Edit: The original post from November 2012 was updated in July 2013 to highlight changes in the space.
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 AirBNB, Etsy 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.)
- Wherever possible offer support for multiple payment gateways – in particular the ones that allow for easy on-boarding of any merchants.
- 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.
- Support as many non credit card payment types as possible so as to offer affordable, alternative settlement types compared to credit cards.
- 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.