A Payments View on Marketplaces – How to Be(come) Successful

The digital world continues to collide with the physical and, because of the pandemic, has seen exponential acceleration. Playing a pivotal role at the heart of this growth is the online marketplace, which has become a critical tool in the ongoing digitalisation of many industries.

Starting back in the 90s, platforms like Ebay and Amazon led the way and arguably defined many of the approaches that start-ups as well as global businesses use today. The model of connecting millions of buyers to millions of sellers carries so much value that it has continued to evolve. Platforms like Uber, Just Eat, Deliveroo, Airbnb and Booking.com demonstrate how this isn't just an approach for retail e-commerce but one that is highly adaptable to Mobility, Hospitality, Services sectors and much more. Today, there are marketplaces that will allow me to order 3D printing (Shapeways) or to book a backing singer for my latest musical creation (SoundBetter).

Marketplaces are solving much more than just the selling experience

When the term marketplace is mentioned, people typically think of the traditional Ebay Business to Consumer (B2C) type model, but the applications are so much broader. B2B is seeing huge success in supporting the increasing demand for sourcing business supplies from around the globe, with vendors like Walmart, Flipkart and Alibaba all expanding in these areas. B2B2C is also evolving, with many drop-shipping models now leveraging this approach to allow for business growth without the expensive burden of having to pre-buy stock. And finally, the C2C segment is not to be overlooked, with a range of peer-to-peer models emerging, from monetising your car or driveway with platforms like Lynk & Co and YPS to peer-to-peer lending and crowdfunding providers.

MARKETPLACES PROVIDE A UNIQUE PROPOSITION FOR SMALL AND LARGE BUSINESSES ALIKE

A large marketplace platform provides a typical SMB (small or medium-sized business) access to a global network of buyers that, without the marketplace, would simply be cost-prohibitive to achieve. Marketplaces are so much more than a simple website platform for sellers: they provide the marketing, the search engine optimisation, an existing market of millions of buyers, payment processing, dispute management and services like shipping and logistics. These platforms really are a turnkey solution for any SMB - simply select the marketplace brand that best suits your target market. Many large retailers are also seeing the value in digital marketplaces. Due to the sheer volume of buyers these platforms attract, they are proving to be a route to market that even the largest businesses can't ignore. The value of the model is such that many of those not using existing marketplaces are building new ones themselves and are looking to capitalise on and hopefully grow their existing consumer base. This isn't such an unusual concept, as many retailers have been selling multiple brands on the shop floor for years - this is simply taking it to a digital level.

HOW HARD IS IT TO BUILD A MARKETPLACE?

While marketplaces represent a fantastic opportunity, the barriers to entry are rising in a potentially perfect storm of industry and compliance changes that is affecting newcomers and the old guard alike.

Regulatory considerations

Prior to the introduction of PSD2, many businesses existed as marketplaces and operated largely without control or regulatory burden. These platforms typically operated under an exemption which for many stipulated that they operated a closed loop network that only facilitated one thing. However, these exceptions were historically very broad in nature, and the introduction of PSD2 saw many businesses now needing to consider the regulatory overhead to continue operating.

Becoming regulated as a marketplace is not a simple process. First, you must consider what regulatory model you wish to operate under - Payment Institute, Payment Facilitator or eMoney Institute being the common options. Each one comes with its own challenges. For many businesses, this is a significant change and impacts everything, from how you onboard a seller and manage incoming funds to monitoring how these funds are running through the systems. The rules are tightly managed by KYC (know your customer) and AML (anti-money laundering) rules, which until recently have mostly been the burden of fintechs and banks, not retail and other marketplace organisations.

Furthermore, becoming regulated in a local market is one thing, but these rules need to be considered for all the geographies you operate in - Europe, UK, US, APAC all have different rules to consider.

Onboarding new customers and sellers

As a non-regulated entity, the rules around giving an account to a new seller or user were largely set by the organisation themselves. Businesses were able to take a risk-based approach to checking and validating who they choose to accept. Transitioning to a regulated business needs a lot of consideration in this area: what are the spending limits, what risk rules apply, what documentation do you need to collect and validate?

Validation is key and typically requires you to engage with a host of CRAs (credit reference agencies) and other data sources to collect sufficient evidence to prove to the regulator that you know who your potential customers are. Furthermore, you need to closely monitor users and be able to provide evidence as well as potentially request further documentation to validate activity that doesn't match a regular pattern, value or other rules.

Managing incoming payments

Most large marketplace solutions are globally oriented, and any global e-commerce solution will typically have to address the ever-expanding list of payment solutions that consumers are looking to use. Your platform needs to support the major card schemes in the target countries or regions, like Visa, Mastercard, AMEX and more in order to optimise your business; these also need to work locally and not simply using cross-border approaches. Also, you should consider the network of APMs (alternative payment methods), like iDeal, POLi, SEPA and potentially dozens more. Wallets are also a serious consideration for consumers today and can have a major impact on checkout conversion - PayPal, Alipay, Venmo and WeChat all being prevalent, with platforms like Apple Pay and Google Pay needing to be considered as well. And lastly, don't forget the new market entrants, from BNPL to Open Banking.

It's crucial that you meet the right regulatory status, as many payment schemes are changing their rules when it comes to marketplaces and a lack of compliance may prevent you from being able to process payments in some regions and in the preferred way.

Disputes and refunds

So, now that you have met your regulation requirements and have the funds coming into your marketplace, let's look at how to manage the exceptions. As a regulated entity, businesses can come under far more scrutiny with regards to refunding and managing disputes. As a non-regulated entity, there is often no institute tracking or governing how or when you return money to a user, but once regulated, your business will fall under AML rules, requiring it to be much more robust.

It is also worth considering the challenges with the many APMs that exist, a lot of which do not offer a method for refunding, requiring the business to engineer rules and processes to facilitate these payments.

Managing outgoing payments

The typical process for many marketplace models involves paying users for the goods or services you have sold on your platform. This process throws up some interesting challenges. Sophisticated modern marketplaces allow sellers to sell all around the globe. In some instances, a single checkout process may involve multiple sellers selling in multiple currencies to a single buyer. This creates a complex web of currency exchange and fee calculations that needs to be carefully tracked and results in the system needing to generate multiple currency payouts to multiple countries.

Once you have your network of partners helping you with payouts, you now need to carefully consider your funding process. There are several hurdles at this stage - let's look at a couple of them. For example, what time does it take for your incoming payment method to clear? This can be anywhere from a few hours to multiple days. Another one relates to balancing your accounts between geographies; if you have a lot of payments coming in in Europe that need paying in the US, you will need to move money. Complicating this is the expectation of the sellers; many want to get paid faster, so you need to consider this when designing your systems. Pre-fundings may be an approach, but it requires cashflow, and you need to be careful not to fall into another regulatory trap by providing credit to your sellers.

Tax and logistics

Finally, marketplaces have recently fallen under the gaze of tax regulation. In many countries around the world, it is now the responsibility of the marketplace to collect the tax at the point of sale and settle it in accordance with the respective agencies in a country. It is no longer the responsibility of the seller in many cases, although you will need to provide them with the means to demonstrate to their local agencies that tax has been paid. This is a huge undertaking and adds significant complexity since most countries have their own set of rules, for example all the local and intrastate rules in the US.

Once you have the tax right at the checkout, you also need to consider logistics, more so across some borders than others. You need to consider any import and export duties that may apply and provide tools to help the sellers with this process.

THE RISE OF THE MARKETPLACE PAYMENT SERVICES PROVIDER

With more complexity come new solutions, and the expansion of marketplaces has brought with it a new generation of payment service providers. No longer just a payment gateway and acquirer combination, these new vendors provide businesses with turnkey solutions for payments in and out, onboarding, AML, KYC, tax and much more. The leading vendors in this space can provide solutions for most of the challenges raised in this article, and some offer it on a truly global scale.

If you are a marketplace or thinking of becoming one, there are some big decisions to make. The first one is probably, do I build or do I partner? There isn't a one-size-fits-all answer, and the specific industries, territories and internal appetite will likely define the best option for your business.

Running a global business is tough enough, but the challenges which be(com)ing a marketplace introduces should not be underestimated. But one thing is for sure: the popularity of these platforms and will only be increasing.