Marketplaces payments and PayPal

Marketplaces present unique challenges for payments. These platforms create experiences that promote discovery, search, selection, payments, fulfillment, and dispute resolution. Multiple sellers or providers interact with multiple buyers engaging in pre-sales, sales, and post-sales activities. These result in many to many relationships, which the marketplaces try to standardize so that the buyers form a preferential relationship with the platform over one with a given seller. A big part of that is the standardization of trust in the delivered goods and services, and in fair resolution of issues, and disputes.

Promoting trust and safety in a marketplace is a tricky proposition as the performance guarantee ultimately rests with the seller. A bad seller, or provider can impact buyer trust significantly. Sellers describing one item on the site, and then shipping another, or failing to fulfill and order, or an AirBnB host not providing agreed to service or accommodation, can leave the buyers high and dry. The bad news spreads virally over social media, and traditional news channels dissuading potentially millions of buyers from spending money on the site, or reducing their expense. Reduced traffic in turn reduces incentive for sellers to stay on the site.

Conversely, bad buyer behavior, such as chargebacks for allegedly poor service or product, or trashing the site, or not coming through with agreed to payments, can scare away casual sellers, and have a major impact on even established providers, particularly when targeted by a fraud ring. These sellers take their valuable inventory to competitive marketplaces where they can be assured of a safe environment.

Hence, the marketplace needs to ensure that the actors engage in good faith so it can remain a credible platform. In this area, payment systems have a significant role to play. Regulations and competitive considerations have forced electronic payments providers to ensure that they not only know the parties involved in a transaction, but also the purpose of those transactions. Think of electronic payment systems as money movement marketplaces that have a vested interest in ensuring buyers and sellers use their platform for moving money. Much like online marketplaces, the payment systems come with guarantees for the buyers that their money is safer when using their system than cash or alternatives. To attract sellers, they need to ensure that those buyer guarantees are not abused at the expense of sellers. Seems much like the same problem, doesn’t it?

That would argue for marketplaces working in synchrony with their payment providers. Unfortunately, most payment systems are constructed as distributed platforms where the buyer trust is managed by separate entities from those that manage seller trust, and the entities in turn are governed by a set of centralized rules. This makes it difficult, if not impossible, to provide any meaningful integration between the marketplaces and the payments trust capabilities. There are however, some payment systems such as PayPal, Venmo, etc. that hold both ends of the transaction that have a unique advantage when it comes to serving marketplaces.

PayPal has 218M active registered accounts, which is a huge base of buyers and sellers with established history. Its past history as the sole payments provider for eBay’s 100M buyers and 4M sellers points to its success in supporting a marketplace model. Thanks to being free of eBay shackles, it is now free to offer that asset to other marketplaces. Some of the features that are unique to PayPal are –

  • A large, global base of potential buyers and sellers – For an emerging marketplace, this has to be extremely lucrative. A well designed two way customer acquisition strategy can jump start nascent marketplaces by attracting a critical mass of buyers and sellers through well designed joint marketing programs.
  • Global support – PayPal is supported in over 200 countries, and supports 25 currencies. That provides an unmatched level of global access, which can help the marketplaces expand quickly.
  • PayPal as the funding account – Many businesses use PayPal as their primary funding account. Connecting to PayPal payments is a no brainer for attracting those customers.
  • Credit risk management – As part of on-boarding accounts, PayPal conducts and then actively manages credit risk for its sellers, handling holds and chargebacks. When sellers sell on a marketplace, they create a credit risk as the cleared payments can be disputed by the buyer. If the marketplace can’t recover, it will be left holding the bag. PayPal can offer holds on funds in accounts, with ability to recoup losses by closely tying the sales to the money in the account.
  • Seller vetting for compliance and other risk factors – Sellers are actively monitored for legal and compliance risks, such as AML, and these indicators can be passed to the marketplace. For seamless onboarding, not all the data is gathered upfront, hence a close tie with payment events and data helps create a complete picture on seller risk that builds up over time.
  • PayPal working capital – can be offered as a way to enable sellers to manage liquidity against sales. Receivables factoring, and dynamic working capital loans can make the sellers on the marketplace more efficient, and better able to withstand lean cycles.
  • Supplement purchase or buyer guarantees – Since buyers receive a guarantee from PayPal and from card issuers, an intelligent approach allows marketplaces to effectively combine or pass through those guarantees, without the need to build out a full purchase guarantee program.
  • Buyer risk management – PayPal can inform marketplaces on potentially risk behavior on the buyers giving the marketplaces and if allowed, to the sellers to better manage their risk in transacting with buyers that have been proven to engage in disruptive behavior e.g., unwarranted returns, excessive returns, etc.

PayPal is also well placed to develop capabilities that will further widen the competitive moat:

  • Social integration: social media interactions have a close affinity to a payment network such as PayPal. Some social networks, e.g., facebook, wechat, etc. have been investing in creating transactional capabilities. They also seek to link these to in house payments. PayPal should aggressively pursue partnerships, and simultaneously lobby for keeping large platforms such as facebook open to user’s choice of payments.
  • Add-on applications: PayPal should also invest in social workflows around multiple buyer transactions to facilitate applications such as ride pooling, home sharing, etc. Venmo integration with Splitwise is a great example of the types of features that can be developed here.
  • Platform for two way data sharing between marketplaces and PayPal. Credit bureaus have done this historically in the lending industry where the data sourced from credit institutions is consolidated, analyzed and fed back into the same institutions. A centralized payment network such as PayPal can perform the same function for the marketplaces.
  • Identity services – integrating PayPal identity into marketplaces/ platforms e.g., sign in with your PP account, will not only provide nascent marketplaces a ready made access to a buyer/ supplier base, it will also strengthen identity verification service that can further reduce the risk while keeping the onboarding process really smooth.
  • Business application ecosystem – There is an opportunity to create connectivity with primary business applications e.g., accounting, hospitality, eCommerce to provide a fully connected experience. Most of the apps support some form of PayPal integration. An investment in enriching the data model so the invoices and other business documents can flow seamlessly across these can create huge value for sellers using PayPal integrated marketplaces.
  • Payment systems – Last, of course, continuing to aggressively expand the payment options to move money into and out of PayPal across all currencies and payment systems will be essential to maintain the global cred.

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