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Marketplace Best Practices
December 5, 2023

Marketplace Payments: A Complete Guide

Nicole Kahansky
Nicole Kahansky

In the ever-growing ecommerce landscape, marketplaces have emerged as popular platforms for connecting consumers with multiple sellers. Examples like Etsy and Amazon illustrate the runaway success of this model, where marketplace owners facilitate storefronts, process payments, and earn a commission from each sale. 

That said, the intricate web of transactions in a multi-vendor marketplace demands a thorough understanding of marketplace payments, navigating payment trends, and the sophisticated payment orchestration of multiple touchpoints, including checkout and vendor payouts. 

Buyers and sellers have come to expect a seamless and automatic experience, including access to different payment options and protection from fraud. While a multi-vendor marketplace poses unique challenges, it’s essential to create a consistent and reliable process across the platform. 

When done well, streamlining the movement of funds between buyers, sellers, and the marketplace operator ensures efficiency, transparency, and security in transactions. And most of all, it creates trust. 

This article reviews:

Ty‎pes of marketplace payments

Payment optionality is critical to the ultimate success of an online marketplace. Alternative payment methods (APMs) already number in the hundreds, and are expected to account for over 50% of global ecommerce transactions by next year. It’s becoming increasingly important to accept the preferred payment methods of every buyer, including:

Credit cards 

Credit card payments are the staple of ecommerce, widely embraced for their convenience and global acceptance. It’s crucial for online marketplaces to collaborate with payment service providers (PSPs) or payment gateways to process credit and debit card payments, guaranteeing a straightforward checkout experience for the majority of customers.

Digital wallets

Digital wallets, like Apple Pay, Google Pay, and PayPal, offer customers a lot of convenience, allowing money transfers without the need for a physical card. Digital wallets use near-field communication (such as tapping a phone) to make marketplace payments. Online marketplaces can integrate this type of process into their checkout system by redirecting customers to the respective digital wallet apps or websites, where authentication – including biometric ID or PIN entry – ensures a secure transaction.

Wire transfers

Wire transfers serve as a reliable option for both domestic and international transactions, enabling direct fund transfers from one bank account to another. Although not as instantaneous or cheap as digital methods, wire transfers remain integral for critical, time-sensitive, or large-value payments — especially for B2B transactions— providing a robust and widely accepted alternative.

Local payment methods

Online marketplaces should strategically integrate local payment methods to meet the diverse preferences of global customers. These methods encompass a wide spectrum of options tailored to specific countries or regions, including bank transfers, direct debit, cash on delivery (COD), and prepaid cards. The integration process for these methods varies based on the payment type and your marketplace’s existing infrastructure, but catering to local demands is a great way to keep customers happy and returning to your platform.

Fortunately, there are many tools to help provide payment optionality to customers, including Stripe, Ayden, Braintree, and more.

Ma‎rketplace vendor payouts

In a multi-vendor marketplace, it’s not enough to be able to receive payments in multiple formats – paying out your vendors with the same degree of flexibility is an essential marketplace feature

To create an effective payout process you need to answer three main questions: When, where, and how.

When to pay out vendors

Finding the right payment schedule can be a challenge, and plays a critical role in protecting yourself as a marketplace operator.

For example, if you’re selling physical goods, and you pay out your vendor upon receiving the order, you’re assuming that no issues will arise with fulfillment or delivery. This might be an okay assumption to make in some cases. But in others, you may be putting yourself at risk. 

There are several options for when to pay your vendors, and they’ll likely depend on the types of goods you’re selling and your relationship with your vendors. Here are some examples of routes you can take:

  • Scheduled payouts that follow predefined intervals, with options like daily, weekly, or monthly transfers. This model gives operators a more predictable cash flow, and is more manageable for big vendors. 
  • Realtime payouts that trigger upon specific events, like fulfilling an order or delivery. This instant access to funds can help attract new vendors to your platform and is optimal for small transactions.

Where to pay out vendors

Where do your vendors want to receive their money? The answer will vary depending on the seller and it’s important to keep this in mind. Some will prefer the money ends up directly in their bank account, while others will be accustomed to leveraging platforms like PayPal or Stripe Connect to receive their funds. 

This is a key decision to set up your marketplace for success. 

How to pay out vendors 

As you can see, marketplace payments can get complicated quickly. Having the right technology in place helps you avoid stacking headcounts as your marketplace grows. Payment orchestration tools make these processes much more manageable while ensuring compliance and provide scalability for growing marketplaces.

Fortunately, there are a lot of payment service providers (PSPs) – the technology you use to accept debit and credit card payments – available to help. These companies facilitate a wide range of transactions between buyers, operators, and banks, providing the necessary infrastructure, security measures, and compliance with regulations. For example, Stripe Connect gives your marketplace the ability to support various payment methods, store customer cards, automate payment processing to vendors, and takes care of KYC, OFAC and other compliance. It’s easy to use and integrates well with other tools in your tech stack.

🔵 Learn more about optimizing vendor payouts in Nautical 🔵

Pr‎eventing payment fraud on marketplaces

Marketplaces operate as the merchants of record, handling transactions on behalf of sellers. When fraud occurs, customers – or their bank or credit card company – often contact the marketplace, not the seller, putting the onus on the operator to resolve the issue. 

Robust know-your-vendor checks are therefore crucial to mitigating the risk of fraud. This involves verifying the identity of sellers, affiliates, influencers, and other entities joining the platform. It not only protects the marketplace but also builds trust with customers and ensures compliance with regulations.

Ot‎her important considerations for marketplace payments

Multi-currency transactions

If you’re operating in more than one country, you’ll need to consider how to handle multi-currency marketplace payments. Offering sales in regional currencies while maintaining a consistent payment experience for all of your customers is vital for global marketplaces.

Tax complexity

Taxes get complicated in global online marketplaces — which poses a risk for operators. To run legally and efficiently, operators need to have all of the essential details nailed down, such as knowing who’s responsible for paying taxes and to whom.

For example, in the US, marketplaces that reach a certain threshold of sales revenue and/or transaction volume are required to collect sales tax on behalf of their vendors, which means tax remittance is the marketplace’s responsibility. 

In Europe, marketplaces are also responsible for collecting sales tax (VAT) if they meet certain conditions, like if the underlying vendor is a small business exempt from collecting tax themselves.

Tax tools like Avalara help ensure you’re complying with tax laws without needing to stack labor against tax remittance. 

Compliance and due diligence

Marketplaces are unfortunate targets for fraudsters, money launderers, and a slew of other unsavory characters. Not doing your due diligence on how money moves through your marketplace, including having mechanisms in place for anti-money laundering (AML) and anti-fraud, can quickly get you in hot water with regulators. It’s crucial for operators to stay compliant with financial regulations and continuously monitor payment processes on their platform.

Split payments

On multi-vendor platforms, it’s very common for buyers to check out items from more than one seller. Split payments are a means of efficiently distributing a single payment among the multiple parties involved in a transaction, such as sellers or service providers.

Essentially, whenever a buyer makes a purchase, the marketplace calculates the distribution of funds, executes the payment after deducting fees or commissions, and then distributes the funds.

Marketplace payment strategies are always evolving

Intelligent payment orchestration is a cornerstone of every successful multi-vendor marketplace. It requires adapting to evolving payment preferences, ensuring transparent vendor payments, and safeguarding against fraud. With the right approach to marketplace payments, operators can provide smooth experiences to customers and pave the way for sustained growth.

Check out Nautical’s payment integrations to ensure smooth payment orchestration on your marketplace. 

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