Spreedly Blog

Spreedly and Marketplaces

We consistently receive interest from developers looking to build a marketplace. We’re really only a good fit with one type of marketplace, which I’ll discuss below. First let’s talk about marketplaces overall. In many ways this post is an update to one we did a while back.

Defining a Marketplace 

There are 3 or 4 major functional components to a marketplace

  • 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 mostly 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)

Why are marketplaces so popular? 

The ease with with anyone can now accept credit cards (immediate onboarding) has allowed marketplace services to rapidly onboard all types of sellers that previously couldn’t accept online payments or were forced to only use PayPal as a payment method. What took someone like Etsy many months of development work can now be achieved in days.

Global

We should point out that right now, July 2014, no one is doing marketplaces globally. PayPal has adaptive payments (which we don’t support) but that is fairly complex and has never really taken off.  There are some good U.S focused offerings (Balanced PaymentsStripe and Braintree) and there is a rumor that PayPal is launching something soon that will be global. PayMill in Europe also talks about having marketplace support. However, these are very regional options. You can’t (easily) create a global marketplace today like you can a U.S one.

Spreedly as a marketplace offering

Spreedly has some characteristics that are useful for marketplaces. Card storage and tokenization means that once a buyer is set up in your marketplace they can buy from other vendors in your marketplace without re-entering data. Secondly, we support a wide range of global payment gateways. But our model differs in three critical ways:

Existing merchants. We service marketplaces where the majority of sellers already have a merchant account and expect to use that merchant account in your marketplace. That’s where our support for 60 + gateways/PSP’s comes in to play. Imagine a marketplace for beach rental properties. Chances are, people who already rent their beach house are accepting credit cards. If you’d like them to list in your marketplace it would help to let them keep using their primary merchant account.

That does not mean you can’t use us with someone like Stripe or Balanced to quickly enable new sellers who don’t have a merchant account. You just have to decide whether support for existing merchant accounts is going to be important to your marketplace. It’s certainly easier in many ways to not provide that choice.

No ACH disbursements: Due to the fact that your sellers have their own merchant account ACH disbursements are redundant. So we do not have support for ACH disbursements. One upside here is you’re free from the flow of funds and therefore the risk of chargebacks.

Revenue Model: Lastly, and this is the big one, we don’t support taking a % of the transaction unless the underlying gateway also supports it. Some like Balanced and Stripe do. However, most don’t. So it’s unlikely you can default to that model for how you get paid if you are using Spreedly. You could track the overall revenue and charge a seller separately on a transaction or monthly basis. Or you could just have a flat monthly fee to be in your marketplace.

So in summary, Spreedly is really only viable as a marketplace platform if you expect the majority of your sellers to already have, or easily get, their own merchant account and use it on your platform. Current industry trends might mean that’s going to be a more viable approach than a single vendor executing on a global strategy. Time will tell.

 

Braintree, TaskRabbit and the future of marketplaces

Marketplaces are all the rage, fueled in part by a boom in collaborative consumption business models. Interest in them has only accelerated since we wrote a post around marketplaces and payments back in November 2012.

For a multitude of reasons the default payment assumption when approaching a marketplace is “I need to collect money from the buyers on my site, keep some sort of fee for myself, and then disburse or payout the rest to the seller.” Sounds easy but turns out to be very hard. Collecting and disbursing money gives you a lot of control as a marketplace. However, it also opens up a whole range of regulatory issues from whether you’re a money transmitter to how you mange things such as fraud and chargebacks. Balanced embraced the challenge to help marketplaces strive. Stripe recently added disbursement capabilities and discussed processing $500,000 per day. Still, many markets outside the U.S remain underserved or try to get by with PayPal’s adaptive payments API.

We saw a competing trend and wrote about that last year. It is becoming significantly easier for anyone to get a merchant account and thus accept cards. What Square was doing for the POS world Stripe was doing for online sales. Braintree played catch up and now supports instant onboarding in some markets. New providers like Pin Payments in Australia and PayMill in the EU showed up. It struck us as the better model for many marketplaces to allow/make your sellers get their own merchant account to collect funds for the sale of their services or goods. Using Spreedly, marketplaces can see all of the transactions moving across their platform. If a transaction takes place, look at the amount, calculate your % and then you directly charge the card on file for that particular seller. We’ve seen vacation rental marketplaces be the first early adopters of this model but it’s happening with others as well.

The news recently by TaskRabbit and Braintree reinforces the validity of this model. TaskRabbit allows buyers to purchase services from sellers within the TaskRabbit marketplace. Those “services” are a range of things from walking a dog to buying roses and hand delivering them to your sweetheart at the office. In the old model TaskRabbit had to collect money for the service, hold those funds, take a cut, then pay the TaskRabbit out upon completion. The relationship with Braintree now means in effect each individual TaskRabbit has a (sub) merchant account to accept cards. I’m not sure of all the nuances of the $$ flow and commissions etc – but it is a seismic shift. In this case TaskRabbit has enough control that it can dictate to the TaskRabbitter that they work with Braintree so a single relationship makes sense. If you’re a vacation rental site working globally though you’re going to to have to work with a lot of options – especially if you want to work with rental properties who already have a processor relationship. Either way though the important point is you’ve removed yourself as the middleman for holding the funds.

There will always be a segment of the market that wants to hold and disburse funds. What’s different now is the availability of a new model. It’s a model that we think will become the more predominant one as the ability to accept payments becomes easier. We expect more and more sites to follow.

 

Marketplaces and Payments

Edit: Make sure you read our newer post on Spreedly and marketplaces

Unlike traditional ecommerce/online sites, that have one seller and many buyers, marketplaces have multiple sellers and buyers. In addition, any transaction involves three parties: the seller, buyer and the marketplace. This uniqueness has always created challenges for marketplaces wanting to accept online payments. “Too hold or not too hold the funds?” – that is usually the question.

Recent trends in payments are slowly making things easier for marketplaces. While it’s hard to pick winners and losers one thing seems certain: marketplaces are going mainstream and payment solutions are following to accommodate their needs. The two big changes would be new services targeting the requirements of marketplaces and new payment types trying to handle marketplace payment requirements (often articulated as “peer2peer” payment types)

From the very beginning of the commercial Internet there was focus on marketplaces. Long forgotten early Internet startups like CommerceOne and Ariba planned to be massive B2B marketplaces. (Ariba survived then thrived after a pivot to e-procurement) Ebay, focused in on the consumer and small business, fared much better. This might be because they were capturing/creating an untapped market vs competing for an existing one.

Market places go hand in hand with payments. PayPal‘s initial focus was peer to peer payments via email. It was a perfect match with Ebay’s client profile. Ebay and others launched PayPal competitors but ultimately came to the “If you can’t beat them buy them” conclusion. Ebay’s acquisition of PayPal highlights the tight intertwining of payments and market places. Another example of marketplaces and payments going hand in hand? Kickstarter. Kickstarter is wildly popular but also only available in the US. Why? Payments: specifically Amazon’s payment services which are only available in the US. (Note – Kickstarter just launched in the UK!)

Just like Ebay before, marketplaces like AirBNBEtsy and Fancyhands are creating many first time sellers. To accept credit cards online you need a merchant account/payment gateway. Traditionally banks only give those out to sellers who have an established business or history that mitigates risk associated with a merchant. Many marketplaces pull in new sellers who find the whole process of procuring a merchant account daunting and/or not possible. Significant friction around payments is a huge drag on marketplace growth. This means payment problems are strategic problems. Yet taking on the ownership of holding the funds on behalf of buyers is a major regulatory undertaking.

Etsy, Airbnb and TaskRabitt had to create their payment platforms from scratch. Many start off defaulting to PayPal only. After all, PayPal was the peer to peer payment type.  Yet that approach can create end user animosity. Merchants want choice.  So what should your approach be now if you’re starting a market place? Well there are changes in merchant accounts, payment types and dedicated services – all of which are making it easier to launch your offering.

Firstly, on the merchant account side. PayPal blazed the way with a single merchant account/payment gateway experience. Recently, Stripe has picked up where PayPal left off and dramatically simplified (at least if you’re a developer) the ease with which you can begin accepting credit cards online. Braintree arrived earlier than Stripe but has only recently followed suit with a similar pricing and approach in the U.S. Although Braintree has a much larger international footprint than Stripe the simplified merchant account offering is only available in the US , Canada and more recently the UK and Ireland. In Australia Pin.net.au has rolled out a Stripe like offering. It’s safe to assume that the UK and then European countries should have a similar offering within 12 – 36 months either from established players or new entrants. Given the complexity of financial laws in each country local payment companies/startups have the chance to compete against the global players. PayMill out of Germany is a great example.

What does this mean if you run a marketplace? Even the smallest online seller should be able to set up their own account and begin to accept credit cards online. Stripe, Braintree and Pin.net.au are to online payments what Square is to the local Farmer’s market. The chances that you’ll need or want to control funds in escrow on behalf of your sellers is significantly reduced.

Stripe created Stripe Connect. Stripe Connect is aimed at easing the on-boarding process of new merchants that need to procure a payment gateway to work with your marketplace. It’s a smart move but it does contain risks for marketplace owners. You have a lot of eggs in one basket. Also, you walk a fine line between “pointing” someone to a third party service and “recommending” a third party service. The last thing you want is your merchants blaming you should Stripe ever fall out of favor (after all, PayPal was once popular with developers). For that reason we think Stripe Connect is a smart thing for marketplaces to offer but probably not exclusively. Lastly, you have to always think about new customers – either net new or competitive wins – that already have a payment gateway they’d prefer you support.

As a marketplace owner in the US and Canada (and hopefully globally soon too) you now have some great options for even the smallest seller being able to accept credit cards from their customers. What about non credit card payment types? Well, here too there is a lot of innovation occurring.

Two examples of newer payment types are Dwolla and GoCardless. Let’s clear up a regular source of confusion right away. Neither Dwolla nor GoCardless let you accept credit cards. So it’s not an “either/or” option. Many of you will need or want to support payment gateways and these payment types. Braintree + GoCardless + Dwolla for example.

Dwolla and GoCardless are money transfers not credit transfers.  In Dwolla’s case you basically drop an amount of money into your Dwolla account from your regular bank account and then use Dwolla to transact. You top it up when it gets low and start again. In GoCardless’s case it’s working with the existing ACH or the direct deposit process only striving to make it more elegant. Both of these payment types allow for person to person payments. Dwolla recently launched a “mass pay” option too called, well, MassPay that may be useful to marketplaces.

Why offer Dwolla or GoCardless along with credit cards? The most obvious = cost savings. There is no charge for a transaction under $10 with Dwolla and just 25 cents for any transaction over $10. GoCardless is 1% of the sale price. (A recent post by Braintree shows that back of the envelope around 4% of a transaction goes to credit card fees.) Then there are other costs like chargebacks, typically around $15 each, and involve a person saying “I don’t remember agreeing to this charge from this merchant”. $50 online sale? $2 to a credit card. 50 cents to GoCardless. 25 cents  to Dwolla. Compelling economics.

The second reason could be cultural or geographical. The financial crisis of 2008 (and longer elsewhere) resulted in an increased pool of people adverse to the idea of “credit” payments. They are looking for alternative ways to pay. Secondly, in many areas outside the US credit card transactions represent a much smaller percentage of online transactions. Many regional European markets have a preferred – typically ACH or bank transfer – approach they use. If you envision a meaningful percentage of your merchants being outside the US you’re going to want to consider non credit card based payment types.

The last reason is price point. Even corporate credit card users typically have a max upper limit – say $5000. If you envision selling goods or services above $1000 it might be a requirement that you have a non credit card way to do that.

What are some of the drawbacks? Well, Dwolla is US only today and GoCardless is UK only. (Although I believe GoCardless has short-term expansion plans within Europe) Secondly the time for money to settle between two parties tends to be longer than with a traditional merchant account (although the newer merchant accounts I mention above also have substantially longer payout times than a “normal” merchant account – partly to manage risk and partly to reduce the need for a “reserve” on your account). In general both of these offerings are also very new so their success is not ensured. In short, we think they’re a great payment option to include alongside credit cards but don’t see them replacing the need for a merchant account any time soon. Again though, they are cheaper than cards and can facilitate peer to peer payment removing you from the headache of controlling funds.

What about “local” payment types like the Dankort, ELV and others? Here you’re going to have to support payment gateways in those regions that typically support popular local non credit card payment types.

The final group is “dedicated” marketplace payment solutions like BancBox and Balanced Payments. In the Stripe and Stripe Connect examples you allow customers to set up their own merchant account/gateway. Marketplace offerings – while potentially offering that capability – focus in on letting you collect on behalf of someone else. So not just the capturing of money but also the disbursement of those funds to the right participants. It’s a subtle but important difference. As of July 2013 it appears that Balanced Payments is capturing a great deal of mindshare here vs BancBox – at least from where we sit at Spreedly. Stripe recently announced disbursement options for marketplaces – another sign of the strength of marketplaces.

It’s early for these offerings so it’s hard to argue around the advantages and disadvantages. One big drawback, similar to other solutions discussed here, is that they’re currently US only. One benefit might be their specialization in areas such as crowd funding or questions around financial and regulatory requirements (1099′s etc). The trick here, like many “complete” solutions, will be balancing the additional functionality you don’t need to develop with the flexibility to support your marketplace when relying on a comprehensive solution.

This leads us to our final recommendations and thoughts. (Note, perhaps unsurprisingly, much of this thought is what drives our development of Spreedly so there’s definitely a product pitch element to this.)

  1. Wherever possible offer support for multiple payment gateways – in particular the ones that allow for easy on-boarding of any merchants.
  2. Ensure your merchants can change payment gateways at any time without fear of technology lock in. The best way to do that is to vault their cards away from the payment gateways.
  3. Support as many non credit card payment types as possible so as to offer affordable, alternative settlement types compared to credit cards.
  4. Think globally so that your niche marketplace has the best possible chance of hitting a critical mass of buyers and sellers.
The last piece to our product pitch is we want to give you a consistent API experience to develop against and in some cases enhance what is already there from the source gateway in terms of functionality.
That’s it. Good luck.
Justin