#EmbeddedFinance / Shopify & Embedded Finance, Part 1: Analyzing Shop Pay’s Flywheel

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.

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.

[Shop Pay—Shopify’s checkout button] 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… That happens in a few ways—customers purchase more frequently or they make bigger and bigger purchases.

[Shopify’s head of financial services] … revealed that Shop Pay significantly reduces cart abandonment, which has been a massive problem for merchants… It turns out that Shop Pay converts 1.72 times better overall than regular checkouts, and 1.91 times better on mobile.

It also solves a UX problem for consumers… 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… Installment loans are a great way to incentivize users to adopt a payment method… The program [Partnership with Affirm] 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…

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.