Shopify & Embedded Finance, Part 1: Analyzing Shop Pay's Flywheel

Shopify is becoming a fintech behemoth for consumers and businesses alike.

This week’s issue is presented by Privacy.com, a consumer and B2B fintech startup. Privacy.com recently unveiled its card issuing API for all developers recently—making it easier and simpler for non-fintech developers to start issuing their own virtual or physical debit cards. While other card issuing platforms have a ton of red tape before you can start playing around with their API, Privacy.com’s API docs are publicly available and the company has prioritized transparent pricing to find a structure that works for you. Check out Privacy.com’s new API at the link below, and if you’re interested in an intro to learn more, email ian@fintechtoday.co for an intro!

Learn more about Privacy.com's API


Shopify is the epitome of the embedded finance theory that’s been all the rage over the last year and a half in fintech. A ton of people smarter than me have written about this extensively over the past few months: Andreessen Horowitz’s Angela Strange, Bain Capital Ventures’ Matt Harris, and Google’s (and Petal Card’s ex-head of strategy) Nik Milonovic in particular. 

I’d like to focus on Shopify. Due to the unique aspects around their business, Shopify could have a massive impact on financial services and fintech simply by embedding finance capabilities into their existing platform. 

Before we dive in, we gotta answer a core question: what is embedded finance? 

Embedded finance is when a non-financial services company creates financial services products for their users, embedding them into its existing products. Companies with massive distribution and powerful data moats use these assets to create unique financial products that can be easily marketed to users. By delivering more value, this becomes a useful way to increase the lifetime value of each customer. The key to success is developing the *right* financial products. 

Embedded financial services aren’t new. They’ve been called other things throughout history; some of the earlier examples are merchant’s keeping a “tab” open for customers from the Old West. The idea was if a merchant held a ledger and customers could borrow from the ledger and pay it back later, purchasing would be frictionless. Banks decided to start guaranteeing some of these outstanding payments on the ledgers and wanted to automate them. 

Over time, they started to evolve—in more recent history, embedded financial products like private label credit cards issued by merchants (think airline credit cards) have become more popular. Brands have looked to create credit card products that had a reward program tailor-made to power customers—incentivizing them to use the card at that store, and at other merchants as well. Brands collected interchange revenue and locked customers into their ecosystems, and by developing their own financial products (like private network cards), they were able to essentially eliminate payment processing fees for transactions made in their store—another win. 

The explosion of the internet has also led to the explosion of digitally native brands, except they can’t really create traditional private label cards for a few reasons. 

For one, these DNVBs are not at the same scale as traditional retailers. As a result,many financial partners haven’t considered these partnerships would be beneficial. Secondly, the cost and time to implementation has up till recently been pretty arduous – and thus was a big burden on companies. Finally, highly-customized private label or co-branded cards require a strong partnership between the brand and financial institution. That means taking on a lot of financial and regulatory risk, which DNVB’s companies have been wary to do. 

In recent times, larger tech companies have dealt with these problems exploring partnerships with banking-as-a-service infrastructure providers. They leverage firms like GreenDot and Marqeta to handle all the infrastructure and regulations around financial products, and then partner with brands like Uber, Apple, and Square who can handle the product marketing and user acquisition. 

That being said, Shopify is a unique case.

Shopify’s primary purpose is to help businesses sell online – their primary customers are merchants, making them a B2B company. That being said, the merchant’s customers also interface with Shopify products, meaning that they need to be delighted too. In that way, one can think of Shopify as a B2B2C company. This provides a unique opportunity to create financial products for both merchants and their customers. For example, Shopify is able to solve a lot of the banking problems small businesses have. At the same time, Shopify is also able to leverage its network effects to provide more purchasing options for customers.

There’s a reason this essay is going to be broken up into a few parts – there’s a ton to talk about. In part 1, I want to talk about Shop Pay—Shopify’s checkout button (if you’re unfamiliar, check out this overview here.) Shop Pay has a real shot to be a powerful online checkout button given Shopify’s entrenched advantages around merchants and new benefits for customers, like the recently announced partnership with Affirm to enable installment loans. 

Shop Pay can create a mini flywheel for Shopify around the payment relationship between merchants and customers. Remember—Shopify’s main goal is to help merchants sell more. That happens in a few ways—customers purchase more frequently or they make bigger and bigger purchases. 

In a FTT+ interview with Kaz Nejatian, Shopify’s head of financial services, he revealed that Shop Pay significantly reduces cart abandonment, which has been a massive problem for merchants. Shopify recently put out data that backs this up too. It turns out that Shop Pay converts 1.72 times better overall than regular checkouts, and 1.91 times better on mobile. For merchants, that difference adds up.

It also solves a UX problem for consumers—checking out on mobile devices is kinda a nightmare. Shop Pay solves that too—the company says Shop Pay increases checkout speed by 4x. 

The next inevitable step for Shop Pay is to add even more value for customers—which is where Shop Pay’s Buy Now, Pay Later product comes in. A simple UX isn’t a strong enough value proposition; other payment methods like Apple Pay and the yet-to-launch Fast are also seamless payment methods. Unfortunately for Shopify, they don’t get the same amount of data from those payment methods, thus breaking down the data flow that powers their lending product. 

Installment loans are a great way to incentivize users to adopt a payment method. Back in May, Julie wrote for FTT+ that she heard it was in a partnership with Affirm (like & subscribe), which was confirmed  earlier this week. The program will allow users to break up a purchase into 4 simple payments, with 0% interest rate. That entices customers to not only make a purchase with Shop Pay, but also to make bigger purchases — a huge win for merchants and thus Shopify. 

Shopify has essentially created a flywheel around Shop Pay and payments: merchants add Shop Pay and customers start using Shop Pay which lowers abandoned carts. Shopify adds installment loans to Shop Pay, which customers are already using, to make larger purchases which results in merchants selling more. 

Getting consumers on Shop Pay is going to be great for merchants, but there’s a ton of other problems Shopify can solve for their merchants as well. In Part 2, we’ll start talking about how Shopify Capital, Balance, and other products can work together to create an embedded financial ecosystem for merchants. 

Thanks to Seyi Taylor, Cokie Hasiotis, Cherry Miao, Mengxi Lu, and Aaron Frank for editing.

Disclosure: Ian Kar owns ~$35 of Shopify stock.