Payment system for Marketplace: how to make the right choice?

What is a Payment Service Provider (PSP)?

Payment Service Providers (PSPs) (or payment service suppliers, payment processors, or payment gateways) are third-party companies that specialize in setting up a payment infrastructure, which they offer to businesses in exchange for service fees.

The main attraction of PSPs lies in the complexity of the services they offer. Having your own payment infrastructure would require agreements with several banks or credit card companies. Additionally, to ensure the collection of payments on behalf of third-party sellers on their platform, the operator must be approved by the ACPR (Prudential Supervision and Resolution Authority). This accreditation can be lengthy and tedious. Therefore, opting for a PSP offers marketplaces the opportunity to provide a simple, secure, and cost-effective remote payment solution on their platform.

How do PSPs Work?

In a classic e-commerce transaction, there are two actors: the buyer and the seller. The marketplace model adds an intermediary to this transaction, the “trusted third party.” Thus, three actors are now present in an online purchase: the buyer, the seller, and the marketplace via the PSP.

Relying on the principle of collecting payments on behalf of third parties, the PSP handles transactions and collects funds for the merchant. This is referred to as collecting on behalf of third parties when a marketplace collects money from its customers and transfers it to its merchants after deducting a commission—or not. The funds are held in escrow until the service ordered by the buyer has been completed by the seller. The PSP thus guarantees the interests of both sellers and buyers.

Steps of a Transaction on a Marketplace via a PSP:

1. The buyer orders and pays on the marketplace using a credit card, bank transfer, or direct debit, depending on the options provided (pay-in or cash-in).
2. The money is transferred to an escrow account until the order is fulfilled.
3. The order is delivered or completed.
4. The buyer’s money is released and transferred to the seller’s account, after deducting any commission for the marketplace.

Additionally, a PSP Ensures:

• Timeliness of payments
• Security of payments
• Authentication of payments
• Refunds for certain customers
• Solvency checks of customers
• Legal action in case of payment default

Why a Payment Solution for Marketplaces?

No provider offers an infrastructure specifically adapted to all marketplaces. Many remember the sudden closure in 2015 of Balanced Payments (supported at the time by the startup accelerator Y Combinator), which was one of the first PSPs dedicated exclusively to marketplaces. Balanced Payments offered innovative features that no one else did, but they were not enough to compete with its competitors in a market where margins were thin, and profits were only possible with large volumes.

Thus, choosing a PSP at the startup phase can be a risky maneuver. Additionally, choosing a regional PSP due to its ability to consider local regulations can limit the development and success of your marketplace. Therefore, marketplaces striving to expand internationally must choose a reliable partner (one that is unlikely to go bankrupt) with a broader global reach (at least in 10 countries and on 2 continents). Especially since PSPs can influence user behavior. Indeed, according to Fevad, 75% of prospects abandon their purchase operations (cart abandonment), meaning 3 out of 4 consumers do not complete their purchase. Three main reasons can explain this:

• A payment process that is too long or too complex (26% of cases)
• Lack of trust in the provider when providing banking information (17% of cases)
• Lack of payment options (6% of cases)

The payment operation is even more critical as it occurs at the end of the user’s shopping experience. When reaching the payment step, they often think the hardest part is over. Therefore, offering a complex online payment process reduces your conversion efforts to ashes. Thus, the chosen payment solution directly impacts the profitability of your project.

Before Making a Final Choice

It is important to ensure that the PSP and the proposed features meet your users’ needs. The challenge will be to guarantee a smooth, fast, and simple customer experience. In these circumstances, several PSPs stand out. Nevertheless, everyone agrees that the most efficient PSPs on the market are:

• Mangopay
• Lemonway
• Stripe Connect
• PayPal

Parameters to Consider for Choosing the Right PSP

With the increase in service providers in the e-commerce market, several offers are available. However, this makes it more challenging for marketplaces to determine which payment solution suits them best.

To understand the specific payment requirements of marketplaces, it is helpful to take the example of Airbnb. On this platform, financial transactions must be extremely organized. It is not limited to a simple payment-collection operation. The host should not receive the money when the client makes the payment. Instead, Airbnb acts as a guarantor, a trusted intermediary, and only transfers the money to the host once the tenant has taken possession of the property. Airbnb also does not distribute the entire payment amount to the host but first deducts a commission, which constitutes its revenue stream.

To enable all this, the payment solution (PSP) must support the following features:

• KYC (Know Your Customer) identification for individuals
• Splitting payments between multiple parties
• Deferring payments to suppliers’ accounts
• Handling disputes
• Subscription billing (many marketplaces use this as their business model)

Let’s take a closer look at these points.

1. Customer Identification Process

In the context of online payments, the notion of KYC (Know Your Customer) generally refers to laws related to the disbursement of funds to individuals and businesses. Each country has its own regulations, but the process typically involves collecting specific information about each person or company receiving funds and verifying this information. The information collected includes at least the name, date of birth, and address, but may also include other legal documents.

In practice, after you create a marketplace, if your platform faces many providers, you cannot afford to manually manage the KYC process. If it is too slow or complicated, it will encourage many customers to abandon the process. In other words, it is essential that your payment service provider offers tools that automate the KYC process and make its use as simple as possible.

For example, Stripe Connect, Mangopay, Lemonway, Payplug, and Adyen offer a “white label” process. This means that the user enters their data on an interface provided by the marketplace. This will automatically create a user account with the PSP without the user knowing. On the other hand, PayPal requires all users receiving money to create a PayPal account. They provide a tool to simplify this process, but each user will always know they are interacting with PayPal.

Both approaches have advantages and disadvantages. The white label experience is the smoothest and fastest for the user. Many people want to avoid creating different user accounts and additional passwords, which a white label process allows. However, many people already have a PayPal account, and offering the ability to receive money via PayPal can be an advantage for you.

2. Splitting Payments

If your marketplace’s business model resembles Etsy’s, this means that a customer’s payment is generally split into three parts: the largest part goes to the seller, another represents your commission, and a small part goes to the payment service provider. In some cases, you may want to split the payment between more than three parties. A typical example is a multi-vendor shopping cart, where a customer buys items from multiple vendors during a single checkout.

In such cases, Stripe recently added the ability to split payments into an unlimited number of parts. Payplug, Lemonway, Mangopay, and Ayden have had this functionality for longer.

3. Deferring Payment and Escrow

As mentioned earlier, marketplaces like Etsy or Airbnb do not immediately transfer the money paid by a customer. Instead, the payment is held until the order is fully satisfied.

This payment deferral/conservation process is generally referred to as “escrow.” It is a contractual arrangement in which a third party receives money from the principal parties of a transaction. It is useful to remember that holding money on behalf of people who are not your employees requires a license in most countries. In this specific case, the role of PSPs is crucial as they offer this type of functionality.

Mangopay is the most efficient PSP in this area. With its electronic money issuer (EMI) license, it can offer an escrow solution in all the countries where it operates, and there is no strict limit on the duration for which it can hold the money. Stripe does not have a similar license, which means it cannot officially call its product escrow. Nevertheless, they can provide an identical feature, but with certain time limits (3 months to 6 months maximum).

PayPal can hold funds for up to 30 days (or more). It partially compensates for the lack of a longer escrow by offering buyer protection. If something goes wrong during the transaction, the buyer can file a claim and get their money back. However, this protection does not apply to all transactions.

Payplug can defer payment for 7 days before canceling it.

Additionally, Lemonway also offers this type of service, without specifying the duration.

4 – Handling Disputes and Fraud Prevention

The payment delay feature can cause certain credit card disputes, also known as chargebacks. Indeed, in many cases, customers who do not receive the product or service purchased file a complaint and request a refund.

If your marketplace does not have a payment delay feature, the supplier is generally responsible for the costs associated with a chargeback. Conversely, if you delay payments, you may be responsible for the chargeback. Of course, you can stipulate in your terms of service that suppliers are responsible for chargebacks, but you will then have to handle their recovery, and if they refuse to pay, you will be legally responsible.

The possibility of fraud is also a good reason for marketplaces to justify their rates. Thus, if you cover the dispute fees for your suppliers, it will “justify” the perception of a higher commission on your part.

Moreover, the 2019 change in European payment regulations introduced a significant improvement in chargebacks. If your payment service provider uses the 3D Secure 2 protocol to verify payments, the responsibility for disputes is transferred to the credit card issuer.

The use of 3D Secure 2 shifts this responsibility away from the marketplace. Card issuers are now responsible for covering any payment verified by the 3DS 2 protocol and contested as fraudulent. All payment service providers mentioned in this article offer 3D Secure 2 verification.

5 – Subscription Payments

Subscription payments (also called recurring payments) through a marketplace PSP refer to situations where a marketplace stores customers’ credit card details to enable regular billing without requiring any action from the customer. Peer-to-peer storage platforms, where billing is done on a monthly basis, are the most frequent users of this type of payment.

Managing subscription payments can sometimes be complicated. You have to deal with expired credit cards, dispute handling, subscription cancellations, refunds, etc. Very few PSPs can handle this type of billing.

Stripe Connect and Mangopay offer many useful features related to subscription billing; however, Stripe Connect is probably the best choice if subscription billing is an essential feature. Adyen and PayPal do not have official documentation on subscription billing, and their representatives have not communicated on this subject.

Finally, Payplug and Lemonway also allow accepting recurring payments by credit card.

How to Choose a Payments Company Adapted to Your Marketplace’s Business Model

Even though we cannot talk about the “best” payment solution in absolute terms, more suitable solutions for your needs exist. Depending on your business model, the choice of your PSP will allow or not allow certain operations. Therefore, the reflection phase is important before you start.

First, ask yourself the right questions:

• Does my marketplace target individual customers, professionals, or both?
• Do I need a solution adapted for international use?
• What type of subscription would suit me best?
• What is the expected average basket on the marketplace?
• What commission or subscription systems should be used to offset the PSP cost?
• How to integrate the solution into the marketplace?

Answer these questions and especially compare the features of the PSPs on the market.

Indeed, not all PSPs offer the same functionalities. For example, most providers are not usable outside of Western countries. This is the case with MangoPay, which is only available in Europe, North America, Hong Kong, and Australia. The same goes for Stripe Connect, which is not yet available in all European Union countries but is available in Japan, Singapore, Brazil, and Mexico…

Thus, if you are launching a marketplace whose primary market is an African or Arab country, the mentioned solutions will not be relevant. You will then have to resort to lesser-known local payment solutions such as SycaPay, SagePay, MyGate, WafaCash, or mobile payment solutions like Orange Money or MTN Mobile Money.

The multiplication of PSPs on marketplaces has led to a diversification of the offer. However, it has also made the comparison of providers more complex when choosing the appropriate PSP for your marketplace. In addition to the previously mentioned criteria, other comparison parameters can make the choice even more difficult, such as:

• The economic model of the PSP
• Its position in the end-to-end chain
• The supported payment options
• Possible optimizations on internal charges
• The opportunities for digitization solutions in the marketplace
• The smoothness of the payment process proposed by the PSP

Therefore, to ensure the success of your marketplace, it is important to choose a good marketplace builder and a good PSP adapted to your marketplace’s objectives, as the right payment method on a marketplace can be a lever for acquiring new customers.