Memo: Working Capital

recent WSJ article began: “Rising Rates Boost Companies’ Focus on Working Capital Management.” Times are getting tougher for small business owners and Shopify sees an opportunity to expand its market position by stepping into fortify its suite of service to merchants.

Shopify has smartly built efficient systems to manage payments and approval processes based on an “instant settlement of eCommerce sales” (according to PYMNTS) within days of the capital request. Working capital is the company’s next frontier. It represents a flow of information between Shopify’s clientele and the company itself.

PYMNTS’ research has estimated that there remain more than a trillion dollars of outstanding receivables out there that smaller firms are “carrying” for larger suppliers on a given day. Part of the proverbial stutter step is tied to hiccups in back office approvals or the simple fact that SMBs are understaffed.

Shopify’s lending business is just six years old but it’s never been more important. It remains a small but influential part of the company’s organization. It’s poised to grow as more merchants benefit from cash loans to keep operations humming. A new report from The Information details how lending could emerge as a bright spot for the eCommerce services provider, pointing out that the company’s new loans jumped 30% in the third quarter over last year, to more than $500 million in gross revenue. That outpaces merchants’ sales volume growth in five of the past six quarters, underscoring the position that these businesses are in as inflation and a looming recession depresses eCommerce growth after a boom.

Business loans to merchants are a sure sign that Shopify is (smartly) doubling down on expanding its suite of services it offers to its merchants, feeding the ever-important Shopify ecosystem it’s built to become a one-stop shop for anything a business owner needs to run a retail business. With lending, Shopify makes it possible to keep the flywheel going: merchants can reinvest the upfront cash into their businesses, including continuing to spend on marketing, logistics and fulfillment. From The Information:

Shopify’s services revenue as a percentage of its overall merchant sales volume hit a record high in the third quarter, which the company attributed in part to merchants leaning more on those services to help pay for costs like inventory, marketing and hiring while inflation soars. Offering merchants cash advances can also keep them hooked on the Shopify ecosystem. “You have those particular merchants captive, and it’s an audience that’s very focused on Shopify—just throw the kitchen sink at them and see how much stickiness there is to the platform,” said Ken Wong, managing director for software research at Oppenheimer & Co.

Investing money into its merchant pool to keep them from suffering cutbacks and further blows to their businesses is a move that favors Shopify and its ability to stay competitive: brands are less likely to bite the hand that feeds it by, say, defecting to another platform in the midst of this turndown. Even as competitors like Stripe and PayPal offer cash advances, they aren’t as well-positioned to offer the complete suite of services that Shopify does. And that’s even more so when you line up the competitors Shopify has worked hard to box out and could offer merchants similar services.

Here’s an example of Shopify’s hold on the payments ecosystem and this is just the B2C side of its business.

Take Amazon: When Amazon launched a “Buy with Prime” service that would be compatible for Shopify merchants to enable Prime benefits into their checkout flows, Shopify retaliated by discouraging use of the plug-in. It was a muscle move to convince merchants that Shopify offers merchants all they need – and that they don’t need Amazon’s assistance. Whether that’s true or false remains to be seen. For Amazon, Buy with Prime was a bid for the dollars of Shopify merchants. We reported on the risk Amazon posed to Shopify in September, when the company changed its tune around Buy with Prime to be more explicitly opposed:

And that could be a bad thing for Shopify as Amazon aims to become more of a discovery platform for DTC brands, essentially letting them get a piece of the pie without fully committing to being an Amazon brand. Shopify is still at a disadvantage here unless it becomes more of a marketplace on its own. Lutke has spoken against Shopify becoming a “kingmaker” for brands. It prefers to remain brand agnostic. But leaders change their minds often; sometimes it only takes three months to change tune.

The rise in loans comes as Shopify continues to bulk up its merchant services to keep them housed within the Shopify ecosystem. On Monday, it announced a global alliance with EY that’s designed to help merchants scale faster with fewer risks, as well as reduce friction in selling certain products globally such as alcohol and pharmaceuticals. In short, Shopify understands that “very large merchants want to use Shopify, but demand that we work with them through existing system integrators.” Deloitte and Accenture round out the shortlist of SIs. Past investments and partnerships like Deliverr and Klaviyo also bulk up Shopify’s one-stop services for merchants who may be feeling the squeeze in areas like fulfillment and marketing.

It’s still a sign of precarious times – Shopify offering cash loans to merchants is not unlike mall real estate companies bailing out struggling retailers in the early days of the pandemic. But by positioning itself as a necessary lifeline to its small businesses, Shopify’s setting itself up to be a necessary force in the next era of eCommerce, one that looks more like fintech than eCommerce. It’s making it more difficult for companies, adjacent and competitive-minded alike, to step into Shopify’s ecosystem.

By Web Smith | Edited by Hilary Milnes with art my Alex Remy and Christina Williams

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