How PSD2 for Marketplaces Can Leverage EU Regulatory Changes for Growth
By design, marketplace platforms provide a targeted customer base for vendors.
The operator of the platform does not own any of the products or services. Instead, their business is to showcase other vendors and facilitate a transaction.
It’s a brilliant business model that changed the business landscape. Uber, Airbnb, eBay, Upwork, Shopify, and multi-sided platforms offer various options for prospects to meet their needs quickly, without dealing with the logistical challenges of managing inventory and financial risks.
- 92% of US consumers are shopping on marketplaces.
- Close to 70% of UK shoppers regularly shop online, of which more than half are via marketplaces.
- Sales on marketplace sites accounted for 62% of global eCommerce in 2020.
That said, the impact of the recent Payment Services Directive (PSD2) on marketplaces in Europe presents a significant obstacle.
What is PSD2?
PSD2 explained simply, is a new regulation that ensures multi-sided platforms must not collect payments that buyers owe their sellers. Platforms that wish to do so must now obtain a payments license and become regulated businesses.
Below we share actionable tips and best practices to help marketplace platforms leverage the changes enforced by the European PSD2 regulation for growth.
EU and UK Regulation: What are the Effects of PSD2 on Marketplaces?
Historically, many marketplace platforms in Europe received transaction payments under a construct known as “commercial agent” for exemption from payments licensing.
Those platforms perform the intermediary role of collecting and managing transaction payments, which, ideally, the customer should pay directly to the vendor. The platform then remits the payment to corresponding vendors (after meeting specific predetermined obligations).
Even though the platform served as an intermediary, the economic liabilities of such transactions do not rest on the marketplace’s shoulders. Instead, the vendor bears the contractual obligation of fulfilling the sale.
Most European payment law interpretations see such services as a regulated activity that requires the marketplace to secure a payments license. And the “commercial agent” exemption under PSD 1 gave marketplaces the ability to bypass such strenuous regulations. All that has now changed with the passage of PSD 2.
Under PSD2 regulations, “the management and remittance of third party funds collected through online purchases will now need to be carried out by a licensed payment services institution.” Marketplaces that wish to continue handling payments and remittances in-house will have to undergo laborious, complex, and expensive licensing procedures to make that possible.
That is to say, for PSD2 compliance, the only way for marketplaces that are intermediate between sellers and buyers to avoid licensing and regulatory obligations is to refrain from possessing or controlling transaction funds. And, instead, employ a PSD agent - a licensed third-party payment service provider - to meet that need.
The new Payment Services Directive redefined the commercial agent exemption to consist of “payment transactions from the payer to the payee through a commercial agent authorized via an agreement to negotiate or conclude the sale or purchase of goods or services on behalf of only the payer or only the payee.”
In that order, the Financial Conduct Authority (FCA online invoicing) in the UK clarifies that: “An example of where a platform will be acting for both the payer and the payee would be where the platform allows a payer to transfer funds into an account that it controls or manages, but this does not constitute settlement of the payer’s debt to the payee, and then the platform transfers corresponding amounts to the payee, according to an agreement with the payee.”
A Checklist to Help you Gain Clarity on Your PSD2 Compliance
All of the activities below are regulated payment services in the EU and UK:
- Operating a payment account and allowing cash deposit and withdrawal from a payment account.
Example: Keeping funds for a given vendor in a bank account before releasing the funds per the vendor’s requirements
- Handling payment transactions.
Example: Processing payments from buyers to sellers
- Providing or obtaining “payment instruments” under PSD1 or “payment transactions” under PSD2.
Example: Obtaining and processing credit card transactions through the card networks
- Money remittance.
Example: Serving as an intermediary between a payer and payee in funds transfer
- Initiating payment services.
Example: Delivering a payment, such as a bank transfer, from a customer’s online bank account to a merchant
- Designing account information services.
Example: Providing consolidated or aggregated services
Weathering The Storm: Applying for a Direct License vs Choosing a Third-Party Payment Partner
For starters, it’s worth noting that the process of acquiring the payment processing license invoked under PSD2 regulation in the UK, is quite daunting. And it’s costly too - which makes that option unfavourable for the majority of marketplaces.
Unsurprisingly, it’s not only the time and resources required to apply for a direct license that’s the hurdle. Most marketplace platforms acknowledge that the advantage of choosing a third-party payment partner to take care of the regulatory burden and associated overhead far outweighs the need for in-house payment handling.
It’s common sense. The success of platforms is traceable to their ability to facilitate sales. Not make sales.
However, all payment gateways are not built the same. Having a payment partner is one thing. But having a partner that provides the non-negotiable features to support your business model is the determinant success factor.
Take note of the following essential features.
Seamless User Onboarding and KYC/KYB Handling
A quality payment gateway, such as UNIPaaS, makes the client onboarding automated and effortless. It takes care of the vendor identity verification process in line with prevailing payment laws. Identity verification is crucial for online marketplaces as they’re always onboarding new sellers, and it’s difficult for platforms to carry out that requirement internally thoroughly.
We created UNIPaaS to ensure that marketplaces can quickly verify the seller’s information and risk profile with automated KYC (Know Your Customer)/ KYB (Know Your Business) and AML (Anti Money Laundering) frameworks to ensure high conversion rates in your vendor registration process. Our verification models verify both privately held businesses and individuals / sole traders so you can be sure your platform is fully compliant with all regulatory requirements.
UNIPaaS: Customized Vendor Experience and Control Over UI/UX
When we created UNIPaaS, one of the crucial considerations we made was ensuring that our payment infrastructure is simple to embed within an online marketplace’s operational systems. You get no redirect out of your platform for any service, including onboarding, and minimal interaction between UNIPaaS and vendors. And we cracked that flexibility and customization code so that platforms can own the entire customers' experience within the platform, and as a result, gain complete control of their flows, data, and ecosystem to optimize conversions.
Scalable, Innovative Payment Functionality
UNIPaaS, provides digital platforms with automated payments checkout, flow, and processes, enabling PSD2 collection account to accept, manage and disburse payments.
Different business models can require different solutions for the sellers. Our simple white-label solution requires minimal development efforts that you can even implement with UNIPaaS' “Low code”/ “No code” approach and embed it into your marketplace UX. With our “YourBrand Payments” system, you increase customer loyalty and lifetime value.
A personalised solution with optimum PSD2 Compliance
Those are a few of the many benefits the UNIPaaS solution offers online platforms. If you’re a marketplace in the EU or UK and you need an advanced, customizable, and compliant payments infrastructure that frees you from the burden of having to procure payments licenses or becoming a regulated business, UNIPaaS can easily and efficiently make yours a PSD2 marketplace.
There is also the licensing burden that has to be considered here. Applying for licensins, building and maintaining a compliance department to keep track of licensing requirements, costs and timelines, and paying the relevant licensing fees on time - these are all time-consuming, expensive and challenging. It also adds risk in that any slip on compliance or missed payment can result in fines and reputational damage.
Again, if you, like many marketplace platforms, are faced with the challenge of funds collection from multiple sources, disbursement and split of funds between multiple entities, manual work, unscalable, expensive, and poor payment reconciliation processes, then UNIPaaS is the answer. Get started here or contact our team for more details.