A guide to marketplace payments
Efficient and compliant payment processes are crucial for the success of online marketplaces. But how do marketplace payments work? And how can your marketplace remain compliant?
This page will explain everything you need to know, including how marketplaces take payments, the importance of tracking balances, and why your marketplace must remain compliant.
What is a marketplace?
Marketplaces are third-party agents that connect consumers and sellers on a single marketplace-branded platform. Popular examples include Etsy and Amazon.
Unlike ecommerce websites that take payment directly from the buyer, marketplace owners process payments and get a commission from each sale while enabling retailers and sellers to reach a wider audience. Also, ecommerce websites have just one seller, while marketplaces have multiple vendors.
If you’re looking to start your own marketplace or improve your current one, it’s important to understand things like regulatory compliance, Know Your Business (KYB), and how to accept payments. All of which we’ll discuss on this page.
In what ways can marketplaces accept payments?
Online marketplaces typically accept payments through various methods to cater to a wide range of customers. Depending on what you’re selling, you can configure these payments into things like recurring payments or split payments, which we’ll explain in more detail later.
Here's an overview of how online marketplaces accept payments using different types of payment methods:
Credit and Debit Cards
Credit and debit cards are widely used for online payments. Online marketplaces partner with payment service providers (PSPs) or payment gateways to securely process card transactions.
Digital wallets like Apple Pay, Google Pay, PayPal, and others offer convenient payment options. Your online marketplace can integrate various digital wallet payments into the checkout process, in which the customer is redirected to the digital wallet app or website to complete the authentication process, which may involve biometric ID or entering a PIN
Local Payment Methods
To cater to customers in different regions, online marketplaces often integrate local payment methods. These methods vary depending on the country or region but may include bank transfers, direct debit, cash on delivery (COD), prepaid cards, and more.
The specific steps involved in accepting local payment methods can vary significantly based on the particular method and the payment infrastructure available.
How do marketplace payments work?
Marketplace payments differ from ecommerce website payments in a number of ways. Here’s a breakdown of how marketplaces handle payments:
- Buyer makes a purchase.
- Marketplace calculates the distribution of funds.
- Payment is executed, deducting fees or commissions.
- Funds are allocated to the respective parties involved (e.g., sellers, marketplace).
- Marketplace charges a commission or fee for facilitating transactions.
- Commission percentage or amount is applied to the total transaction value.
- The marketplace deducts the commission from the payment received.
- The remaining funds are allocated to the seller or service provider.
- Marketplace maintains a balance for each seller or service provider.
- When a seller generates sales or earns funds, their balance increases.
- Sellers can use their balance to make purchases within the marketplace or withdraw funds to their bank accounts.
- Balance transfers involve moving funds from the seller's marketplace balance to their preferred payment method.
- Payouts involve transferring funds from the marketplace to sellers or service providers.
- The marketplace determines the payout schedule, whether it’s daily, weekly, monthly, or allows sellers to request manual payouts.
- You can initiate payouts manually or automatically, transferring the seller's earnings to their designated payment method (e.g., bank account, digital wallet).
- Payouts often involve deducting any applicable fees or meeting minimum balance thresholds.
Benefits of marketplace split payments
- Revenue sharing – you can distribute funds among multiple parties involved in a transaction, such as sellers or service providers. This means you can share revenue with partners while ensuring transparent and accurate payment distribution.
- Streamlined transactions – you can automatically allocate funds to the respective parties involved, removing the need for manual calculations and disbursements. With integrated solutions like Checkout.com, you can also get access to custom payment routing options.
- Scalability – split payments make it easy to onboard and manage a large number of sellers or providers, as you can automatically distribute funds according to predefined rules or commission agreements. This should all be included in the contractual agreement.
Options for collecting commission
There are three ways to collect commission: fixed, variable, and compound. Here’s an overview of each structure:
This is a predetermined, fixed amount or a flat fee for each transaction made by the seller. This structure is ideal for low-value transactions where a percentage-based commission might be less practical.
The commission rate is determined as a percentage of the transaction value or sale price. This means your commission amount is proportional to the value of each transaction, so it’s best to set different commission rates based on factors like the product category, seller performance, or promotional campaigns.
This structure combines fixed and variable commission components to create a hybrid model. It involves a fixed fee as well as a percentage-based fee on the transaction value, meaning your marketplace is guaranteed consistent income via fixed commission and additional earnings from high-value products via the variable commission component.
Managing balances and fund transfers
In the event of refunds, credits, or promotions, it’s important that you track the transfer of balances between buyers and sellers. Those reasons include:
- Accuracy – ensures that the correct amounts are credited or debited from the respective parties’ balances, maintaining accurate financial records.
- Transparency – provides transparency to both buyers and sellers, allowing them to see how refunds, credits, or promotions impact their account balances.
- Customer satisfaction – contributes to a positive customer experience, maintaining trust and loyalty among buyers.
- Improve seller relationships – enable sellers to understand the impact on their revenue and build trust in your marketplace’s operations.
- Financial reconciliation – facilitate financial reconciliation processes, ensuring that your marketplace’s financial records align with the actual movement of funds.
- Compliance – supports compliance with financial regulations and auditing requirements, providing an audit trail of funds movement.
Learn more: Guide to E-commerce payment processing
How do marketplace payouts work?
Marketplace payouts involve transferring funds from the marketplace to sellers or other parties. The payout process can vary depending on the chosen payout method and frequency.
Here’s an overview of how bank and card payouts, as well as scheduled and real-time payouts, work within a marketplace:
The best choice is real-time payouts, which are designed to deliver funds to sellers instantly or within a very short timeframe, providing immediate access to funds. This method requires integration with payment service providers that support real-time payment capabilities, but offer quicker payouts and keep sellers happy.
Scheduled payouts involve setting specific payout intervals, such as weekly, daily, or monthly, to transfer funds from the marketplace to sellers. The marketplace establishes a predefined payout schedule and initiates the transfers accordingly. This approach offers predictability and ensures that sellers receive funds at regular intervals.
Bank and card payouts
Marketplace operators can transfer funds directly to sellers’ bank accounts using bank payouts once sellers provide their banking information. In card payouts, the marketplace transfers funds to sellers’ linked debit cards or prepaid cards. Sellers typically associate their cards with their marketplace accounts to receive payouts.
Read more: Mass payouts explained
How are marketplace payments integrated with Checkout.com?
Checkout.com integrates marketplace payments in a number of ways:
- Frames – we send customer card details back to you in token-form
- Hosted payments page – send your customers here to finalize payments
- Payment links – send the link to your customer and direct them to a hosted payment page
- Full card details API – accept payments using full card details (requires SAQ D PCI compliance)
- Mobile SDKs – software development kits that enable you to process payments
Why is marketplace compliance and regulation important?
As a bridge between buyers and sellers, the marketplace is responsible for all the transactions on its platform. However, it’s a strictly regulated process and it’s vital that you comply with regulations for these reasons:
Following AML Regulations
- Prevents fraud, identity theft, money laundering, and financing of terrorism.
- Protects reputation and integrity.
- Ensures legal obligations are met.
Securely Holding Funds
- Protects sellers’ funds from fraud or unauthorized access.
- Builds trust with sellers and promotes marketplace integrity.
Customer Due Diligence
- Efficient identity verification leads to efficient onboarding of sellers.
- Ensures compliance with Know Your Customer (KYC), Know Your Business (KYB), and Anti-Money Laundering (AML) requirements.
- Mitigates risks associated with politically exposed persons (PEP) and sanctions lists.
- Conducts Vendor Management Systems Screening (VMSS) and MATCH checks to prevent fraud.
Know Your Customer (KYC)
This is a set of processes used to verify the identity of customers. This is done to prevent fraud, money laundering, and other illegal activities. Know Your Customer (KYC) is required by law in many countries, but even if it isn’t, it’s good practice to follow.
KYC helps to protect your marketplace from fraud by verifying the identity of sellers and ensuring they’re not selling products to criminals or other bad actors. It can also protect buyers from scams.
To implement KYC, you can require sellers to provide a government-issued ID, such as a passport or driver's license. You can also ask sellers to provide proof of address, including utility bills and bank statements.
Know Your Business (KYB)
This is used to understand customers and their businesses. By sourcing this information, you can assess the risk of doing business with a particular customer, protecting your business from fraud while ensuring you comply with government regulations.
There are a number of ways to carry out KYB, including collecting information about the customer’s business, such as their industry, size, and financial history. You may also want to collect information about the customer’s ownership structure and management team.
Here’s a breakdown of the different methods you can use for KYC and KYB:
- The best method for efficiency and user experience
- Uses technology and algorithms to automate the verification process, typically using AI-powered software.
- Offers quick and streamlined onboarding experiences for customers.
- Provides real-time results and minimizes manual intervention.
- Outsourcing KYC/KYB verification to a third-party service provider.
- The service provider's technology and infrastructure are integrated into the marketplace's platform.
- Offers flexibility and customization options to match the marketplace's branding.
- Requires coordination and collaboration with the service provider.
- Can provide reliable and efficient verification results if implemented correctly.
- The most time-consuming and prone-to-errors option
- Involves manual review and verification of customer or business documentation.
- Requires human intervention to review and validate submitted ID.
- Relies on trained personnel to check and verify the authenticity of documents.
- May be necessary for complex or high-risk cases that require additional scrutiny.
What must your marketplace do to comply?
To comply with the regulation against money laundering and terrorist financing (LCB-FT), you must keep a register of beneficial owners. This register identifies the people who control a company and benefit from its economic activity. Marketplaces must also subject all their sellers to KYC/KYB identification processes.
The ACPR, the Prudential Supervision and Resolution Authority, impose these regulations on marketplaces. In addition, your marketplace must comply with the PSD2, the European Payment Services Directive, which requires marketplaces to use strong authentication for certain transactions. This means that marketplaces must verify the identity of buyers and sellers before processing payments.
By complying with these regulations, you can help to prevent money laundering and terrorist financing while protecting your business from fraud and other financial crimes.
Discover Checkout.com’s Integrated Platform for marketplaces
Our Integrated Platforms is a new solution for marketplaces and payment facilitators to connect and control every payment experience, from onboarding checks and accepting payments to reconciliation and payouts. With this tool, you can convert more sellers, grow seller activity, and win seller loyalty.
In short, our Integrated Platform is a comprehensive solution that can help you to improve the seller experience on your platform, making it easier for sellers to get started and to manage their finances. That means you can help them to be more successful, leading to increased sales and revenue for your marketplace.
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