This is the fifth in a six-part series of posts about online/mobile marketplaces brought to you by rageandrelease.com and our content partner Balanced. Read parts one, two, three, and four.
Why Marketplaces Tend to Do Payments
In my last post about fighting marketplace fraud, I mentioned that “marketplaces with payments functionality are lightning rods for fraudsters with stolen credit cards” So, why would any self-respecting marketplace want to take on that type of risk and do payments themselves? I maintain that marketplaces must do payments in order to stay in control of their platforms and streamline their operations, but there’s more to it than that. The job of a successful marketplace is to remove as much friction as possible between a merchant listing inventory and a consumer buying it. To accomplish this, they need to control payments not only to manage merchants, but also to deliver a great experience to consumers, but they do not need to become payments companies.
Marketplace = Trust Broker
The most fundamental element of a great online/mobile buying experience on a marketplace is trust. Trust is specifically important for marketplaces because the merchants are often so varied. For highly curated marketplaces, like Uber, where the experience is consistent regardless of which merchant is offering the service, the marketplace must garner at least as much trust as any traditional eCommerce provider. On most marketplaces, however, the value is that the merchants are unique, so the experience will vary from merchant to merchant. Regardless, the consumer must trust either the marketplace or the merchant, and usually, because the consumer has discovered the merchant through the marketplace, it’s the responsibility of the marketplace to broker trust to the merchant. Imagine if things were the other way around and the merchant could be easily discovered on their own while generating enough trust to have consumers buy directly from them, why would a merchant even need to list their inventory on a marketplace? Intermediating payments is one highly effective way for a marketplace to broker trust to their merchants (I explain further here). Many successful marketplaces also build trust through reputation, social dynamics, and ease of use. Payments is usually just a means to an end.
You Care About Commerce, Not Payments
Sometimes during a sales call, a marketplace operator will tell me they want to do payments themselves. I reply by asking “why?” 90% of the reasons I hear about why a marketplace wants to do their own payments are about control. They want to offer escrow and control when payouts occur. They want to be able to store card information to charge in a “card on file” manner. Above all they don’t want their customers redirected to ‘yet another service’ to get signed up with an account to accept payments. I tell them I agree, and they should be able to provide their customers with all those things. Then I ask them how they’re planning to comply with state and federal compliance issues, tax responsibilities, and banking/credit card company regulations. This is where the desire to “do payments” starts to wane. They tell me they hope they’ll work with a payments vendor who will help them out with such concerns. It’s very difficult to have it both ways. Dealing with regulations, compliance, and fraud are core competencies of a good payments company. Most marketplaces have more important things to do – like enabling new forms of commerce – to worry about also running an internal payments company.
Marketplace Payment Options and The Conservation of Pain
Historically, there have been two options for doing marketplace payments:
A. As a payment aggregator a marketplace would need to:
Charge a buyer’s credit cards
Take the money into their own merchant account,
Disburse funds to a seller via check, PayPal, or ACH
Example tools: Braintree, Merchant eSolutions, Stripe
B. Using a third-party payments solution (TPPS), a marketplace would need to:
Have a merchant create an account with the TPPS
Specify a commission to apply to each payment
Allow a buyer to pay a seller via the TPPS
The seller would receive payment directly from the TPPS (requires off-site redirect)
Example tools: PayPal, Amazon FPS, WePay
Under option A, a marketplace would be responsible for handling all of the compliance and regulatory hurdles themselves, but they’d have much more control over their marketplace. Under option B, the marketplace would lose control, but would get a lot of help on the regulatory and compliance front. I call this tradeoff the “conservation of pain” principle of marketplaces. Luckily, today there are payments products from (my company) Balanced, Braintree, and Stripe that offer a hybrid approach to the scenario described above.
Sufficiently Advanced Payments are Indistinguishable From Magic
The most magical part of the Cover dining experience is standing up from your table and simply pressing a button on your phone to pay for your meal. It’s elegant: much less socially awkward than trying to split the bill with a group. It’s convenient: no need to remember getting cash before you head out; just charge the card on file. That elegance and convenience comes from how Cover has employed the payment technologies at their disposal. One could even make the argument that Cover, since they are not actually the merchants providing services on their platform, is in fact just a payment company masquerading as a marketplace (their url is paywithcover.com). But I strongly believe that while most marketplaces should employ payments technology in a fashion similar to Cover, no marketplace should actually become a payments company themselves.
If you have specific questions about payments on your marketplace I’d be happy to offer my advice. Please contact me on Twitter (@jkwade) or via email (jkwade+collcons at balancedpayments.com). Also, feel free to follow @Balanced on Twitter, where we often post links about marketplaces and payments.
Pay it forward,
Jareau
Disclosure: My company, Balanced, provides payments technology to Cover.
Jareau Wade is co-founder and VP Growth at Balanced, a payments API for online and mobile marketplaces (available in the US only for now). Previously, he was the 1st employee and head of data acquisition at Milo.com until it was acquired by eBay in late 2010. Before Milo, Jareau was a founding faculty member at an Accra, Ghana-based technology-entrepreneurship training institute called MEST.
