PF Model Helps to Fuel Shopify Gains

Last week, Shopify reported a third-quarter revenue increase of more than 45% year over year. 

A closer look at that revenue number provides a snapshot of the role that being a payment facilitator can play in feeding growth.

Shopify divides its revenue into two business segments. The first is Subscription Solutions, which covers revenue from the merchant users who pay a monthly fee to use the Shopify platform. The second is the company’s Merchant Solutions business. Shopify describes this segment as the parts of its business that provide additional value for those merchants. 

Merchant Solutions include Shopify Payments, the service that enables Shopify merchants to accept credit card and other electronic payment methods, as well as sales of the company’s point-of-sale hardware and services such as Shopify Capital and Shopify Shipping. In the Management’s Discussion and Analysis portion of its SEC filing, Shopify points to payment processing fees from Shopify Payments as the principal driver for revenues in the Merchant Solutions business segment.

An examination of the numbers in Shopify’s third-quarter earnings report shows that, while the numbers across the business segments are strong, those payment processing revenues were fueling much of the company’s growth during the quarter. 

While the subscription revenue grew 37% thanks to an increased number of merchants signing up on the Shopify platform, the merchant solutions business grew 50%. In its filing, the company attributed that growth primarily to an increase in Shopify Payments revenue:

“The increase in merchant solutions revenues was primarily a result of Shopify Payments revenue growing in the three months ended September 30, 2019 compared to the same period in 2018. This increase was a result of an increase in the number of merchants using our platform, continued expansion into new geographical regions, and an increase in our Shopify Payments penetration rate, which was 42.1%, resulting in [gross merchandise volume] of $6.2 billion that was facilitated using Shopify Payments for the three months ended September 30, 2019,” the company said. 

During the company’s second quarter this year, merchant solutions business revenue – again driven primarily by growth in GMV – grew 56% while the subscription business grew 38%. During the first quarter, the growth was 58% for the merchant solutions business and 40% for the subscription business.

So, payment processing and its associated revenue clearly represent a significant chunk of the company’s quarterly gains. By being a payment facilitator, Shopify is able to collect revenue off of every transaction from its merchant’s customers. And as Shopify’s merchant base continues to grow, so will its payment processing revenue.

“More than a million merchants are now building their businesses on Shopify, as more entrepreneurs around the world reach for independence,” Tobi Lütke, Shopify’s CEO, said in the earnings release. 

“These merchants chose Shopify because we’re making entrepreneurship easier, and we will continue to level the playing field to help merchants everywhere succeed.”

Leveling the playing field for entrepreneurs – especially when it comes to accepting payments – is thanks in no small part to the streamlined ease of acceptance that distinguishes payment facilitators like Shopify from other business models. It’s this simplified access to payments that the company itself markets as a key differentiator.

“Shopify Payments is the simplest way to accept payments online,” Shopify says on the help page for the service. “It eliminates the hassle of setting up a third-party payment provider or merchant account and having to enter the credentials into Shopify. With Shopify Payments you’re automatically set up to accept all major payment methods as soon as you create your Shopify store.”

Eliminating the need for small or micromerchants to deal with third parties enables them to get up and running more quickly. Because payments acceptance is integrated within the Shopify platform, those merchants can turn to one provider for all of the tools they need to run their business, rather than having to set up payments in a separate, often lengthy process. 

The company also addresses this point on its web site, saying of Shopify Payments: “Skip lengthy third-party activations and go from setup to selling in one click.”

Companies like Shopify are able to allow their merchants to skip those lengthy third-party activations precisely because of the payment facilitator model, which has streamlined the underwriting and onboarding process for an entire generation of new entrepreneurs. This in turn serves as a key selling point for payment facilitators, fueling their own revenue growth.