Shopkeep Increments Revenue with Lending Because It Has to

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Shopkeep recently launched a loans business. Like many processors, their interest and principal will be automatically deducted from the payments revenue their merchant makes. This is probably the most convenient way to reduce non-payment.

But we’re more interested in why Shopkeep is going down this path. That is, can we read between the lines to understand the underlying causes?

It’s fundamentally true that life is lazy. Creatures do not want to expend energy where they don’t have to. So when Shopkeep decides to spin up a new division to underwrite loans, it makes one think about what might be going on.

We can look to Square as an early harbinger.

When Square went public in late 2015, they were losing nearly $150MM a year. Their processing continued to grow, but their losses were becoming a problem. So Square spent energy creating a lending program (Square capital).

Earlier this year [2016], Square said that it would be expanding into traditional online loans from cash advances, with fees between 10% to 16% of the amount borrowed. The company has also expanded beyond just lending to merchants who use its credit card scanner.

In other words, when things ain’t working, companies will expend energy to do something else.

Shopkeep is no different.

Shopkeep first took money in 2012. We’re now five years in, and their investors are doubtless looking for an exit. On their core revenues, we’re pretty confident that Shopkeep is not doing $100MM a year, the magic number needed to go public. So Shopkeep is needing to increment their revenues.

Enter lending.

The difference between Shopkeep and Square, however, is the size of the portfolio. Square’s processing earns them over $1.7B annually from more than 2 million merchants.

Square said it processed $10.2 billion in payments in its busiest quarter — up 47 percent from a year earlier — on behalf of more than 2 million merchants. More importantly, larger merchants — those processing at least $125,000 annually — represented 39 percent of all transactions in the quarter, an increase from 33 percent of volume a year earlier.

Shopkeep doesn’t appear to have anywhere near that playground when you dig into the numbers.

Shopkeep represents somewhere around 20-25,000 merchants. Their merchants skew small – reasonably < $400,000 per year. If we multiply this out ($400K * 20,000 merchants) we arrive at a potential processing portfolio of $8B.

However, these merchants are much larger than Square’s average merchants. Basically this means that Shopkeep’s merchants would be foolish to agree to similar, aggressive loan terms (effectively payday loans) that Square gives its merchants – the same loan terms that earn Square nearly $80MM annually at about 75% margins.

So can Shopkeep convince enough of their merchants to take their loans that this becomes a material new business?

The jury is still out, but Shopkeep has quietly admitted they need something else to get them over the IPO revenue threshold.

POS companies should otherwise be pooling data to create a larger loan portfolio that any number of banks would underwrite. Once the portfolio gets large enough, risk comes down and interest rates are much, much more reasonable than what Square, and presumably Shopkeep, will offer. This is yet another revenue opportunity for POS companies if they would only understand the value of data.

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