The crowdfunding and marketplace model industries have blossomed in recent years, with companies such as Airbnb acting as a shining example to a raft of similar companies looking to follow in its footsteps.
With the explosion of this new type of marketplace comes a need for a payments solution that specialises in the transactions these companies require on a daily basis. James Morton, Mangopay’s country head UK & NL, sat down with bobsguide to give his unique perspective on the fast-evolving tri-party payments market, and explain how being a fintech specifically founded to serve the tri-party market gives Mangopay an advantage over its competition.
How was the decision to launch Mangopay made?
Leetchi was founded by Céline Lazorthes in 2009, and was created for one specific need, to enable groups to collect money online easily into one single pot. Mangopay was built following the identification of a need whilst operating Leetchi.
When it came to identifying a payments provider to help her facilitate what should be quite a straight forward flow, our founder couldn’t find a solution in the market, so she decided to build a technology solution to support the process she needed.
She developed the technology to facilitate end-to-end payments online, which included technology to accept the payment, to pool the funds easily, and then pay out to an end beneficiary.
Leetchi was very successful, it’s currently Europe’s largest money pot platform, and has now entered the UK market as well.
What we realised after two years of Leetchi being in existence was that a huge percentage of the value of what we had built was the held in the payments infrastructure. This realisation came when one of the largest crowdfunding platforms in Europe, Ulule, approached us in 2012 because they liked what we were doing for the consumer market. Ulule wanted to have a similar customer experience with as seamless a process as Leetchi, and asked us where we acquired the platform from.
From that conversation we created a very simple Leetchi API to test the product. It was the first time we’d even considered going to market with a completely different product to Leetchi, but tested it with Ulule, and the concept worked well. That was the birth of Mangopay.
How has the product developed since that initial testing phase?
We are now regulated as an e-money issuer, we are regulated in the EEA by the CSSF Luxembourg, which enables us to hold client money, effectively in escrow. We also now operate using our own proprietary technology API. We have a payments partner on the front end that processes payments in multiple currencies and via multiple methods, we can acquire funds ourselves and then escrow them on behalf of third parties, and through the technology API we have the ability to control those funds for our clients and then automate the pay-outs for a beneficiary.
What we have built is a payments API that enables our clients to facilitate and automate payments from one end to the other specifically for a tri-party payment, where you have a middleman facilitating a transaction between a buyer and a seller. We don’t focus on standard e-commerce, we specifically focus on processing payments within a marketplace, or via a crowdfunding platform.
It’s a relatively simple concept, but at the time we launched there was no other technology in the market. And the timing of the launch coincided with the explosion of marketplace-model commerce products such as Airbnb, so there was a huge organic demand for this specifically tailored payments processor.
Has the tri-party payments processing market developed since you launched? How do you fit into it today?
There are more and more solutions coming to the market today because the marketplace economy is growing so quickly. But because we were first to market in Europe, and as we understood the problem because the company’s specific purpose has always been to develop a tri-party payments solutions and nothing else, we have an advantage. We weren’t an e-commerce payments processor first that was subsequently trying to solve the tri-party payments problem, the problem was already integral to the business.
A gap in the market is still there, so there is still plenty of room for growth. We grew 420% in the UK last year, and over 200% as a business overall, which is impressive considering that we are in our fifth year of business.
Not only has the economy in general moved to a more tri-party model, because it’s moved to that model regulation has now caught up to that model and therefore backed that model up with further regulation. Our technology supports compliance with that tighter regulation.
You were acquired by a bank in 2015. How did that come about and what is your experience of working in collaboration with a traditional financial services provider?
Being acquired by the bank was very exciting. We were speaking at an event recently about how the relationship between fintechs and banks historically had provoked quite a heated debate, because fintechs believed that they would replace banks and banks were adamant that they wouldn’t, due to the banks’ size and the trust in their brands. Our unique perspective is that it has been a really good learning curve and experience working with the bank, having been acquired. We are advocates of banks and fintechs working together instead of trying to knock each other out of business. We definitely believe that the harmonious approach is the best way forward.
Being acquired by a bank has hugely benefited us. It has given us a lot of credibility being a fintech in our specific space; as a company that holds money on behalf of third parties, whether it be investment or marketplace funds. Even though we are regulated ourselves as a financial institution, and are held to account just as banks are by internal and external audits and by a regulator, it’s still nice to say that we have a bank that has revenue of €8bn backing us up.
And not only has the bank injected capital, it has given us access to technology that we didn’t have before. And we are very fortunate that the bank that acquired us is a very innovative bank in itself, so it has been a very harmonious acquisition.
Having being acquired, have there been any occasions when the bank has had an issue with who you partner with?
In short no, and there’s a reason for this. When Mangopay first entered the market, the bank that we launched with was Crédit Mutuel Arkéa (Mangopay’s subsequent acquirer), so it wasn’t the case that the bank came along out of the blue and acquired us.
Because we had a relationship with the bank that worked so well they trusted us, and therefore felt comfortable telling us to continue doing what we were doing, and they haven’t dictated what we should do or what we shouldn’t do since. They advise on strategy but they never dictate to us.
Has the market evolved to a point where you won’t see any new competitors in your space? Are the barriers to entry too high?
Yes and no. Yes because of regulations, and this is slightly specific to the UK market.
Because of the place we occupy in the market, we don’t process standard e-commerce payments, online or offline, but that market is going to change drastically because of PSD2.
Because of PSD2 we might see a number of companies enter the tri-party payments space in an effort to maintain growth, but there is a lot of additional work they’ll have to do to catch up to where we are. This includes acquiring an e-money issuer licence, providing e-wallets, digital currencies, that’s very different; then having an acquiring platform and escrowing all the trust accounts that we have, and then all of the customer due diligence that we have integrated directly as well, and then the pay-out functionality.
But then I also think this market is expanding exponentially. The tri-party market is growing quickly. I personally think there will be a blip at some point, because it’s grown so quickly that you will see a lot of fodder fall by the wayside. So many crowdfunding platforms and so many P2Ps, so many marketplaces have been created that if there is another credit crunch in the next five years a lot of the smaller ones won’t be able to survive. If there’s not, a lot of them will be acquired by the larger platforms.
Even if there is slight consolidation I still think there is a huge amount of room for growth, so in that respect the barriers for entry are a little lower because the opportunity is right there in front of you. But having said that it’s still not easy to enter the market, especially operating as a payments company and then adding in the complexity of the tri-party payments process; that is the reason no one had developed the technology before us.