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Payments on Shopify - A Roundup

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Introduction


Shopify was founded on the simple idea of making it easy for small enterprises to set up an online shop without much effort or technical wrangling. Initially, Shopify's revenues primarily came from subscriptions aimed at small and medium businesses looking to set up an online presence quickly and easily. So subscription rates were kept low and scaling up revenues meant ramping up on merchant onboarding. It works well as long as new sign-ups keep growing. While the introduction of the enterprise solution Shopify Plus encouraged growing merchants to remain within the Shopify fold, maintaining merchant relationships meant providing other value-added services that helped them go to full scale without having to re-platform or seek customizations beyond Shopify. Of the four pillars of eCommerce (Store, Payments, Logistics, Marketing) Shopify was already providing one and it was only logical to empower its merchant base with the other three.

What is Shopify Payments?


Shopify Payments is an easy-to-use, credit card processing system that enables merchants to accept and manage VISA, MasterCard and American Express payments directly through Shopify instead of having to set up accounts with many third-party payment gateways.

Shopify Payments comes with many functionalities such as …


  • Shop Pay, the checkout solution that simplifies the checkout process across any Shopify merchant's site, irrespective of the payment method
  • Chargeback management and
  • Shopify Installments, a Buy Now, Pay Later (BNPL) enabler integrated with Shop Pay.

However, Shopify is not a payment processor or a gateway by itself. Rather, it is powered at the back-end by payment gateway, Stripe. Shopify Installments is powered by Affirm, a BNPL solutions provider.


How does Shopify make money through Shopify Payments?


Shopify principally makes money from payment processing and currency conversion fees via Shopify Payments. It charges merchants between 2.4% -2.9% of the gross transaction value of purchases. Transaction fees are primarily earned from the use of credit and debit cards which are processed through Stripe.

However customers buying from a Shopify-powered online store can also select from several other payment options. Shopify Payments also allows transactions via PayPal and Amazon Express Checkouts apart from its own Shop Pay checkout. To take customer payments, merchants could also use a third-party payment provider other than Shopify Payments; this could also include Stripe — independent of its tie-up with Shopify. While Paypal and Amazon Checkouts do not carry any fees, Shopify earns additional transaction fees from merchants who have installed other payment gateways in lieu of Shopify Payments.



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Why Are Payments Important to Shopify?


In 2015 when Shopify went public, its revenue from subscriptions was nearly twice that from payments. By 2021, the revenue break-up had flipped with merchant solutions (including payments as a major component) accounting for more than twice subscription revenues. In Shopify, the growth in the number of merchants is slowing down but the average GMV per merchant is increasing. The system is making more money and for Shopify to have a share of these accruals, payments are critical. Like with its store – platform, Shopify's payment system was meant to provide an easy setup of third-party payments. Unlike Amazon, a marketplace, Shopify did not have control over buyer behavior which indirectly influenced stickiness with its merchants. Enabling good buyer relationships was critical for Shopify to keep its merchants within its fold. Shop Pay and Installments make it easy to checkout on any Shopify merchant site without having to fill in details repeatedly on each merchant site or sign up for different services.

This report evaluates the market share of Shopify Payments and looks at how it is helping Shopify to build buyer relationships and increase revenues.

Summary of Report


  • Earlier, merchants had to create separate accounts individually with each provider they wished to use; maintaining them was a cumbersome task. Shopify's single tool, Shopify Payments provides three different functionalities – a payment gateway (powered by Stripe) integrated into the system that allows merchants to accept all forms of payments through a single window; faster checkout at repeat purchases by the same customers, and an option to pay in installments without the hassle of the lengthy approval process.
  • Although Shopify Payments' Gross Payment Volume (GPV) is almost half of the total GMV transacted in the Shopify system, it still is less than 2% of global eCommerce payment transactions, leaving a lot of room for growth. Even though Shopify's merchant base is much larger than Stripe's or Adyen's, Shopify processed only 17% and 15% respectively of the payments that Stripe and Adyen did.
  • Shopify sites are enabled with PayPal and ApplePay direct checkouts which channel payments through their gateways and this is a potential loss to Shopify. 75% of the companies that have enabled Shop Pay, are providing PayPal as a payment option. At the same time, Shopify has to have these checkouts to ensure consumer stickiness which in turn makes its merchant base stick with it.
  • BNPL market is still nascent, it is expected to account for 5.35% of the market by 2025. But offering a BNPL option to customers can increase conversion rates by 20-30% making it an indispensable tool for customer stickiness. Shopify's partnership with Affirm has helped the latter but has not been beneficial to Shopify with only 20% of Shopify merchants offering BNPL and the majority of them having accounts with Afterpay, Sezzle, and Klarna. Shopify's merchant base's stickiness with Shopify depends on how much the base adopts the easy-to-enable Affirm over opening merchant accounts with other providers.


What is the size of the market for Shopify Payments?


The value of global eCommerce payment transactions is expected to exceed USD 7.5 trillion by 2026 from $4.9 trillion in 2021 according to Juniper Research2


Shopify's GPV, in comparison, was USD 86B in 2021 accounting for more than 48% of its GMV, up from 37% in 2017 and is about 2% of global eCommerce sales in 2021.

Digital wallets are expected to account for more than half of all eCommerce payments worldwide by 2024 overtaking traditional payment methods like cash-on-delivery and cards. The number of mobile wallets in use is expected to reach 4.8 billion by 2025 (60% of the estimated world population). The US has been lagging behind in digital/mobile wallet adoption when compared to global averages but digital wallets represent 29% of e-commerce transactions, up 23.7% over 2019 levels. For now, debit and credit cards still dominate the US payment landscape, though digital wallets are fast catching on. Currently, Shopify does not charge a transaction fee for PayPal Express checkout which is included in Shopify merchant accounts. This could potentially change as card payments give way to wallet payments, with PayPal already having a lion's share of eCommerce payments in the US.


Shopify Payments - A comparison with other payment gateways


Shopify Payments is available exclusively for Shopify merchants and its 2021 GPV amounted to almost 17% of Stripe's and 15% of Adyen's Total Payment Volume (TPV; Stripe's TPV includes transactions made through Shopify Payments). Shopify has a much larger merchant base than Adyen or Stripe and its entire merchant base has access to Shopify Payments. Yet Shopify Payments relies on small and medium merchants with a lower volume of transactions and order volume compared to Stripe which includes the likes of Google, Slack, Zoom, Lyft, Amazon, and Salesforce.


While Shopify Payments is powered by Stripe, merchants can have accounts with any payment gateway including Stripe (outside Shopify Payments). As per PipeCandy estimates, at least 5% of Shopify's merchant base is likely to be having direct merchant accounts with Stripe.


Is Shop Pay enabling buyer relationships?


Shop Pay is Shopify's customer-facing checkout system. It saves customers' personal information like shipping address and credit card details and makes checkouts faster for repeat customers. For a system that comprises multiple shopping sites each with its own payment process, cart abandonment can result from repeated checkout formalities or unavailability of a preferred mode of payment. Shop Pay, therefore, binds the Shopify merchant system together with a one-time input of buyer information that works on all partner merchant sites.

In 2020, Shopify disclosed that at least 40M buyers used Shop Pay regularly to purchase from Shopify stores. Shopify's online shopping assistant app named Shop (not to be confused with Shop Pay) is a critical part of Shopify's effort to build buyer relationships by automatically recommending products from the Shopify merchant base to customers on their phones. As of June 2021, Shop App had 118 million registered users and 23 million monthly active users and it is estimated to have contributed more than $43 billion in GMV since 2017. Shop and Shop Pay work in tandem to bring all merchants into a single marketplace of sorts with one search and one checkout.


Competition for Shop Pay at checkout


As per Shopify's claim, Shop Pay increases checkout speed by four times, and conversions via Shop Pay are 1.72 times higher than other checkouts within Shopify. However, Shopify also has to contend with Amazon, and PayPal and Google Pay express checkouts on its platform — each of which has its own advantages.

According to PipeCandy's estimate using a sample (N= 18,400), 76% of the companies who have enabled Shop Pay, are providing PayPal as a payment option. Shopify's investment in payments includes partnering with these competitors to retain its customers. Merchants can provide PayPal as a payment option on Shopify's platform, which has almost double the installed base of Shop Pay, globally. While Shopify claims it has no intentions to compete with PayPal, transactions through these express checkouts do not earn a fee for Shopify Payments but help them maintain buyer relationships for its merchant base.


What is the significance of Shopify Installments?


Shopify Installments is a Buy Now, Pay Later (BNPL) solution from Shopify. BNPL offers consumers an alternative to defer payment without having to pay interest on credit cards or be subjected to "hard pulls" (credit history and scores). According to a 2021 study by C+R Research, 56% of BNPL users surveyed said they prefer using BNPL over credit cards for these and other reasons. With credit and debit card usage online expected to come down, BNPL providers will gain a share of the transition from cards to digital wallets making them a necessity to improve buyer stickiness.


About Shopify Installments


In 2021, Shopify ventured into the payment installment market by extending its partnership with Affirm. Shopify merchants who wish to provide Affirm's BNPL option to their customers need to download the Affirm app from the Shopify store and enable it for the customers. Shop Pay customers checking out from the store can choose to split their payment through Affirm and complete the transaction without going offsite. According to Affirm, one in four merchants that used Shop Pay installments during its early launch saw a 50% higher average order volume compared to other payment methods8


Installment Market Analysis: Is it helping Shopify build buyer relationships?


Affirm claims that Shop Pay's Installment has helped it grow from 6,500 active merchants to 102,000, y-o-y in 20219. It has also declared that there were 28% fewer cart abandonments after customers shifted to Shop Pay installments. During Q4, 2021, Affirm's revenue reached $4.5 billion, an increase of 115% y-o-y, mainly through its eCommerce partnerships with Amazon and Shopify. Affirm expects its Split Pay offering to contribute 10-15% of the GMV, in Fiscal Year 2022, with the largest contribution coming from the Shop Pay Installments program10.

If the Shopify-Affirm partnership has benefited Affirm, more than Shopify, part of the reason lies in the inadequate adoption of BNPL amongst Shopify's merchant base. Based on a sample of 48,000 Shopify merchants, PipeCandy estimates that only 20% of Shopify merchants offer their customers a BNPL option. Among those offering BNPL, AfterPay dominates the market as the preferred choice of 50% of merchants. Only 12% of merchants provide Affirm as a checkout option. In 2018, Affirm dominated the US BNPL market and accounted for 78% of the BNPL app downloads. But by Q1 2021, the figure came down to 16%, and AfterPay and Klarna gained popularity with 34% and 26% of the app downloads respectively.


Challenges for Shopify Payments

Sustaining long term growth is crucial for Shopify


New merchant signups on Shopify have been on a steady decline over the years, except in 2020 due to the Covid-19 pandemic. While the GMV per customer has increased during this duration, the growth in total GMV of the system itself has been gradually declining. Shopify's merchant solution revenues are tied to the GMV of its merchant base: More transactions bring in more payment fees and a decline in GMV growth puts a limitation on transaction fees.


The shift in the digital payments market


Credit and debit card usage dominated the US market with a 51% share in 2021. Currently, most of the revenue for Shopify Payments comes from the fees generated through the use of credit and debit cards by customers. As long as cards dominate payments, Shopify benefits from having Stripe as a backend partner. It is estimated that by 2025, the share of credit and debit cards will decline to 48% and that of digital wallet payments would rise from 29% to 33% of the eCommerce payments. As consumers move towards digital payments, it will be a challenge for Shopify to build newer partnerships and tap into digital payments for transaction fees. PayPal already has a large customer base among consumers and is preferred as a checkout option by a large majority of Shopify merchants.


Opportunities for Shopify Payments

Geographic expansion


Shopify Payments is currently offered only in a few countries. In countries where it is not available, PayPal is the default payment provider. In 2022, Shopify plans to integrate Shopify Payments with the local payment methods and provide Shop Pay payment options in more countries.


Shop Pay for non-Shopify users


While on one hand, Shopify allows its merchants to offer payment options from its competitors, on the other hand, it offers Shop Pay to the users outside of its ecosystem. The Shop Pay option is available to customers on various social platforms. In 2021, Shopify extended its support to even non-Shopify users through its partnership with Facebook, Instagram, Google, and Pinterest. Social commerce sales via social channels are expected to double in the U.S. by 2025. Facebook Shops allows small businesses to open stores on social media apps. It has partnered with many payment service providers, including Shop Pay. It is likely that soon Facebook Shops would address 50% of the global eCommerce market (excluding China).


Capital is an incentive for small businesses


Shopify Capital lets small merchants borrow capital from Shopify for running their businesses. Unlike banks, the merchants are not required to go through long approval processes. Shopify gives preference to those who have enabled Shopify Payments. Hence, it uses capital as an incentive to drive merchants to adopt Shopify Payments.


Conclusion


Though Shopify has benefited from its Payments initiatives, it remains to be seen whether the company will continue to scale up on payment revenues at a time when its overall GMV growth is slowing down. Its competitors include companies like PayPal which already has a large customer base within the Shopify ecosystem. Similarly, in the BNPL segment, AfterPay, Klarna and Sezzle are popular among Shopify customers. In addition to pure-play BNPL providers, even PayPal and Apple Pay are entering the BNPL market. BNPL has become a focal point in consolidation activities, as players seek to provide improved risk models to the customers. Hence, surviving in this market which is dominated by big players will depend on how Shopify taps into digital payments, increases GMV and enhances its BNPL suite.




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