Choosing a Platform Payment Provider

At Payment Rails, I have daily conversations with marketplace founders, executives, and employees at all stages of building their marketplace to learn about the challenges that are top of mind for them.

Since we deal with designing and implementing scalable marketplace payment solutions, I've decided to team up with MultiMerch share what I've learned in hopes that other marketplace founders and executives can learn from my unique position of being able to talk to and explore the challenges of so many others in the industry.

This is a guest post by Myles Foster from Payment Rails.

The success of the early marketplaces like Ebay has paved the way for new companies to adopt the marketplace business model. As we've seen with newer companies like Airbnb and Uber, it has proven to have an incredible scalability potential.

Now, there's a lot of challenges when it comes to building a marketplace – operational, finance, legal and others. The challenge of selecting and implementing a payment solution is another big one.

In this article, we've put together some important considerations to help you make an informed decision when it comes to marketplace payments.

One vs multiple processors

Most marketplace platforms will use at least two different payment types – accepting payments from buyers and making transfers to sellers.

As the founder, you'll need to decide whether you want to use a single payment processor to handle everything, or use a few different ones.

There are several factors to keep in mind with this:

Where are your buyers located?

If most of your buyers are in only one or two countries, there may be more cost effective local solutions available to you. You will pay a premium for platforms that offer global credit card processing, even if you don't need it or use it.

However, keep in mind that many local domestic pay-in processors will not offer payout functionality – so you will need a separate solution for payouts.

Where are your sellers located?

If you plan to accept international sellers on your platform, you will need a global payment solution. Processors that offer global payout coverage will allow for scalability in the future, but can be more expensive when you're just starting out.

Some processors may also offer different payment products for different regions – for example, Stripe Connect's Separate Charge/Transfer payment flow is only available if both the buyer and the seller are located within the US or the EU.

What's the time difference between buyer's payment and the seller receiving the funds?

If you're running a marketplace platform that takes deposits bookings or rentals for a future date – like Airbnb or Camplify – there may be technological or regulatory limitations (e.g. Europe's PSD2 directive) when it comes to collecting payments and making payouts to your vendors. For example, the vendor might not get paid until after the rental, but your platform will take a deposit up to 90 days in advance. Many integrated payment solutions will instantly split the payment at checkout without a way for you to withhold the payout until the buyer receives and confirms their order.

What features and coverage do you require for pay-ins and payouts?

Different payment processors will offer different sets of features for pay-ins and payouts, so you'll need to make sure the features you're looking for are available for both payment types. For example, some payment solutions may require your sellers to go through a lengthy Know Your Customer process and collect their government-issued ID and other information. In this case, you may be looking for a processor that simplifies KYC for both buyers and sellers.

Difficulty of starting vs scalability

Marketplace founders often think everything has to be automated and ready to scale from the very beginning. This isn't always true. For example, you can handle seller payouts manually for quite a while before you HAVE to automate them.

The fastest-growing startups follow something similar to what the founder of LinkedIn Reid Hoffman wrote in his book Blitzscaling:

I believe that there is a Maslovian hierarchy of fires that applies to most rapidly growing start-ups, where the top of the list is the most important fire to fight first:

• Distribution
• Product
• Revenue model
• Operations ← SCALABILITY
• Competition
• What's next?

The most important steps in building a fast growing marketplace are:

• getting it into the hands of customers and users (distribution)
• making a great product and continuing to improve it (product)
• figuring out how you can be profitable (revenue model)
• THEN figuring out the operational challenges like scaling payments, etc.

Some payment solutions will require you to use their APIs from the start and to automate everything, which might be somewhat difficult to do, especially when you're not sure how all parts of your project come together. On the other hand, standalone payout processors like Payment Rails will offer you convenient dashboards, white-label banking detail collection and mass payment uploads for you to process payouts to your sellers manually.

This way, you can let that "scalability fire" burn for a while until handling payouts manually gets too time-consuming, with the peace of mind that you can quickly automate when needed.

White-label vs off-platform experience

Another thing to consider is how important it is for you to keep your users on your platform at all times and whether you need to handle all payments directly within your platform.

Pay-ins will look pretty much the same no matter what processor you choose - in most cases, they'll be handled onsite. You'll see the biggest differences in terms of user experience with payouts, which is due to the regulated nature of sending money electronically, especially with cross-border transfers.

Some payment processors like Stripe Connect will offer different account types for different seller experience. For example, Stripe's Standard and Express accounts will require the user to leave your marketplace to upload their KYC documents.

Other processors designed specifically for payouts (e.g. Hyperwallet) will offer an on-platform experience, but may still require the user to go through an additional KYC verification process.

Yet another option is to use a processor that stores your vendors' funds in a "wallet" instead of transferring them directly to a bank account – but this means it will take more time for your vendors to actually get paid, and they'll still need to go through KYC before they can withdraw their funds.

All of these extra steps mean more friction – and as the platform owner, you want to reduce friction as much as possible to keep your users' experience streamlined. The most flexible payouts-only platforms will keep your users on the marketplace and only ask for the basic details like address and banking information via embedded forms.

Pricing and fee structure

For buyer payments, the pricing structure will be more or less the same for most payment processors: a percentage processing fee on top of a smaller flat fee for every transaction. In some cases, processors may also offer separate "micropayment" pricing models for platforms processing smaller payments (e.g. less than $20 per transaction).

In many cases, payment processors will apply different rates for international payments and payments in other currencies. If you're expecting a lot of purchases from foreign credit cards, you should shop around for a processor that supports these types of transactions for an affordable rate.

Some pay-in-only and all single-vendor solutions will have monthly fees to maintain their accounts as well. Pay attention to this because a higher price doesn't always mean better. Higher price usually means more features, but it depends if you will actually need those features or not.

Now, payout-specific processors will usually offer two different pricing models:

• A high monthly fee for a certain amount of transactions per month plus extra per additional transaction
• A lower monthly fee with a per-transaction cost – flat, percentage-based or both

In addition to per-transaction pricing, you also might be looking at extra costs for payouts to foreign countries.

Here's an example of a few simple calculations to hep you compare payment processors:

Extra features and integrations

In addition to different ways to price their services, dedicated payout provides will often offer more accounts-payable-focused feature sets.

Typical additional features you might be looking for specifically for payouts include:

• US IRS Tax Compliance features for US businesses (W9/W8 collection, year-end tax filing etc.)
• Payment approval workflows and automated returned payment handling
• Multi-currency accounts for collecting and storing multiple currencies
• Build in batch frameworks to batch payouts automatically

Last but not least, you'll need a way to integrate your payment solution into the rest of your business processes.

Even if you're managing and reconciling your payments and payouts manually, you'll still need a way to tie them into the other tools you're using to manage your business – such as the accounting system, the CRM and the email system, for example.

Here, you'll be looking for the availability of a REST API at the very least, which is essential for future integrations. The documentation for these APIs should be readily available, and someone technical on your team should be able to easily test that the APIs are functioning as expected.

Ideally, your payment processor of choice should also offer native integrations – for example, with popular accounting systems like Xero or Quickbooks, CRMs like Salesforce or business automation tools like Zapier.

And there you have it – a brief overview of factors to consider when choosing a payment provider. Although there's no one-size-fits all solution, this should serve as a framework to help you make an informed decision.

Keep in mind that you don't have to settle for a single processor either. The payment solution you choose at one stage of your marketplace might not be the one you stick with in the long run, but the one that solves your current needs and provides you the flexibility to grow for the foreseeable future.