Over the past three years I’ve helped companies build their own app stores, plugin marketplaces and partner listings using OpenChannel. In that time, I’ve learned first hand about the headaches of implementing marketplace payments for large SaaS and hardware platforms. Surprisingly, there’s a lot of hidden work and complexity involved – especially when buyers and sellers are located internationally.
Therefore, my goal today is to talk about my experiences and present comparisons to help you make the best decision possible when setting up marketplace payments for your platform.
What Are Marketplace Payments?
Marketplace payments aren’t considered traditional e-commerce. In traditional e-commerce there is one seller with a product or service to sell to many buyers. However, with marketplace payments, there are three parties involved. With marketplaces, a marketplace owner allows sellers with a product or service to sell to many buyers.
The best example of a marketplace is the Apple App Store. Apple is the marketplace owner and allows app developers to sell apps to their users. In return, Apple receives a 30% commission on each sale.
What Are Marketplace Payments Platforms?
A Marketplace payments platform takes care of the payment processing, security, compliance, fraud detection and splitting the money between the seller and the marketplace owner. Now, some may ask: Why use a marketplace payments platform? Why not just accept payments myself then simply pay out developers later? Because, in reality that’s actually pretty damn hard to do. I’ll explain why.
First of all, it all starts when a payment is made by a seller. From that moment on, you are now the Merchant of Record (MoR). This means that you become financially, legally and reputationally responsible for the purchase. As a result, if the actual seller of the product is someone that you don’t quite know or trust then that’s where it gets risky. For example, if the seller is a fraud, accumulates charge backs or accumulates disputes then the majority of the liability and penalties ultimately will fall on you, the MoR.
Also, there are a few little details such as tax, compliance and reporting that make it a hassle to deal with under most circumstances. With that said, sometimes being the MoR is really the best way to go. It all depends on your unique situation. After all, there are companies like Uber, Apple and Google that take on the role of merchant of record and make it work – even internationally.
PayPal For Marketplaces
Ok, look. I’m going to be upfront about it. I strongly dislike PayPal. Every developer resource they have is frustrating to use and gives me anxiety. Now, even though I’m being harsh, I’ll also be fair. After all, it’s all because PayPal was the first real payment provider. PayPal was founded in 1998 and because of this PayPal has to deal with lot’s of legacy documentation and code clogging up their pipes.
In any case, PayPal for Marketplaces (formerly PayPal Adaptive Payments) works by allowing you to chain payouts after the total price of the item is charged to the buyer. The first payee in the chain becomes the merchant of record for the transaction. Under the covers, payment chaining is set individually for each transaction when calling the API.
For example, a buyer is charged $100 for an item. The seller (1st in the chain) will receive $80. The marketplace owner (second in the chain) can receives a commission of $20. With PayPal you can set it so either the seller or the marketplace owner pays the transaction fee.
However, frustratingly, there is no way of getting the actual fee dollar amount from the API. This coupled with the variability of fees depending on the sellers country makes determining exact payout amounts impossible (problematic if you’re trying to do automated accounting). So if the transaction fee is applied to the seller and the seller receives $80 minus fees then what’s the total dollar amount paid out to the seller? Yeah, good luck with that.
Paypal for Marketplaces Strengths
There’s one area where PayPal is the undisputed leader. It’s the fact that PayPal supports sellers in over 160 countries. No other payment provider on the planet can come close to this kind of availability. Compare that to around 25 countries for Stripe.
In addition, PayPal supports mass payments. This is really useful, especially if you’re taking on merchant of record (MoR) responsibilities. One way to implement marketplace payments is by being the MoR and credit card transactions with your own payment gateway. Once the transactions have cleared, you use mass payments to payout the partners. It’s important to note that you will pay both payment processing fees as well as mass payment fees with this strategy.
Paypal for Marketplaces Weaknesses
The top, most rage-inducing, WTF moment for PayPal involves implementing subscriptions with Adaptive Payments with PayPal’s “Pre-Approval”. Pre-Approval works like a regular checkout flow where users are sent to a PayPal checkout page and agree to pay a recurring fee. No red flags here. Except, the moment where you figure out that Payment Pre-Approval is limited to $2,000. This means that if you’re selling a $200/mo subscription service, your users will have to re-subscribe and go through the PayPal checkout flow every 10 months. That’s pretty useless.
The second, worst thing about PayPal Adaptive Payments is that you must send your users through PayPal’s checkout page to complete their purchase. You have no control over the styling, branding, look or experience. No exceptions. It gives your user’s the full 1998 PayPal experience.
There are a few more notable issues with PayPal, mainly that the documentation is sh*t and the API/SDKs are terrible. Oh, also PayPaypal Adaptive Payments is limited and you must get special approval from PayPal in order to use the service.
In my opinion, I think Dwolla is a fantastic service. Everyone I talk to that has used them falls in love. It’s simple, It’s easy, It’s straightforward.
Dwolla works by allowing the marketplace owners to perform mass, automated ACH transfers using their API. This is extremely useful for paying sellers (and taking a commission for yourself). For Dwolla to work as part of a marketplace strategy, the marketplace owner will need to be the merchant of record. As I said before, this is a less than ideal scenario. However, being the MoR becomes easier since the marketplace owner and all merchants must be in the US anyway to use the service.
First, Dwolla’s documentation is fantastic. In addition to that, the simplicity and size of the API is a refreshing change from that of PayPal and Stripe. We’ve said before how much we like their developer experience and talked to them about their awesome documentation. Although I would have liked to have a Java SDK available, I didn’t really mind developing directly to the REST API.
Due to the nature of ACH payments, transaction fees can be much lower than the standard 2.9% + $0.30 for credit card fees. However, if you’re still going to be taking credit card payments from buyers then the payment processing fees will be unavoidable.
The biggest downside to Dwolla is that all parties must be located in the US. Unfortunately, Dwolla doesn’t support international payouts at all and that’s prohibitive when creating a marketplace with international sellers.
As far as i’m concerned, Stripe is the industry standard for marketplace payments. They do everything fairly well across the board and account for 90% of all the marketplace payment implementations I’ve developed. Best of all, the seller can act as the merchant of record.
Stripe Connect works by allowing other Stripe accounts to connect to your Stripe marketplace account. Once a partner’s Stripe account is connected, the API can process payments from buyers and automatically transfer proceeds to sellers. The seller becomes the merchant of record and the marketplace owner is able to set an application fee on each transaction. This fee is registered as a payment from the seller to the marketplace owner and is, in essence, the commission fee from the sale.
Stripe Connect Strengths
Stripe is very easy to implement and several well-built SDKs are available. In fact, their API documentation is widely regarded as some of the best ever built and we’ve talked about how it’s crucial to providing a great developer experience.
With regards to merchant accounts, Stripe supports sellers in 25 major countries. Obviously I would prefer the number of supported countries to be as high as possible but I also understand that it’s a working progress and they will expand to more countries over time.
Stripe Connect Weaknesses
Although Stripe has a great service, they are the most expensive (but not by much).
For Stripe Connect, expect to pay the standard 2.9% + $0.30 per transaction in credit card processing fees. On top of that, there is a 0.6% fee for transactions involving international credit cards. In addition to that, your sellers will be charged $0.25 per ACH payout.
Secondly, Stripe doesn’t have a mass payments system like Dwolla or PayPal. So, if you’re strategy is to be the merchant of record then Stripe’s not the best choice.
I short, Braintree is the main competitor to Stripe. Although they were purchased by Paypal, it hasn’t adversely affected the quality of their API or documentation.
Braintree Marketplace works by allowing the “Master merchant” (marketplace owner) to manage and connect to other Braintree Marketplace sub-merchant accounts (sellers). Once a sub-merchant’s account is connected, the API can be used to process payments from buyers and automatically transfer proceeds to the seller. Fortunately, the seller is the merchant of record and the marketplace owner is able to set a service fee on each transaction.
Braintree Marketplace Strengths
Braintree’s API, documentation and SDKs are very well built. I would say that it’s just as easy to integrate marketplace payments with Braintree as it is with Stripe.
Braintree Marketplace Weaknesses
The biggest downside to Braintree is that master merchant and all sub-merchants must be based in the US. In fact, Braintree doesn’t support international marketplaces or merchants at all.
Although Braintree is great, they are about as expensive as Stripe. For Braintree Marketplace, expect to pay the standard 2.9% + $0.30 per transaction in credit card processing fees. On top of that, there is a 1% fee for transactions involving international credit cards.
What Should I Use?
In all my years building multi-seller marketplaces, I’ve realized that each payment platform is performs best when applied to a specific use case. There is no winner take all here.
First, when it comes to building an e-commerce platform where items or subscriptions are sold by partners located in different countries, Stripe is the clear winner. Braintree’s lack of international support for their marketplace product is a big limitation.
Second, if you’re going to be the merchant of record and your sellers are in the US then Dwolla is a match made in heaven. Low transaction fees, great documentation and a a slick API make integrating with Dwolla a pleasure.
Finally, when it comes to building an e-commerce platform where one-time-payment items (not recurring) are sold by partners all over the world, Paypal is where you’re might want to focus. I have a rage-filled relationship with Paypal as you may have guessed. However, I must admit that their supported countries list is unmatched. If you don’t mind being forced to use an ugly checkout UI, not offering subscriptions or having to beg PayPal to approve your account for Adaptive Payments then maybe it’s worth looking into.