A guide to marketplace payments

Efficient and compliant payment processes are crucial for the success of online marketplaces. But how do marketplace payments work? And how can your marketplace remain compliant?

This article will explain everything you need to know, including how marketplaces take payments, the importance of tracking balances, and why your marketplace must stick to regulations.

What is a marketplace?

Marketplaces are online platforms that connect consumers and sellers. Sellers use the platform to list their products or services for sale or rent, while customers use it to browse and shop – the marketplace is the intermediary. Popular marketplace examples include Amazon, Etsy, eBay, Uber, Airbnb, Fiverr, and Skillshare.

Unlike ecommerce websites, which take payments directly from the buyer, marketplaces process payments and usually take commission – a percentage of the total fee – from each sale before sending the funds to the seller. At the same time, they’re enabling retailers and sellers to reach a wider audience. Also, ecommerce websites have just one seller, while marketplaces have multiple vendors.

If you’re looking to start your own marketplace or improve your current one, it’s important to understand things like regulatory compliance, Know Your Business (KYB), and how to accept payments. We’ll cover all of these below.

In what ways can marketplaces accept payments?

Processing payments is an important part of most marketplace business models, because it’s how they:

• Generate revenue - from commission taken per sale, which can be scaled as the business grows
• Offer value - by helping vendors find more customers to increase sales, guaranteeing reliable payouts, and helping consumers find what they need and make purchases
• Provide security - by offering customers and sellers a secure way to pay and get paid with a reduced risk of fraud, which also increases trust
• Protect business models - through offering a smooth payments process, ensuring both buyers and sellers become reliant on your platform and reducing the likelihood of them bypassing your platform to make deals elsewhere

Online marketplaces typically accept payments through various methods to cater to a wide range of customers. Depending on what you’re selling, you can configure these payments into recurring payments or split payments, for example.

Here's an overview of how online marketplaces accept payments using different payment methods:

Credit and debit cards

Credit and debit cards are widely used for online payments. They’re considered a traditional payment method – they’ve been around for a long time and are used by most of the banked population. Accepting them is convenient for buyers, making them essential for your platform. Online marketplaces partner with payment service providers (PSPs) or payment gateways to securely process card transactions.

Digital wallets

Digital wallets like Apple Pay, Google Pay, and PayPal are often considered some of the most convenient ways to pay too, although they are much newer. Your online marketplace can integrate various digital wallet payments into the checkout process – the customer will usually be redirected to the digital wallet app or page to complete the authentication process, which may require biometric ID or entering a PIN.

Local payment methods

To cater to customers in different regions, online marketplaces often integrate local payment methods. These methods vary depending on the country or region but may include bank transfers, direct debit, cash on delivery (COD), prepaid cards, and more.

While consumers in different countries may have the same preferences for payment methods, such as digital wallets, the providers available or popular in those countries may vary. For example, Blik and Przelewy 24 are incredibly popular in Poland, iDEAL is favored in The Netherlands, Vipps MobilePay reigns supreme in Nordic countries, and MB WAY leads in Portugal. Here’s the directory of all the payment methods we offer at Checkout.com. 

The specific steps involved in accepting local payment methods can vary significantly based on the particular method and the payment infrastructure available.

How do marketplace payments work?

Marketplace payments differ from ecommerce website payments in numerous ways. Here’s a breakdown of how marketplaces handle payments:

Split payments

Buyers often want to purchase from multiple vendors in a marketplace at once. After the customer has paid, the money must be distributed to each vendor, minus the marketplace’s commission. Split payments make this possible. 

1. Buyer makes a purchase.
2. Marketplace calculates the distribution of funds.
3. Payment is executed, deducting fees or commissions.
4. Funds are allocated to the respective parties involved (e.g. sellers, marketplace).

Make sure you choose a PSP that enables you to split payments between multiple parties. 

Commissions

1. Marketplace charges a commission or fee for facilitating transactions.
2. Commission percentage or amount is applied to the total transaction value.
3. Marketplace deducts the commission from the payment received.
4. Remaining funds are allocated to the seller or service provider.

Balance transfers

1. Marketplace maintains a balance for each seller or service provider.
2. Seller generates sales or earns funds, increasing their balance.
3. Seller uses their balance to make purchases within the marketplace or withdraw funds to their bank account.

Payouts

Payouts involve transferring funds from the marketplace to sellers or service providers. The marketplace determines the payout schedule, whether it’s daily, weekly, or monthly, or allows sellers to request manual payouts.

You can initiate payouts manually or automatically, transferring the seller's earnings to their designated payment method (e.g. bank account or digital wallet).

Payouts often involve deducting any applicable fees or meeting minimum balance thresholds.

Delayed payouts

Many marketplaces don’t transfer the money paid by a buyer to the seller immediately, instead, they delay the payment until the product has been received or the use of the service has started. This increases trust between sellers and buyers.

However, this requires the money to be held somewhere after the payment has been made. Holding money for customers is strictly regulated and often requires a specific license. Make sure your PSP has the right license if you need delayed payouts for your marketplace. 

Benefits of marketplace split payments

• Revenue sharing – you can distribute funds among multiple parties involved in a transaction, such as sellers or service providers. This means you can share revenue with partners while ensuring transparent and accurate payment distribution.
• Streamlined transactions – you can automatically allocate funds to the respective parties involved, removing the need for manual calculations and disbursements. With integrated solutions like Checkout.com, you can also access custom payment routing options.
• Scalability – split payments make it easy to onboard and manage a large number of sellers or providers, as you can automatically distribute funds according to predefined rules or commission agreements. This should all be included in the contractual agreement.

How to collect commission

There are three ways to collect commission: fixed, variable, and compound. Here’s an overview of each structure:

Fixed commission

This is a predetermined, fixed amount or a flat fee for each transaction made by the seller. This structure is ideal for low-value transactions where a percentage-based commission might be less practical.

Variable commission

The commission rate is determined as a percentage of the transaction value or sale price. This means your commission amount is proportional to the value of each transaction, so it’s best to set different commission rates based on factors like the product category, seller performance, or promotional campaigns.

Compound commission

This structure combines fixed and variable commission components to create a hybrid model. It involves a fixed fee as well as a percentage-based fee on the transaction value, meaning your marketplace is guaranteed consistent income via fixed commission and additional earnings from high-value products via the variable commission component.

Managing balances and fund transfers

In the event of refunds, credits, or promotions, you must track the transfer of balances between buyers and sellers. The reasons include:

• Accuracy – ensures that the correct amounts are credited or debited from the respective parties’ balances, maintaining accurate financial records
• Transparency – provides transparency to both buyers and sellers, allowing them to see how refunds, credits, or promotions impact their account balances
• Customer satisfaction – contributes to a positive customer experience, maintaining trust and loyalty among buyers
• Seller relationships – enables sellers to understand the impact on their revenue and build trust in your marketplace’s operations
• Financial reconciliation –  facilitates financial reconciliation processes, ensuring that your marketplace’s financial records align with the actual movement of funds
• Compliance – supports compliance with financial regulations and auditing requirements, providing an audit trail of funds movement

Learn more: Guide to E-commerce payment processing

How do marketplace payouts work?

Marketplace payouts involve transferring funds from the marketplace to sellers or other parties. The payout process can vary depending on the chosen payout method and frequency.

Here’s an overview of how bank and card payouts, as well as scheduled and real-time payouts, work within a marketplace:

Real-time payouts

The best choice is real-time payouts, which are designed to deliver funds to sellers instantly or within a very short timeframe. This method requires integration with payment service providers that support real-time payment capabilities, but offer quicker payouts and keep sellers happy.

Scheduled payouts

Scheduled payouts involve setting specific payout intervals, such as weekly, daily, or monthly, to transfer funds from the marketplace to sellers. The marketplace establishes the predefined schedule and initiates the transfers. This approach offers predictability and ensures that sellers receive regular funds.

Bank and card payouts

Marketplace operators can transfer funds directly to sellers’ bank accounts using bank payouts once sellers provide their bank information. In card payouts, the marketplace transfers funds to sellers’ linked debit cards or prepaid cards. Sellers typically associate their cards with their marketplace accounts to receive payouts.

Read more: Mass payouts explained

How are marketplace payments integrated with Checkout.com?

Checkout.com integrates marketplace payments in several ways:

• Flow – boost conversions, stay compliant, and enter new markets quickly with customizable components in just one simple integration some text
  • Dynamically offer customers their preferred payment methods based on details such as location, currency, or device
• Hosted payments page – send your customers here to finalize payments
• Payment links – send a request for payment link to your customer
• Full card details API – accept payments using full card details (requires SAQ D PCI compliance)
• Mobile SDKs – software development kits that enable you to process payments

Why is marketplace compliance and regulation important?

As a bridge between buyers and sellers, marketplaces are responsible for all transactions on their platform. However, it’s a strictly regulated process and you must comply in the following ways:

Follow AML regulations

Anti Money Laundering (AML) refers to laws and regulations aimed at preventing criminals from disguising illegally obtained funds as legitimate income. In addition to money laundering, AML efforts are designed to combat other financial crimes such as terrorist financing and identity theft. 

AML regulations help protect your business’s reputation and integrity, while ensuring legal obligations are met. 

Hold funds securely

As a marketplace, you have a duty to protect your sellers’ funds from fraud or unauthorized access. This builds trust with sellers and promotes marketplace integrity. 

Conduct customer due diligence

Customer due diligence requirements involve numerous factors. You must conduct identity verification for all sellers, which leads to efficient onboarding. You must also comply with Know Your Customer (KYC) and Know Your Business (KYB) regulations. Vendor Management Systems Screening (VMSS) and MATCH checks also help to prevent fraud. 

Thorough customer due diligence mitigates risks associated with politically exposed persons (PEP) and sanction lists. 

Know Your Customer (KYC)

This is a set of processes used to verify customers' identities and activities to prevent fraud, money laundering, and other illegal activities. Know Your Customer (KYC) is required by law in many countries.

KYC helps to protect your marketplace from fraud by ensuring sellers aren’t selling products to criminals or other bad actors. It can also protect buyers from scams. 

Most marketplaces implement KYC by requiring sellers to provide a government-issued ID, such as a passport or driver's license, during the onboarding process. You can also ask sellers to provide proof of address, including utility bills and bank statements.

The KYC process can be complex and time-consuming to manage, so many businesses use tools like Checkout.com’s Identity Verification to optimize it for them. 

Know Your Business (KYB)

This is used to understand sellers and their businesses. By sourcing this information, you can assess the risk of doing business with a particular seller, protecting your business from fraud while ensuring you comply with government regulations.

There are a number of ways to carry out KYB, including collecting information about the seller’s business, such as their industry, size, and financial history. You may also want to collect information about the seller’s ownership structure and management team.

Here’s a breakdown of the different methods you can use for KYC and KYB:

Automated KYC/KYB

• The best method for efficiency and user experience
• Uses technology and algorithms to automate the verification process, typically using AI-powered software
• Offers quick and streamlined onboarding experiences for customers
• Provides real-time results and minimizes manual intervention

Whitelabel KYC/KYB

• Outsourcing KYC/KYB verification to a third-party service provider
• The service provider's technology and infrastructure are integrated into the marketplace's platform
• Offers flexibility and customization options to match the marketplace's branding
• Requires coordination and collaboration with the service provider
• Can provide reliable and efficient verification results if implemented correctly

Manual KYC/KYB

• The most time-consuming and prone-to-error option
• Involves manual review and verification of customer or business documentation from trained personnel who can validate authenticity 
• May be necessary for complex or high-risk cases that require additional scrutiny

What must your marketplace do to comply?

To comply with the regulation against money laundering and terrorist financing (LCB-FT), you must keep a register of beneficial owners. This register identifies the people who control a company and benefit from its economic activity. Marketplaces must also subject all their sellers to KYC/KYB identification processes.

The ACPR, the Prudential Supervision and Resolution Authority, imposes these regulations on marketplaces. In addition, your marketplace must comply with the PSD2, the European Payment Services Directive 2, which requires marketplaces to use strong customer authentication for certain transactions. This means that marketplaces must verify the identity of buyers and sellers before processing payments. PSD3 is set to come into effect in 2027 with significant updates to PSD2. 

By complying with these regulations, you can help prevent money laundering and terrorist financing while protecting your business from fraud and other financial crimes.

Discover Checkout.com’s Integrated Platform for marketplaces

Our solution for marketplaces helps you connect and control every payment experience, from onboarding checks and accepting payments to reconciliation and payouts. With Checkout.com, you can launch sellers faster using automated verification, boost seller loyalty with instant payouts on demand, and increase your margins on each payment with fixed, variable, or compound fees. 

Our solution is built to give you more flexibility and efficiency with a frictionless checkout, automated operations, actionable insights, and global compliance. Optimized performance is at the core of everything we do, making sure your acceptance rates are industry-leading. 

By helping your sellers be more successful, you’ll create increased revenue for your marketplace.

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