ShopKeep Joins the MCA Crowd. Are Loans Next?

Above: Michael DeSimone, ShopKeep, CEO

ShopKeep, an iPad-based cloud-connected technology company designed around POS and payments for small businesses, is expanding into MCAs with the launch of ShopKeep Capital in recent days. With its move into funding ShopKeep joins an area that competitor Square already operates in. But while both companies have unlocked the secret of customer acquisition they are not targeting the same small businesses.

Meanwhile this latest move into MCAs is just a step in what ShopKeep CEO Michael DeSimone describes as an evolution, one that could potentially lead to small business lending sooner than later.

“We had a lot of interest from our customers,” said DeSimone, referring to the nearly 25,000 small businesses that are on ShopKeep’s payment and software platform. ShopKeep Capital extends funding offers to eligible small businesses on the ShopKeep platform, and funding is approved within a couple of days.

Playing Field

ShopKeep is entering a space – MCAs — that is only getting more crowded, with the recent addition of iPayment, for instance. And while ShopKeep and Square operate in a similar market segment, they’re targeting different SMBs.

“Our customers tend to be larger than Square and more complex in their business models,” said DeSimone, pointing to the example of a restaurant with numerous employees and multiple locations. On average, customers on the ShopKeep platform generate sales of $350,000 per year.

As a payments company, ShopKeep’s customer acquisition strategy is tied directly to its software and payments businesses.

“This leverages our ability to understand the small business data flowing through our POS platform and manage it the way we do payments based on the premise of greater visibility into their business by the virtue of our payments platform,” said DeSimone.

He is quick to point out that ShopKeep is built on technology, and he said like every other part of the economy tech is disintermediating some parties and bringing others closer to the outcome they desire.

“The closer you are to the actual customer, the more your opportunity is to be able to be top of mind when they need something,” he said. “They have huge amounts of interaction with us. This level of interaction predicated on technology is really what creates the ability to have a relationship with the merchant to then be able to offer them a range of different products and services.”

DeSimone describes ShopKeep more as a technology play than a funder.

“We have a lot of information most other providers of capital aren’t going to have unless they ask merchants to do a lot of work,” said DeSimone, pointing to an underwriting model that is almost 100% automated.

“We’ve built it to be largely pre-underwritten We only offer advances based on running the merchant through our underwriting model to see who comes up as a good candidate for ShopKeep Capital and making it available to them. We continually tweak the algorithm to make sure we are not being too tight or too loose,” he added.

Funding is the third revenue stream for ShopKeep, with software and payments representing the other two legs of the revenue stool. Meanwhile ShopKeep Capital is turning to its balance sheet to fund MCAs, but that is not the long-term plan.

“Currently it’s coming off our balance sheet, but it won’t be for very long. We have had several discussions with funding partners. And we expect over time we will migrate to more of a loan product and away from MCAs. We will explore the features and benefits of both to understand both our perspective and that of our customers,” said DeSimone, adding that there could be more clarity about the direction of this evolution in the next six months.

If ShopKeep does move into loans, the company could open up the platform to investors. “They are debt funds looking for returns and specific underwriting criteria. They will buy an advance or a loan eventually from what we originate. That’s the model we think we’ll go toward,” he said.

Something DeSimone and other lenders might want to keep in mind is a credit gap that exists among small businesses today, as described by Karen Mills, a senior fellow at Harvard Business School and former administrator of the U.S. SBA.

“There is no doubt that online lenders have identified an important segment that is not getting enough access to credit, but data also shows that borrowers are less satisfied with the interest rates and repayment terms from online lenders than from traditional banks. So even if small businesses are getting the loan, if it is not at an appropriate price, we should still consider this a credit gap,” Mills said.

Future Plans

While loans could be the next growth phase for ShopKeep Capital, this could be one of many new directions that the payments company takes. For instance, with key competitor Square, which boasts a market cap of approximately $10 billion, in pursuit of obtaining a bank charter, they could have company someday.

“It’s an interesting idea. It’s still very early for us but we’re not ruling anything out at this point,” DeSimone said.

For the near term, however, he is focused on ShopKeep Capital, for which he expects to make a couple of key hires for soon. “In my mind, this helps us to be more competitive with Square. I think it’s a really good service for our customers and it fits very well into the other pieces of our business,” said DeSimone.

The Scoop on iPayment’s MCA Renaissance

iPayment, a small business payment processing company, is placing a bet that it could be better the second time around in the MCA industry. iPayment Capital, which is scheduled to launch in the fall, is iPayment’s second foray into the merchant cash advance market. In conjunction with this expansion iPayment tapped Tomo Matsuo as senior vice president to spearhead iPayment Capital.

iPayment’s announcement comes on the heels of industry peers Square Capital’s Q2 loan origination of $318 million and PayPal’s acquisition of Swift Financial. Rather than remain on the sidelines, especially with access to data on some 137,000 small businesses, iPayment is making its move.

“Before Daily ACH loans and MCAs, we all started with the split payment MCA, and it’s exciting to see the recent renaissance of that mechanism with companies like Square and PayPal making it a key product feature. Transaction-based underwriting and variable payback schedules have become much more mainstream thanks to companies like Square and Amazon,” said Matsuo.

iPayment’s timing for getting back into MCAs is apparent but also coincides with the industry being held under a microscope for some questionable practices, not the least of which involves stacking, which can get small businesses in over their heads. Matsuo said the industry has a shared responsibility to fix this.

“I think there’s an opportunity for the industry to clean up some of the stacking and other practices. We all need to do more to better align ourselves with the needs and long-term health of the customers,” said Matsuo.

Meanwhile David O’Connell, senior analyst at Aite Group, offered his thoughts on the future role of MCA in small business funding: “Although we will always have merchant card advances in large volumes and these will be important to SMBs seeking funding, some of this volume will be replaced as the practices of alternative lenders become more entrenched: the provision of capital to an SMB based on a variety of data sets that achieve a fuller view of an SMB’s ability to repay only some of which is related to credit card volume.”

Balance Sheet Funder

Similar to its predecessor product iFunds, iPayment Capital will be a balance sheet MCA origination business. The company has the benefit of hindsight with iFunds, which was before Matsuo’s time there, as well as any missteps by the industry from which to pull.

“My job is to launch and build our own balance sheet MCA product, and we have a management team committed to the initiative,” said Matsuo. “iPayment is in a unique position because of our long history with the product — as a funder, split payment technology provider, and referral partner — and have a lot of experiences to build upon. There’s a great team at iPayment with a ton of institutional knowledge.”

iPayment’s access to customer data and insights certainly gives the company an edge. “It’s a crowded market going after a finite universe of customers. From a customer acquisition standpoint, iPayment has the benefit of having 137,000 customers,” said Matsuo.

iPayment also has solid industry partners including the likes of RapidAdvance with whom the company serves merchant customers. iPayment will continue to work with RapidAdvance and others on MCA. “We recently had the opportunity to strengthen our balance sheet, and we believe investing in iPayment Capital makes great business sense,” said Matsuo.

Matsuo pointed to opportunities within the smaller merchant segment for MCAs. iPayment Capital’s average funding size will be somewhere between Square Capital’s range of $6,000 – $7,000 and that of ACH alternative lenders at about $40,000. “We’ll be right in the middle,” he said.

Matsuo, a Bizfi alum, officially started in his new role on July 1, and he has no interest in looking in the rearview mirror. “At the end of the day, it comes down to pricing risk appropriately and maintaining proper controls,” said Matsuo, adding: “We all want to grow, but there are responsible ways of doing so.”