Marketplaces and the arrival of DSP2
Marketplaces are today an essential asset for e-commerce players around the world. There are many potential benefits for e-commerce websites, including expansion of the product offering, attraction of new customers, creation of new revenue streams and greater price competitiveness. For sellers, by joining a well-established website, they can rapidly grow sales, while benefiting from the many services provided, including management of their product deliveries.
It is estimated that there are more than one thousand marketplaces in France alone. At Amazon, the global e-commerce leader, more than half of sales are now made through the marketplace. However, e-commerce players find themselves in a tricky situation with the introduction of new regulations, and the search for new revenue streams is a core concern for all stakeholders.
The new EU payment regulation DSP2 (Revised Payment Services Directive) brings with it many changes for e-commerce players that offer a marketplace model. Among the regulatory changes, that which most clearly affects e-commerce websites is that they are now unable to collect payments due to sellers. Sums that were previously kept for several weeks by marketplaces must now be kept by a third-party financial entity, with the necessary approvals from the banking regulator of the country concerned.
While this new regulation makes it possible to secure sums due to sellers, it has a significant impact on e-commerce players' cash flow, increasing their working capital requirements. The sums at stake can be worth tens or even hundreds of millions of euros.
Faced with this situation, marketplaces must ensure that their sellers' business volumes, from which they draw revenue through commissions, are constantly growing. However, they can also monetize new services. And this is where fintech has a role to play, in a win-win relationship.
Fintech: finance specialists in the service of your sellers!
Startups specialised in financial services have become much more accessible. While their offering was initially focussed on conventional financial services, which addressed the inconveniences of traditional service providers, it has gradually expanded to cover all business sectors. Several former investment bankers identified the commercial potential of e-commerce websites.
Addressing a wide client base, many fintech companies now provide solutions that enable the following:
- Open a line of credit to fund business operations;
- Receive early payment, as soon as the day after a sale;
- Offer payments in the seller's preferred currency;
- Finance a stock of goods in delegated delivery, as soon as it arrives at the e-commerce website's warehouse;
- Finance in advance, and exceptionally, sales made during highly seasonal commercial periods (Black Friday, sales, etc.), in order to enable sellers to restock more rapidly.
- Manage all regulatory aspects related to a marketplace business: VAT, billing, etc.
For sellers, these services are clearly very attractive. By receiving a cash advance, they can pay their suppliers more rapidly, and with more advantageous conditions, which will enable them to buy more goods in return.
The cost of the service can therefore be directly absorbed by the profits they make through their business. During very busy periods, these finance solutions will give sellers the opportunity to offer products at very attractive prices, and in greater volumes.
There are also very clear benefits for e-commerce websites. With these services, they will receive revenue via a commission from the partner. They will also be able to build the loyalty of their sellers, and even attract new sellers, which would not necessarily have sold their products at the marketplace in question. Beyond the financial service, the provision of cash flow solutions will enable platforms to promote their other products (such as marketing and delivery). By providing the right combinations of services, marketplaces will be able to greatly increase the benefits they draw from these solutions.
Now is the time to exploit the potential of fintech!
Why is the potential of fintech being revealed right now?
Firstly, as mentioned above, stricter regulations are creating new business opportunities on the market. As e-commerce websites are looking for cash flow, they are more receptive to the ambitious young companies that can help them improve their margins.
Secondly, new innovative technologies have been developed in the areas of payment, banking transactions, security and identity. They make it possible to easily provide these new services on platforms, by rapidly integrating them in the form of APIs. Lastly, investors are increasingly interested in these new markets and are ready to bear greater risk to generate more revenue.
These investors' eligibility criteria will therefore be relaxed in terms of the service that an e-commerce website can directly offer, which will make it possible to address a wider seller base. And, ultimately, generate greater margins.
Deploying new services: from dream to reality
Everything seems simple in this landscape: e-commerce players that want to open their doors to fintech, sellers that are looking for new solutions to grow their daily business, and young companies with the technology and investors needed to offer the right solutions.
However, deploying a new financial service is a real challenge due to the complexity involved. Teams will need to have a full grasp of the subtleties of the various services offered, as well as the specificities of the company from a financial, legal and IT standpoint. There is no magic solution to successfully deploy these new services in a marketplace. That said, taking several key points into account will certainly make it easier:
- Test the service as a POC with a small number of sellers This initial stage should present no great difficulty, as it requires no IT investment. It can, however, be challenging in terms of operational management, and demanding for the teams involved, if many projects are tested at the same time and then rapidly abandoned. Management of the company's priorities therefore needs to be clearly defined.
- Involve financial, legal and compliance teams as early on as possible The added value they bring in these areas will play a major role in securing the project from the outset. By integrating new solutions in the marketplace's traditional financial management, it will not only be possible to reduce friction between teams, but to get them engaged in a shared project.
- Introduce APIs that make it possible to share the customer knowledge and financial data needed to ensure effective operation of the service The crucial thing here will be to provide sellers' financial data to the various partners in a rapid, reliable and secure way. Firstly, this will make it possible to test their eligibility for the service, and then ensure daily operational management.
- Think long term Leading directly on from the last point, project managers will need to bear in mind what the company's direction is and its ambition in terms of developing new services. APIs will, therefore, need to be designed to be reusable by all partners, as far as possible, in order to be able to rapidly launch new services.
- Create seamless customer journeys Most partners will put forward their own subscription journeys and dashboards in the run phase. Their integration with the marketplace's back-office must, therefore, be facilitated, and all of the responsibilities between the company and its partners clearly defined throughout the service lifecycle (subscription, management and cancellation).
- Manage the overlaying of services E-commerce players will need to create many partnerships in order to avoid potential defaults by their service providers. By doing this, they will increase the complexity related to overlaying different services, insofar as all partners will want financial guarantees, in particular concerning payments made to sellers in the event that they default. The strength of a marketplace will, therefore, be its ability to manage this complexity by building a model in which services will be interoperable, with an acceptable level of security for the partner.
- Work with agile companies There should be no problem in this respect. However, the host company may prove to be less flexible than expected and have data security requirements that will make a lot of development work necessary. It will then be necessary to reassure partners regarding schedules, manage discontent and avoid good ideas being taken by the competition if possible!
The financial services market looks set to grow further in the coming years. Marketplaces that exploit this potential early on will be able to create new revenue streams while meeting strong demand from their sellers.
Are you ready to join the adventure?