Effectively integrating marketplace payments

Marketplaces that choose to adopt payment models can build new profit centers and broader audience reach. But success depends on secure and reliable marketplace payments.

Marketplaces and their audiences vary widely, so there isn’t a one-size fits all payment model. Understanding the risks and benefits of various approaches can help marketplaces optimize processes to reduce risk, lower fees and create better experiences.

Why adopt marketplace payments?

Some marketplaces bypass payments and just connect various participants, acting as brokers and making money from ads, fees or commissions. Accepting payments is up to sellers and, for most online scenarios, their choice of payment processor or facilitator.

That model is simpler for the marketplace because it doesn’t have to deal with payments complexities such as fraud rates, chargebacks and overseeing significant transaction volumes. But that model places the burden on vendors and sacrifices payment fee revenue.

It also creates reputational risk. The marketplace often has no say in payments disputes between parties but can still be associated with a negative experience.

Some marketplaces don’t offer payment capabilities but have integrated with approved payment companies. That simplifies the process because the vendor doesn’t need to consider as many options, and the setup with the marketplace should be straightforward. But the vendor still needs to get an approved payment account.

Marketplace as a payment facilitator

To simplify and speed vendor onboarding and take more control over the value chain, some marketplaces become payment facilitators. In that model, vendors sign up with the marketplace, which has the master merchant account and is ultimately responsible for payments.

Signing up is simple because payment processors don’t need to vet the vendors. While the fees are often higher, vendors can often start selling on the marketplace within minutes.

As a facilitator, the marketplace’s revenue stream is the difference in fees it charges vendors and the amount it pays the payment processor. The marketplace controls the payment, so it can send payment flows to different processors to improve risk management and maximize profit.

Control over the payment also allows the marketplace to embed financial services, providing finance, insurance, investment and other services to vendors and users. It’s another way to improve marketplace offerings and create new revenue streams.

Choosing the right payment partner

Choosing the right payment partner is a major consideration because the marketplace’s name is on every transaction, and it’s expecting a revenue stream from the fees. The partner also should provide support in handling vendors, their sales, different markets and currencies, payment channels, and loyalty programs.

There also are legal, IT and compliance factors to consider. There are often license requirements and Anti-Money Laundering (AML) procedures to follow. Helping the marketplace simplify Know Your Customer (KYC), payment card industry (PCI) compliance and navigating money transmission licenses is a key differentiator in working with a payment processor.

As potential revenue increases from being a payment facilitator, so does the risk. It’s vital to understand the payment processor’s fee structure and how to minimize payment fraud to get the lowest rates possible.

A fraudulent merchant can cause even more damage, leading to hundreds of fraudulent charges. With no party for a chargeback, the payments are charged to the marketplace.

Onboarding customers and merchants

Effective customer and vendor onboarding helps prevent fraud and reduce risk. It’s the first opportunity to gather and verify vendor and customer information and offers a chance to check legitimacy and perform due diligence before an account is created and any damage is done.

Customer identity verification and vendor business verification are quick and simple measures that provide insight into the entire payment life cycle. Depending on the payment activities, further verification can help isolate problems or refine risk status.

Payments are core to marketplace success. Taking them in-house presents opportunity but also requires operational expertise and poses new risks. With carefully considered strategies, good payment partners and intelligent onboarding, marketplace payments can add significant value to the platform.