Solving the PSD2 problem for marketplaces: Inbound vs outbound payment providers

By Luke Trayfoot | 4 May 2017

In roughly six months, two-sided marketplaces based in the European Union will need to comply with PSD2, the Second Payment Services Directive. Amending the original Payment Services Directive that had left them exempt, this piece of legislation mandates that marketplaces serving as an intermediary for transactions between buyers and sellers must obtain authorisation as either a payment institution (PI) or electronic money institution (EMI). Failing to do so could lead the government to levy hefty financial penalties upon the organization, or even shut down the business altogether.

The trouble is that getting authorization as a PI or EMI is no small task. The process is confusing, costly, and incurs new regulatory oversight. On top of that, it’s time-consuming—and with less than a year left before the deadline, there’s little time to spare.

Fortunately, marketplaces have another option. By leveraging the services of businesses that are authorised to provide payment services, ecommerce marketplaces can remove themselves from the process of collecting and distributing payments and avoid the need to obtain this kind of authorisation altogether. While most ecommerce marketplaces can easily find at least one inbound payment provider —that is, a company that facilitates the collection of funds from buyers—many are struggling to find a suitable outbound payment partner to handle disbursements to sellers. It’s a difficult issue to tackle, and it’s been made even more difficult with the introduction of PSD2.

To be compliant under PSD2, marketplaces that choose to forego pursuit of their own authorisation will need to decouple themselves from seller payouts using one of two methods: expand their existing relationships and entrust payouts to one of their inbound payment providers—a functionality that some popular acquirers have just recently introduced—or forge a new relationship with an established outbound payment provider.

The Problem with End-to-End Payment Solutions

On its face, consolidating both the collection and distribution of payments under a single partner has some notable advantages—namely, administrative convenience. Digging deeper, though, we find that recruiting an inbound payment provider to manage outbound payments presents a number of issues for ecommerce marketplaces:

High costs: While it might seem easier to conduct all transactions through just one provider, it’s rarely the most affordable option for ecommerce marketplaces. Without the financial relationships that are common to payout platforms, inbound payment providers often have limited control of funding flows, service fees, and foreign exchange costs. As a result, the fees levied by inbound providers can be steep—typically well above what a marketplace would pay when working with a provider that deals in payouts specifically.

Limited payout control: Because their systems have been primarily designed for receiving payments, inbound payment providers rarely offer the tools necessary for an ecommerce marketplace to control how and when payouts are delivered. Most of these providers offer just one or two payout methods and transactions can take a number of days to settle in the seller’s account. For international payments, inbound providers usually only offer wire transfers—a slow and costly payment method that adds further friction to the payment experience.

Restricted global reach: In order to provide payout functionality, inbound payment providers often need to piggyback on existing financial networks—rarely can they facilitate these kinds of transactions on their own. For payouts within the US, UK, and EU, that’s usually fine. As ecommerce platforms look to scale, though, they find that their payment partner is incapable of providing fast and convenient payouts for sellers in new markets. With emerging opportunities for ecommerce marketplaces in places like China, India, and Latin America, these companies need a payout partner with a stable global footprint.

Integrating payout functionality with outbound payment providers

Fast-growing ecommerce marketplaces with global expansion aspirations would be wise to entrust their payouts to an established outbound payment provider, which brings a number of advantages. Authorised payout companies like Hyperwallet present solutions that help marketplaces mitigate their compliance risk with PSD2 while retaining control of their payment process by providing the tools necessary to manage funding flows, pinpoint payout delivery times, and enable a range of convenient payout methods. With diverse integration tools—including APIs, SDKs, and JS widgets—ecommerce organizations are able to embed payout functionality into their own platform, ensuring that they can continue to do business the way that they prefer.

Another benefit: outbound payment providers are often ‘acquirer agnostic’, meaning that ecommerce marketplaces don’t need to make any significant changes to their existing inbound payment solution. By seamlessly working with acquirers, payout providers like Hyperwallet can help marketplaces maintain oversight of their entire payment process while still keeping the necessary distance between themselves and the transaction.

There’s more than one way for ecommerce marketplaces to reduce their risk of non-compliance with  PSD2. Rather than jumping at the first opportunity to shield their platform from regulatory scrutiny, these companies should take the time to consider which solution is an optimal fit for their business. It’s true that inbound payment providers offering payout functionality could make the payment process more convenient from an administrative perspective, at least in the short term—but the higher fees, limited control, and restricted global reach may spell trouble for marketplace payouts down the line.

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