The purpose of any marketplace is to enable transactions between users. Without transactions, your marketplace provides no value to anyone. That is why it is essential to pay attention to the design of the flow of transactions offered by your platform.
We define a transaction as an exchange of value between a customer and a supplier. The transaction may involve money, it may be an exchange, or the supplier may offer its product or service for free.
Before a transaction is completed on your marketplace, there are several factors at play that could prevent or even interrupt the entire payment process. If your marketplace receives a multitude of visits but these are not translated into a significant increase in sales, then the flow of transactions is a key aspect to pay attention to.
Although it is indeed the basis of the payment process that leads to the completion of a transaction, the flow of transactions is often overlooked. This is a mistake. If your marketplace’s transaction flow were reliable and seamless, users would be encouraged even more to make transactions on your marketplace.
Here are the keys to optimizing your marketplace’s transaction flow.
OUTLINE
- Increase liquidity rate, not user rate
- Select different payment options and choose the best ones
- How to choose the best payment gateway
- Know the payment process (or checkout) step by step
- When to transfer the customer’s money
- When to transfer the money to the supplier
- How to transfer the money to the supplier
- In summary
1. Increase liquidity rate, not user rate
Liquidity is the soul of marketplaces. It is the efficiency with which a marketplace connects buyers and sellers on its platform. It could be said that a marketplace without liquidity does not have a real product, because the ability to operate on the platform is the product.Â
Since different types of marketplaces have very different liquidity probabilities, there is no universal liquidity number to aspire to. However, it is a metric that you should monitor closely and try to increase as much as possible. High liquidity, that is, many transactions and a lot of added value, should mean that users are satisfied.
To achieve high liquidity on your platform, transactions must be simple. Even if the customer found what they were looking for in your marketplace, this does not guarantee that they will complete a transaction. Many things can go wrong at that moment. It is necessary to ensure that the transaction ends up happening as the primary objective.
2. Select different payment options and choose the best ones
Online payment goes hand in hand with today’s marketplaces. In spite of that, there are many marketplaces that make the payment out of their platform to reduce the friction that this sometimes causes in the purchase process. This makes it necessary to minimize the friction at each point of the flow of a transaction, especially on the payment side.
If you decide that it is necessary to make a payment through your platform, you will have to select a payment method, define the steps of the payment process and choose the point at which it is made .
How to choose the best payment gateway
Credit cards are the most common payment method, as they are used all over the world. They are especially convenient for online payments, as credit card companies often offer coverage in the event of fraud. However, credit cards are not for everyone, as they allow people to spend more than they actually have. In addition, in some developing countries, credit card use is quite low.
After credit cards, the world’s best-known payment gateway is PayPal, but more and more people are not fully satisfied with how it works. That’s why offering alternatives to customers is a great way to increase the chances of generating a conversion. Choosing the wrong payment gateways can lead to a loss of sales, as not all of them can be tailored to customers’ needs in terms of accepted currencies, security or affordable commissions.
Check out this previous article to learn some tips to keep in mind when choosing a payment gateway.
3. Know the payment process (or checkout) step by step
By checkout , we are referring to any of the eCommerce pages intended to complete the checkout process. The online checkout process begins when the user clicks “Finish Checkout” or the shopping cart icon on the top bar. They are then redirected to the payment page itself to complete their purchase.
Learn more about checkout design in our previous article. We presented some insights and the best recommendations to improve checkout flows in your marketplace .
In traditional eCommerce, the most popular checkout experience involves a shopping cart. The customer adds all the desired products to the cart and then completes the purchase. If you expect most of your users to make multiple purchases in a single session, this is still a good option.
However, many marketplaces have noticed that including a shopping cart is unnecessary on their platform. If the marketplace offers second-hand rentals, services or products, a shopping cart is much less common. After all, it constitutes a further step to complete a transaction: you need to add the product to the cart before you can proceed with the purchase.
A good rule of thumb for designing a marketplace payment process is that the number of steps to complete the payment should be as few as possible. For example, when using Booking.com, there is no “add to cart” action: when you see something you want, you go to the booking page instantly.
Importantly, a good payment experience is one that requires as little time and effort as possible. When you offer your customers an unforgettable shopping experience, they are more likely to return to your marketplace and buy again.
When to transfer the customer’s money
Each marketplace is different and has specific needs. Such needs play a decisive role in determining at which point in the flow of a transaction the payment (or payout) should be made.
On the one hand, in traditional ecommerce portals, money is transferred immediately after completing the purchase process . This process is great if you know in advance the availability and exact price of the product. This is usually the case when a physical product is purchased and then shipped.
On the other hand, transferring money immediately does not work as well for rental or service marketplaces. Think of Booking.com, for example. Customers generally want to check and confirm that everything is correct in the accommodation they have booked before the money exchange takes place.
Transferring money immediately after completing the purchase process can also be problematic for product marketplaces, not only for services. If funds are withdrawn from the customer’s credit card and products are not delivered on time, this can lead to great dissatisfaction in your users and a bad image in your brand. Most of the time, if the merchant uses pre-auths, the credit card will be charged only after delivery of the order to the customer. What exactly is a pre-authorization?
A pre-authorization is a temporary hold of funds in a customer’s account that lasts about 5 days. Unlike an actual transaction, no deposit is yet being moved, you simply put an official hold on those funds until you receive the subsequent authorization.
The main advantage of pre-authorization is that these funds are technically held in the client’s account. It’s like when you’re waiting for a check to be cleared and you see the new balance in your account: you know the funds aren’t there yet, but you also know they’re officially on their way.
Transfer the money to the supplier
In an online store, the transaction flow ends once the money is moved from the customer. However, marketplaces are more complicated, as the money must also be transferred to the supplier. Despite the huge advances of recent years, this process remains surprisingly complex. At this point, there are two questions to be solved: when to transfer the money to the supplier and how to do it.
When to transfer the money to the provider
The easiest option is to transfer the money directly to the provider once the payment has been made. However, there are situations where this may not be the best alternative. As we’ve already mentioned, part of your value proposition could be to act as a trustworthy intermediary to ensure that the customer receives what they’ve ordered. One way to do this is to delay payment from the supplier until the customer confirms receipt of what has been ordered.
There are many ways to manage the relationship between your suppliers and customers. One is to become a service provider , which means that the transaction essentially occurs between you and the customer. This is what Uber does. Drivers don’t have a direct financial relationship with passengers. Uber guarantees the level of service and charges the money. Drivers have a financial relationship with Uber as contractors.
This is a viable approach, but it also means that Uber, as a platform, is responsible for everything that happens in its market, including the level of service. It also opens another gap: it is not clear whether suppliers are really contractors or freelancers. There was already a nationwide complaint against Uber in this regard in 2018. Classifying your suppliers as employees is a huge financial and regulatory burden. To avoid these problems, it may be better that the financial relationship is between the customer and the supplier.
There is a very attractive alternative with which it is possible to delay payment without being the service provider yourself: through escrow . Thanks to an API escrow , such as truust, payments when purchasing products from certain Marketplace can be made with an escrow account in between. This ensures that the item will be delivered correctly and that it will be charged when the buyer receives it.
How to transfer the money to the provider
Transferring money to your suppliers seems like an easy task. Unfortunately, it’s not; it’s another area that’s heavily regulated to prevent money laundering.
Before you can move money to an individual, they must first go through a process called Know Your Customer (KYC) to verify their identity. KYC is well known by financial institutions as an effective method to verify the identity of customers. It is a fundamental practice to protect your FI from fraud and losses due to illegal funds and transactions. This process includes: analyzing identification documents, verifying data with other databases, and tracking user behavior to see if it is consistent.
The KYC process is probably one of the reasons why marketplaces like OfferUp and Wallapop have decided not to offer an online payment system. They want to make it as uncomplicated as possible for users to sell used low-value items, and adding their financial information could be a key barrier preventing suppliers from starting.
From a regulatory perspective, managing multiple countries and currencies in the same marketplace can be very complicated. It might be a good idea to start from one country, or at least have all your suppliers in the same country, to avoid having to deal with regulatory differences between countries.
If you want to charge a commission for the transaction, you have to decide when and how to charge it. As we discussed earlier, from a regulatory perspective, getting all the money and transferring your share to suppliers can be difficult. If you want to avoid this inconvenience, you should either split the payment into two separate transactions – one going to the supplier and one to you – or transfer the full amount to the supplier and charge the commission once the transaction is complete.
In summary
In this article we’ve focused on how to make transactions as easy as possible for users of your platform. There are several steps in the transaction flow of any marketplace, and decisions need to be made about each of them.
The checkout flow should be simple and have as few steps as possible. The first decision to make is whether or not to use online payments. The most common forms of payment are credit card, bank transfer and PayPal. You should only move the customer’s money when you are sure that the transaction will take place.
Transferring money to your suppliers can be surprisingly difficult, especially due to regulations. If you want to hold money for others, you may need an escrow license. Alternatively, you can be the service provider and turn your suppliers into your contractors (or employees), or charge the credit card only after the service has been rendered. Your suppliers will need to go through a verification process before you can transfer money to them, which can be a problem for marketplaces where individuals trade in low-value items.
REFERENCES
https://medium.com/point-nine-news/wtf-is-marketplace-liquidity-f2caca3802c0
https://www.cs-cart.com/marketplace-software/payment-processing-on-ecommerce-marketplace
https://www.bbva.com/en/6-characteristics-payment-channels-must-conquer-market/
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