Do tech companies give back to small business as much as they take?

Shopify HQ.
Shopify HQ.
Image: Reuters/Chris Wattie
We may earn a commission from links on this page.

Small businesses are a big business for technology companies.

Shopify, for example, makes it easy to spin up an e-commerce site on the cloud, while Stripe makes it simple to add payments processing into a website. Square provides online and offline checkout systems, and DoorDash connects restaurants to a fleet of couriers to deliver food to customers.

Commerce has been shifting online for years, but Covid-19 supercharged the move as consumers do more of just about everything digitally, from payments to grocery shopping. Small businesses around the world have responded, with about 70% of them speeding up their digitization, according to a 2020 survey.

But third-party online services aren’t free, and the expense can add up. Small business owners have to decide whether these services give back as much as they take, and they also have to contend with tech giants like Google and Facebook that have a tight grip on the digital advertising market.

SidelineSwap, a site for athletes to buy, sell, or trade sports gear, wrestled with these issues when it was starting out. Executives had to decide which technology to build themselves and which third-party parts they could plug in. After researching all the different kinds of services, the company went with a mix of homegrown and off-the-shelf technology. Shopify didn’t have the kind of two-sided marketplace SidelineSwap wanted, so the company built its own marketplace—its core business—from scratch. But it went with EasyPost to generate shipping labels and to provide tracking services, and SidelineSwap initially used Stripe for payments.

“We could take the few engineering resources we did have and focus on what would differentiate us,” said Brendan Candon, CEO and co-founder of SidelineSwap. The Boston-based company says it has 1 million users and has handled nearly $100 million in transactions since starting up in 2012. For SidelineSwap, the cost of third-party offerings has been manageable, but whether this holds for small businesses in the future may depend on whether these platforms are held in check by competition.

“You’ve seen proliferation of marketplaces generally because a lot of the building blocks are now there,” he said. “And I think the cost structure generally works. You can build a business with healthy margins on top of all those things.”

Image for article titled Do tech companies give back to small business as much as they take?

Is “buy now pay later” a benefit for smaller merchants?

Right now SidelineSwap is deciding whether to offer a “buy now pay later” option. Companies like Affirm, Afterpay, and Klarna make it quick and easy for customers to break up their purchases into multiple payments, but the service can cost the merchant around 2% to 6% or more of the transaction. If SidelineSwap would have gotten the sale without offering a pay-later service, then there’s no reason to give up that money. Large retailers likely have the analytics and sophistication to help make that decision, but it can be harder for a smaller operation to discern.

“It’s just something we’re kind of working through in our process,” Candon said. He thinks pay-later is becoming kind of like PayPal—something consumers automatically expect will be an option. “You’re leaving money on the table if you don’t incorporate it.”

Affirm CEO Max Levchin told Quartz that the company’s pay-later offerings get results for businesses like SidelineSwap: The average order value goes up around 85% when companies offer Affirm’s financing, and repeat purchases jump by 20%. He says Affirm has proven to consumers that its no-late-fee financing is transparent. “We think of ourselves first and foremost as a marketing platform and a revenue accelerator,” the former PayPal mafioso said.

Image for article titled Do tech companies give back to small business as much as they take?

Third-party services are transformative, until they become Big Tech

These days there are thousands of third-party services offering all kinds of business intelligence, says Karen Mills, who ran the Small Business Administration during the Obama administration. She says it’s still unclear how small operators will use all these services because so many of them are new, but overall she’s optimistic.

“It’s going to be highly positive and highly transformative,” said Mills, now a senior fellow at Harvard Business School. The key to whether it’s a net benefit for small companies depends on whether these providers become monopolistic behemoths like Amazon, which provides small enterprises with everything from cloud service to inventory tracking, and then has the power to copy its customers’ most successful products once they’ve become locked in and dependent on the system.

SidelineSwap’s CEO agrees that there’s a difference between advertising, where monopoly-like companies like Google and Facebook have tight control over the industry, and the more fragmented market for payments, in which the likes of Stripe, PayPal, and Adyen are competing vigorously with each other, which can help keep a lid on costs to the entrepreneur. He says the company switched from Stripe to PayPal-owned Braintree for payments, in part because of cost.

In some parts of their business, entrepreneurs can’t avoid the big players. “There’s no way to get the ball rolling without paying Facebook, Google, or Amazon to reach the audience,” Candon said. When SidelineSwap was starting out, the company was able to reach a lot of people on social media sites like Facebook and Instagram without heavy advertising costs, but he says those days are over. Facebook’s algorithms have changed, and the only way to reach a lot of people is to dip into your wallet: “You have to pay the piper to reach the customer,” he says.

Fortunately, Candon thinks there’s still a lot of competition in industries other than advertising and social media. “In most parts of tech there’s a lot of choice,” he said.

Mills is betting that financial startups offering business intelligence, money transfer, and cash flow management can ultimately make small businesses better at what they do. She argues that regulation can help keep the field competitive and prices contained. She envisions a future in which artificial intelligence-powered vendors offer lines of credit before entrepreneurs realize they need it.

“All of these pieces are services that address pain points that small businesses know they have,” she said. “They just don’t really know how to buy a product yet and integrate it into their activity. But the pain points are real enough that I think that’s going to evolve.”