Looking to leverage or provide MarketPlace Payments? What you must know
There are 5 components that any SAAS platform has to consider to offer Marketplace Payment Solutions:
- Easily create a merchant account when onboarding a new seller to the marketplace
- Take a percentage of each transaction as a fee while the transaction is occuring
- Accept payments in the marketplace any way possible but primarily via credit cards
- Pay out to sellers, once the money has been collected and the marketplace has taken its share, via ACH/bank transfer (cost savings)
- Deal with buyer | seller conflict. Buyer is unhappy with product and wants a refund. If chargeback happens the marketplace is first in line to deal with resolution
Etsy provides a platform that enable users to easily display their goods for sale. So a jewelry maker would upload photos of their creations, set pricing and shipping info and of course collect payment.
Normally accepting payments would require each Etsy user to apply for their own merchant account. This traditional need creates friction for Etsy clients. Most are unfamiliar with merchant accounts and the process of applying and providing supporting documentation is more trouble than having the platform is worth.
Etsy and many other providers [PayPal was first] realized that if they could make payment sign up simple there would be much higher adoption rates. To that end Etsy has a Marketplace Payment Solution.
This means that Judy Jetson of ABC Jewelry selling handmade earrings can sign up with Etsy, provide some basic information [including bank account] and almost immediately be approved for accepting credit card payments.
For every sale Judy makes Etsy is acting as the Merchant of Record [MOR]. What does that mean?
- Etsy has the master merchant account. Etsy decides on when Suzy gets funded and VERY importantly “Etsy” appears on the customer’s credit card statement--not “ABC Jewelry”
- Etsy ultimately deals with chargebacks or customer credit card disputes. Etsy terms of service will clearly spell out they get to debit ABC’s bank account to recoup monies already paid out to ABC
- Etsy funds the sale price less their typical 3.5% payment fees
MarketPlaces generate revenue in several ways but acting as the MOR is typically their largest revenue generator. If the actual cost to process payments is 2.6% then Etsy makes over 20 million dollars per year from their payments business [process over $2 billion per year].
This recurring revenue model is very attractive and it’s very easy to see why MarketPlace Payment Solutions are much in demand. Much of this article is from the vantage point of leveraging payments as a revenue driver for the platform.
There are now many businesses looking to aggregate like goods and create a marketplace. There are even platforms that let you enter this pace without having to create your own engine.
What are the challenges in MarketPlace Payments
Payment processing is inherently risky. Non-payment of fees, chargeback exposure and fraud are all areas where there can be potential $ loss.
In Etry’s case as in most marketplaces fee non-payment of is not an issue as the seller is funded the purchase price less the typical 3.5% and per transaction fee.
But you still have potential chargeback exposure. Someone buys earrings from ABC and upon receipt is not happy. If they can’t resolve with ABC they could initiate a chargeback. When that happens Etsy sees a debit to their bank account from their credit card acquiring bank.
Etsy in turn would debit ABC Jewelry. If that debit was not successful Etsy potentially eats the $ loss. This risk is fairly small but certainly has happened.
The fraud risk has the biggest loss potential. Someone applies to Etsy and sets up a bogus store. They have 100 stolen credit cards and place orders for fake goods. Etsy funds the fake business. Those stolen cards charges are all likely to come back on Etsy as the entity that loses the money.
There are also compliance requirements. MarketPlace Payment Solutions must offer PCI compliant solutions and some are subject to obtaining a Money Transmitter License.
Each MarketPlace is different and whether an MTL license is required should be given careful consideration.
In addition to legal and risk mitigation concerns you also have the challenges of international payments and payouts. Most if not all payouts are done via the ACH network or the country equivalent when not in the US. Coupled with exchange rate concerns there is a LOT to have to manage.
Lastly there is reporting. Every platform user needs to track sales and deposits [as well as IRS reporting needs]. This means there needs to be a user portal to reconcile these transactions.
So the payment processing is only one layer of a complex system. This makes using pre-built Marketplace platforms like Mirakle much simpler. For first movers like an Etsy much of what they do has been built from the ground up. If you have ever done development than you know this takes SIGNIFICANT time and money.
What took Etsy many months and a ton of money to create can now be implemented in days.
There are the usual suspects: Stripe | PayPal | Adyen [primarily European]. In each case the platform will have a flat rate charge for processing credit cards. Payouts are supported via ACH.
Most of these platforms support multi-country payment options.
All of these options have deep experience handling payments and depending on marketplace goals can be viable options.
The issue is that a MarketPlace payment solution is potentially your biggest revenue generator. With Stripe etc you may find it difficult to get pricing that allows you to optimize revenue.
By exploring other payment solution options you might be able to generate .30-.50% or more per transaction. When the MarketPlace is small this may not make a material difference but if volume grows this % variance adds up to a significant amount of money.
If you are considering or have already implemented a MarketPlace Payment solution it makes sense to explore your options. Why not have a conversation with a group that understands payments and the critical role payments can play in driving business growth.