This is a big deal and if you’re running an online marketplace in the EU you need to read this…
The Payment Services Directive version 2 (PSD2) will come into force on 14th September 2019 and there are a couple of key areas that will affect software vendors and their merchants who accept payments in Europe.
The first area for consideration is called SCA. We’ve created another post about the SCA (Strong Customer Authentication) and what that means for vendors and their merchants, you can check that out over here, in short, there is going to be more ‘friction’ at checkout for buyers and compliance requirements for merchants and vendors.
Follow the money
This post tackles the issue that online software marketplaces face in terms of receiving payments on behalf of merchants and then paying out to those merchants later. Effectively remitting the money or executing a transaction.
Online marketplaces have sprung up in recent years and become very successful, some notable examples are: ebay, Amazon, Shopify, Etsy, Kickstarter, Funding Circle & Just Giving. And marketplace startups have not necessarily conformed to the previous mould, as I would argue there are many more ‘marketplaces’ that are not in the consumers’ mind, those in healthtech, proptech and insuretech to name just a few categories; with many platforms providing a multi-merchant checkout process. Think Gym management software, rental property or even insurance policy sales. And of course, good cause marketplaces that manage donations are not exempt by virtue either.
We’ve met lots of software marketplaces that have this model since it enables a number of benefits:
1) They can collect the money
2) They can take a cut of the payment
3) It means that they don’t have to integrate multiple payment providers
4) Vendors can receive commissions from some payment processors
But here’s the kicker
– You can no longer collect the money!
Unless you are regulated that is. And I don’t know any software vendors who want to go through regulation.
So just to be clear if you’re running a software marketplace that takes payment for a product that you sell on behalf of a merchant and then pay that merchant later, you will be breaking the PSD2 regulation and get investigated from September onwards if you are not registered as regulated.
What options do we have?
Ok, so what are your options if you’re a software vendor providing this marketplace model… In short, you don’t want to be touching or holding the money or running the payment process:
Use a regulated payment provider and don’t touch the money. This will certainly alleviate the concern, but as far as I can interpret the legislation this means the provider is the commercial agent not the marketplace. Single payment providers will be limited by region and functionality.
Find a single processor with ‘connected’ accounts.
Stripe has something called Stripe Connect that means a marketplace can connect other Stripe users accounts and pass the transaction directly from payer to payee, routing the payment straight through. The downside to this is, it’s a single processor approach and secondly, you have no control over the transaction. Stripe does allow the marketplace to add in a fee, which will make lots of people happy.
If you’re a marketplace with more complex requirements, like the need to have multiple payment providers, operate in a broader range of countries and offer multiple payment methods you’re going to need to find some sort of aggregator or payment provider code library. This is where we can help, our platform provides a consistent payment experience across the leading payment providers and methods. With one integration you can have ongoing access to our compliant payment components and view all transactions and merchants in one place.
The question that needs to be answered regardless of which of the above options you choose, as a marketplace, who is your customer?
A bit more detail
Under PSD2, the definition of a commercial agent has been tightened up and you must decide if you represent the payee (merchant) or the payer (end customer), you cannot represent both. And regardless of whether or not the marketplace is in possession or control of funds. This is where adding fees like in Stripe’s Connect solution has to be carefully considered in the flow. It is, therefore still a difficult and grey test to pass for online marketplaces.
If you do want to act on behalf of both parties, then under PSD2 you will need to apply for a license. Any platforms which accept payments or donations before passing them to the intended recipient (e.g. online fundraising platforms) should also review their regulatory position.
In conclusion, the simplest way around this new directive is to outsource the payment process to compliant solution providers but your position as a marketplace and your processes still need to be considered carefully.