Square subsidiary and will work independently. The bank will extend small business loans and deposit accounts, Square said in a statement.

Pymnts

Then on the Installments side, you have Afterpay Touch and Klarna (Visa-backed) who are competing in a rapidly-growing niche that Shopify seemingly wants to help bring mainstream with their Shop Pay Installments. Afterpay made waves earlier this year when they received a minority investment from China-based Tencent. It gives the company the ability to tap into a large merchant network and offer installment payments; therefore, it could be another source of competition in this space in the year ahead.

Overall, competition will be fierce in the bid to get SMEs banking businesses on various Fintech platforms in the years ahead. Shopify Balance’s main advantage is its ability to scale multiple products up simultaneously and tap into a large, existing network of merchants to acquire customers in the early stages. Shopify very well capitalized with its recent $1.3 Billion equity raise, so they will certainly be going for it when they launch in the US later this year.

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