Podcast May 10, 2022

How to Build Network Effects and Integrate Payments as a Marketplace

Marketplaces of the past used to work by collecting money from a card, funneling that money into an operational account, and then bank transfer funds out of the account.

Which means: A lot of money sits between buyer and seller.

But what happens when the company holding your money suddenly fails?

A question asked by Nick Fulton, Co-Founder & CEO at trustshare, who joins the show to discuss why a marketplace wants to go transactional, changes in regulation, the loss of revenue due to payments made outside the marketplace, and helping marketplaces grow through excellent customer service.

Join us as we discuss:

  • The lightbulb moment that led to the founding of trustshare
  • B2B & B2C marketplace growth impact
  • Who’s driving the expectations of payments within the marketplace
  • How fraud is being mitigated

The lightbulb moment that led to the founding of trustshare

Before the founding of trustshare, Nick was working with a company that tracked phone calls; during that time, a consistent ask of their customers was the opportunity to start offering payments — A solution that, at the time, the market didn’t offer.

Together with his CTO, Nick began to solve the market’s pain point.

B2B & B2C marketplace growth impact

In the past two years, marketplaces have experienced explosive growth, specifically in the B2B and B2C side — Somewhere that, in the past, has been traditionally non-digitally transactional.

Using Craigslist as an example, Nate explains how he’s seen the marketplace evolve:

In 2019, the platform made around a billion dollars in revenue, highlighting how every category on Craigslist has grown exponentially. Seeing that verticalization everywhere, consumer marketplaces began to catch on — Why can’t this kind of growth happen in my vertical?

The history of marketplace payments

Marketplaces are used to operate by collecting money from a card acquirer, the funds come into the operational account, and then bank transfer the money out of the account. But this means they’re sitting on a lot of money between buyer and seller.

Nick mentions one company that made more money off of their account interest than they did in sales for a month. Due to the risks posed by this situation and other similar ones, regulators required companies to move funds out of the operational accounts and start to work with a payment provider or become one themselves.

One of the biggest solutions: Giving merchants accounts to every seller on the platform. This, however, doesn’t come without its limitations — Specifically the slow speed of payments and KYC verification.

Who’s driving the expectations of payments within the marketplace

For larger B2B companies, the speed of transactions is incredibly important: Businesses need cash flow. With it, they can double or triple their business.

Think of a platform that hosts freelancers: One of those freelancers goes to a home to perform the work. When they’re done, they have two options — Get paid in cash and immediately have that money; or get paid through the platform where it could take 5-10 business days to receive the funds with a percentage taken off.

So, if a platform can speed up that transaction process, a flood of those freelancers would begin using the platform instead. This is exactly why the marketplace is driving this change.

Marketplaces getting close to the transaction

When you look at the way platforms like eBay connect buyers and sellers, they would only charge a subscription fee. As they got closer to the transaction, however, they realized that instead of charging on the platform, they could make more profit by charging on the payment instead.

“The closer the markets are to the transaction: The more they own the flow and make it easy, the more they can charge.” — Nick Fulton

How fraud is being mitigated

For those entering the marketplace, the biggest piece of advice Nick has for those interested parties is to deal with the problem of fraud by figuring out KYC verification early.

While it’s a foolproof way to minimize fraud, if a company is already established, it can be difficult to backtrack. What ends up happening — Integrating KYC late can frustrate sellers to the point of leaving the platform.

“One way to mitigate fraud is to verify the seller because I haven’t seen a criminal yet who will selfie video verify themselves by their ID.” — Nick Fulton>

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Until next time! 

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