Demystifying transaction flow for marketplaces

Grasping the concept of transaction flow can be a challenging task. When you initially set your marketplace into motion, it may seem counterintuitive, but the primary concern isn’t the number of users registering, but rather if you’re meeting their requirements.

Your marketplace fundamentally revolves around transactions – you are providing a platform for transactions between your sellers and your buyers – and it’s essential that this procedure is not only well-planned but also highly efficient.

Achieving high liquidity

Your ultimate target should be achieving high liquidity, or in simpler terms, a high volume of successful transactions. To achieve this, you must ensure that transactions are executed seamlessly. Reflect on how you envision the search and display process and align it with your business objectives. Even with a flawless search mechanism, where customers can easily locate what they are look for, a transaction is not assured. In this article, we will delve into strategies for increasing the likelihood of a successful transaction.

What is transaction flow?

A typical transaction flow usually consists of a customer payment, transferring the money (minus the marketplace commission) to the vendor, and the exchange of reviews from both sides. Let’s look at these in more detail.

Payment

Does your marketplace transaction involve an online payment? The answer, most often, is yes, and this can introduce challenges. Fortunately, as we previously covered in ‘choosing the right marketplace payment gateway‘, there are numerous excellent payment gateways offering solutions tailored specifically for marketplaces. Start by determining your desired payment method, the checkout process, and the payment timing.

Stripe is often regarded as the most popular payment method for global marketplaces. Stripe also offers safeguards for both buyers and sellers, and most people are already comfortable using it.

It should not be news to you that online payments are heavily regulated. This means that leveraging existing software can be more straightforward than creating a new one and dealing with the associated compliance requirements. With numerous payment service vendors specialising in marketplaces, it might be more convenient to choose one of them. With Stripe, for example, their PCI compliance means you don’t have to worry about it.

Each existing provider comes with its pros and cons – some charge lower fees, some are easier to integrate, and some offer more protection for buyers and sellers. Conduct thorough research, determine the best fit for your business, and ensure they can deliver an exceptional experience to your users.

Once a customer has selected a product (or service), they need to undertake several steps in the marketplace checkout process. Traditionally online, this process includes a shopping cart, which, once filled, leads to the checkout process. If your marketplace encourages multiple purchases, this might still be the optimal solution.

However, recently, many marketplaces have foregone the need for a shopping cart as it adds an extra step. The goal is to streamline the process as much as possible. So, if a customer can purchase or book something with a single click that takes them directly to payment, it’s preferable, eliminating the need for a cart.

Studies have also shown that carts are often abandoned, so the faster the transaction process, the higher the chance of completion.

Some sites require users to register before transacting. Consider whether it’s beneficial for you to have users sign up and if the added information outweighs the initial longer process.

Most marketplaces typically transfer money as soon as the checkout is complete, especially for sites selling physical products that require shipping.

However, this system might not be the best fit for sites that offer rentals or services, where the vendor might want to review and approve the purchase request. In such cases, along with instant booking, there may be options for pre-authorisation, where credit card details are stored, but the funds aren’t transferred until the vendor gives their approval. If approval is granted, the card is charged; if not, no money is moved. However, do remember, if you choose to accept bank transfers, pre-authorisation will not be an option.

At times, the sale might be more intricate, like charging a service based on an hourly rate for an unknown number of hours. The final cost will only be apparent once the work is complete. Therefore, it might be easier for the transaction to occur independently of your marketplace or consider integrating a payment system that can generate invoices on behalf of the vendor.

Transferring funds

The subsequent matter to consider is the point at which you transfer the funds to the vendor. The simplest answer is to do it immediately after payment has been received, but there are exceptions. Maybe a significant portion of the value you add to customers is guaranteeing that they receive what they’ve ordered. You could do this by holding on to the payment until the customer confirms receipt, effectively delaying payment to the vendor.

Another option is to manage all transactions directly between you and your customers, receiving invoices from your vendors. This, however, could lead to challenges as you would bear full responsibility for every aspect of your marketplace, and it’s impossible to ensure the service of a third party beyond your control.

Moreover, this turns your vendors into employees or contractors, introducing a high level of responsibility and risk. It is generally more preferable to have the financial relationship directly between your vendors and customers.

Assuming this is your chosen route, it’s still possible to delay payments via an escrow system. In this setup, you essentially act as a third party holding the funds for the other two parties. As escrow is heavily regulated, unless you’re ready to meet the necessary requirements, this might not be the best choice for you. That said, some payment gateway vendors like Stripe Connect offer escrow services as part of their package, thereby reducing the legal responsibility for you, the marketplace owner. A simpler alternative could be to use a vendor that, instead of offering escrow, has a protection program for buyers, like PayPal.

The actual procedure of releasing funds to your vendors is regulated to prevent potential money laundering. Your vendors will need to undergo a process known as Know Your Customer (KYC).

Charging commission can be executed in a couple of ways – you could split a transaction into two, with one part going to the vendor and the other to you, or pay the vendor the entire amount and then charge them the agreed commission fee.

Reviews

After a transaction, customers and vendors are often asked to review each other. This has a dual purpose. Firstly, it ensures that reviews can only occur post-purchase, reducing the possibility of fake reviews. Secondly, a review system encourages all parties to deliver a good service.

Most review systems allow for a numerical evaluation (often via a ‘star’ rating) and a more detailed written evaluation. You may choose to break down the review into specific topics and provide a quantitative and qualitative rating for each category.

Reviews can be given immediately (if the customer isn’t awaiting a physical product delivery) or after the vendor has supplied the product. Regardless, it’s beneficial to send a reminder email to your customers to leave a review.

Conclusion

A transaction flow goes through several stages. The first involves online payment and its management. Money should only be transferred from the customer’s account (be it a card, PayPal, ApplePay, Stripe or similar) when the transaction is mutually agreed.

Moving money to vendors can introduce challenges due to regulations, though using a partner like us, who use Stripe Connect, can handle this for you, making the process simpler. The final stage in the transaction is crucial – reviews help build trust.


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