Sellers, including large brands which have traditionally used large distribution and traditional sales channels, are realising the benefits of being involved in direct-to-consumer sales channels and are therefore increasingly selling their products through online marketplaces. Similarly, large Retailers are recognising that customers may want to purchase directly from the brands and are starting to leverage their ecosystems to provide forums for this by setting up online marketplaces.
On the face of it, these online marketplaces are quite straightforward: they are simply a website or an app that aggregates sellers of products and services into an online ecosystem and enables customers to buy goods or services from within that ecosystem. However, in reality, they often involve complex transaction structures and funds flows. The way in which relationships are structured within online marketplaces raises some key questions regarding allocation of responsibility for regulatory compliance and credit risk issues in relation to funds flows.
It is important for Retailers setting up online marketplaces and Sellers making use of them to be aware of, and navigate, these complexities. To help with this, we would highlight five key considerations:
1. Marketplace Structure – "show me the money"
Online marketplaces are often promoted as "fully customisable", and "seamless" which means that the Retailer will manage the technology, infrastructure and transaction experience, and Sellers simply have to deliver their goods or services to the customer. While this "one-stop-shop" approach is appealing in principle, in practice it can pose risks from a legal / regulatory perspective that need to be considered carefully.
If you are considering setting up a marketplace or selling on a marketplace, an important starting point is understanding how the marketplace will be / is structured – a true marketplace; or a Retailer acting either as a reseller or distributor of third party products; or a Retailer facilitating payments between customers and Sellers? Different models come with different risks, customer experiences, compliance obligations and funds flows responsibilities.
Some other key things to consider are:
- Who will be "touching" the money and in what capacity – the "funds flow"? This may be more than one person and in more than one capacity.
- Who is the ultimate seller of the goods to the end customer – the "merchant of record"?
- Who is processing the payment and on whose behalf – the "acquirer of record"?
- Who deals with refunds and customer service?
- Is it clear to the customer who they are actually purchasing the goods or services from?
2. Compliance obligations
Once you understand how the online marketplace is structured and the services you are offering or being offered, you will need to ensure you are aware of your compliance obligations.
If you are not the merchant of record (i.e. not the ultimate seller of the goods) but intermediating the settlement of transaction funds, you should make sure that you are aware of your obligations under the Payment Services Regulations and E-Commerce Regulations; and, if you are not a regulated entity you should consider whether you fall under certain exclusions from such regulation (for example the commercial agent exemption).
You will also need to comply with other relevant requirements including under the payment network rules, Payment Card Industry Data Security Standard, know-your-customer and anti-money laundering requirements.
The consequences of non-compliance can include fines, sanctions, reputational damage, paying compensation to customers, and enhanced monitoring and oversight obligations.
3. Contractual Arrangements
For both Retailers and Sellers, it is important to put in place binding marketplace agreements to ensure the structure of the online marketplace is properly documented and the funds flow and roles and responsibilities of each of the parties involved in the transactions and funds flow are clear. This will help to mitigate some of the potential regulatory and operational considerations, as well as allocating risk and providing potential remedies if things do go wrong.
If you are providing an online marketplace, you will need to ensure that transaction processing and settlement are carried out by a regulated entity or that you are properly regulated. Many online marketplaces engage with payment service providers who specialise in marketplace payment processing – including Stripe, Worldpay, Shopify, Adyen or Checkout.com.
If you are a Seller on an online marketplace you might find yourself contracting with a payment processing entity which is completely separate from the Retailer, or being asked to "click-through" to a set of terms and conditions as part of your marketplace participation.
These contractual arrangements should support the operational considerations and risks of your position in relation to the digital marketplace (see points 4 and 5 below).
4. Operational Considerations
Retailers
As an online marketplace provider, it is imperative that you understand how your marketplace is structured and operates, where you fit into the contractual matrix and, in turn, what your operational and compliance obligations are. If you are not a regulated entity then you should ensure you are comfortable that by providing a digital marketplace you are not providing a regulated activity, and set up and maintain operational guardrails to ensure that you do not inadvertently fall within the scope of regulation.
If you are "touching" the money, acting as the "merchant of record" or involved in transaction processing or settlement then you are likely to be subject to credit risk posed by the Sellers that sell on your marketplace. This can be limited by putting operational and contractual controls in place with your Sellers and your payment service providers, including conducting appropriate due diligence on Sellers and actively monitoring refund, chargeback and fraud rates.
You should ensure that any data (including personal data and payment data) that you are receiving is held safely and securely, in line with regulatory and industry requirements, for example the General Data Protection Regulation and the Payment Card Industry Data Security Standard. Often Retailers use a third party provider, such as a gateway provider, to ensure that payment data is encrypted or tokenized. This can reduce the risk of fraud is it renders the payment data effectively unusable.
Sellers
If you are a Seller on an online marketplace, reconciling transaction history is key. You should ensure that you are comfortable that you will get appropriate reporting and transaction information from the Retailer to undertake reconciliation, and raise any issues with them promptly.
The time it takes for funds to be deposited into your account after a transaction is completed—known as the settlement period—can vary between payment service providers. Some might offer daily settlements, while others might take several days or more than a week. You should choose a provider that offers settlement periods that align with your business' cash flow needs. Shorter settlement times can help maintain steady cash flow which in turn lets you reinvest in other business needs.
A smooth integration of your payment solution with your marketplace platform is critical for efficient operations. Ensure that the marketplace solution provider you choose can integrate with your existing systems, including your website, inventory management, and accounting software.
5. What could go wrong?
- Too many cooks spoil the broth – if multiple different payment service providers are involved in the provision of marketplace services, this may indicate a poorly structured marketplace solution. In addition, if payment amounts are being passed through multiple payment service providers there is an increased possibility that settlement could be withheld or delayed.
- Withheld / delayed settlement – for Sellers that are reliant on their cash flow this can pose a risk to their business. On the other hand, Retailers will want to ensure they have adequate rights to withhold or delay settlement or request collateral to limit their credit risk to payment processors.
- Funds flow – depending on who 'touches the money' there may be credit/failure risk, for example if the Retailer receives funds before passing them on to the Seller. It is not uncommon to see funds being held on 'trust' for Sellers to address this risk, but this can increase complexity.
- Fraud risk – fraudulent transactions can result in significant financial losses and damage to reputation. Regularly monitor your transactions for suspicious activity and make use of dashboards, tools and third-party fraud prevention tools to help you track and analyse transaction data.
- Chargeback risk – if a customer sees a business name that they do not recognise on their bank statement they may be more likely to raise a chargeback, so it should be clear to customers who they are purchasing goods and services from. Effective disputes systems and processes should also be in place to make sure that legitimate refund requests are honoured and do not result in an unhappy customer raising a chargeback.
