You’re here because you’re a marketplace looking at becoming transactional, this will give you an overview of the why and the how as well as the really common pitfalls related to payments and how to avoid them.
Why go transactional?
We define marketplaces and platforms as businesses that are a central place where buyers and sellers can interact and who benefit from network effects. This photo was taken at a packed-out conference room at the marketplace conference (https://www.marketplaceconf.com/) in a pre-COVID 2018:
Taking more control of the transaction results in a higher percentage commission and better monetisation. So why are so many C2C and B2B marketplaces not already transactional? Two reasons:
- The hidden effect of disintermediation
- The lack of good solutions (outside of B2C goods marketplaces) on the market
- Regulatory requirements for holding client funds
Going transactional does not mean changing your business model — it would be a mistake to attempt this in a single project- as you’re likely to fall into the trap of disintermediation, which is a really difficult problem to solve.
Disintermediation (AKA network or lead leakage) is the process whereby a buyer and seller can avoid paying platform fees by transacting directly. It is very commonplace when the item is:
- High-value — the incentive to avoid fees will be higher.
- Repeat business — you form a trusted relationship with them off-platform.
- The marketplace isn’t responsible for the majority of the seller’s revenue — less risky to cheat and be offboarded from the marketplace.
- There is a face-to-face interaction — service marketplaces where people meet face-to-face have very high disintermediation rates.
- There are few value-added services — Amazon has low rates because they add value to their sellers with delivery services and sales support.
- More complicated sales cycles — where milestones payments or deposits are important.
To summarise, if your value as a marketplace does not greatly exceed your take rate, disintermediation will go up, so don’t change your business model until you have this fully under control!
How do I go transactional without changing my business model? Use payments as a new revenue stream and consider charging a side of the marketplace that you haven’t before — perhaps buyers instead of sellers. Understand the rates of disintermediation with this initial launch, add value with extra services and iterate. Once there is a clear business case for switching your business model, you’ll have all the real data to make that decision and you’ll have made a lot of additional revenue in the meantime, whilst protecting your buyers and sellers from fraud. A win-win by all accounts.
How to go about it?
If you’re a marketplace without disintermediation risks (i.e. standard, low-value B2C marketplaces) — you’ll probably already have a marketplace payments solution in place. There are a few basics to know with marketplace payments:
- PSD2 — don’t hold customer funds
- Seller onboarding — KYC and due diligence
- Fraud — don’t let funds go to the seller until you are ready and be aware of the danger of chargebacks
Firstly, you need to make sure that you, as a marketplace, are not in control of your customer funds or in the flow of money (either in your bank account or any other eMoney account that you may own). This wasn’t always the case. Pre-2018, marketplaces were able to hold customer funds and bank transfer funds out to sellers, but the regulators realised that there is a huge risk of handling client funds like this and made changes to the “Commercial Agent Exemption” clause of the PSD2 regulations.
The solution: traditional card payments providers allowed marketplaces to offer merchant accounts to all of their sellers. This means that funds go directly to the seller accounts with the added functionality of being able to split out a commission to the marketplace.
This ties into the second important point you need to know: payments businesses need to verify and complete “Know Your Customer” checks (KYC checks) on those who own seller accounts. The payments businesses do this to prevent money laundering, fraud and financial crime, which is also a great thing for your marketplace. However, there is a requirement for sellers to complete an extra step to get verified before they can take their first transaction, which can be disastrous for the roll-out of a payments project when you already have thousands of sellers. Why? Because if you have a team selling payments to your sellers, you’ll likely only get a small portion of your sellers signing up and completing the steps to get verified. The impact on buyers, well, the marketplace will advertise the service but it will only be available on a handful of profiles so uptake will be low. Three months of selling later, the project falls over and 6–12 months of build time is wasted. It’s not all doom and gloom though, we’re unique in that we allow you to launch payments on every listing from day one (more on that later).
Finally, once funds have left your platform, they are incredibly hard to get back, which is why payment fraud is something you should be aware of and focus on (and of course, you also want to protect your buyers and sellers from fraud). KYC checks are one way to reduce fraud, 3DS checks (for card payments) is another and slowing payments down is a third way. Slowing down payments gives buyers a bit more time to complain and refund a transaction before funds are sent to the seller. Once funds are in the seller’s bank account, it’s difficult, fiddly and sometimes impossible to claim these back and the marketplace may be liable for the entire transaction! Say you are a C2C marketplace, a scammer just needs to sign up, verify, accept their first transaction and leave with the money. The buyer complains and only has the marketplace to foot the bill.
But slowing payments down has a major effect on disintermediation. It’s standard practice for payments to take 10 days to get from buyer to seller. Instant payouts (often advertised as instant payments) charged at a greater cost still take over 5 days to clear. If you’re a service marketplace and it takes 10 days for you to receive the funds, there’s a very large incentive to pay the person directly. If you rely on charging a percentage on the transaction, this is disastrous.
Chargebacks are the final piece of the puzzle. A chargeback is when a customer, rather than asking the seller to refund the transaction, instead contacts their bank directly and asks them to reverse the transaction. Chargebacks are a big problem for marketplaces, not just because of the transaction fee applied by the payments business (which is typically £/€10–20 per transaction) but also because funds may have left the seller’s account so the marketplace may be liable for the entire transaction amount. Some chargebacks can be made 540 days after the transaction so this is a lot of uncapped liability.
These are all important hurdles and not too obvious pitfalls. We do a few things differently and use escrow as a payment method to solve all of these issues. We’ll run through them below but before this, it’s important to note that escrow isn’t applicable for every marketplace; if you are a low-value goods marketplace in particular, and the main disintermediation factors are less applicable to you and we’d recommend using a marketplace payments provider. Our team is happy to point you in the right direction.
How trustshare uses escrow
We use escrow as a payment method in our 5 line of code integration, where you have full control over your pricing model and branding:
The buyer checks out (via card, open banking or bank transfer), we hold funds in a dedicated IBAN per transaction, once the buyer is happy with the goods or service received, they can release funds to the seller. It’s a simple concept; why it’s so powerful for allowing marketplaces to go transactional is really interesting and we’ll dig into that below.
We’ve got you covered for PSD2 as we hold funds in a dedicated and regulated ring-fenced account per transaction rather than per seller, so you’re not in the flow of funds. Because we’re unique in having a period of time between deposit and release, we can complete all KYC verifications only after the buyer has checked out. Why is this so important? Because with trustshare, you can roll out payment links on every single listing from day one. Only once the buyer has checked out will the seller get a request to get verified to collect their funds. This opt-in methodology on the buyer side, rather than the seller side (or both sides), is the difference between a successful and unsuccessful project, the importance of which cannot be overstated.
When the buyer confirms that they are happy with the service or item, the credit and chargeback risk is so much lower that we can speed up your payments. By this, we mean a buyer can pay a seller end to end in under 30 seconds (rather than 10 days), reducing disintermediation and giving a cash-like feel to face-to-face transactions whilst protecting buyer and seller. We also give you chargeback protection as standard which means there are no hidden liability concerns from buyers and sellers, so that issue is ticked off.
Best of all, it’s 5 lines of code to integrate end-to end-in your branding, ready to go. We do all the heavy lifting for you — we’re here if you’d like to chat.