The slow decline of department stores is evident – in the US, Macy’s, Sears, and JCPenney have all recently announced that they will close dozens of stores.
In the UK, BHS has closed for good, and Marks & Spencer is set to close 30 of its stores. The online equivalent of the department store, the marketplace, is going from strength to strength: according to an e-marketer report, e-commerce sales will grow to $4 trillion worldwide by 2020, and 40% of these sales will be through marketplaces.
Online marketplaces have the advantage of offering far greater variety, virtual as well as physical goods, easy access to both big name brands and niche products, and offering both goods and services. Deliveroo and Uber are both marketplaces, linking consumers with the service providers they need.
While the future for marketplaces looks secure, there is one issue that could seriously affect their growth: PSD2.
While PSD2 is much discussed, the bigger discussion is what the regulation will mean for banks when they are forced to open their systems for use by outside providers. Less discussed are payment institution licenses, already necessary for any firms that provide payment services in Europe – with some exceptions. It’s the changes to these exceptions that could mean trouble for many marketplaces.
Commercial Agents are currently exempt from this license under PSD1, and many marketplaces fit the criteria as it stands now: an agent authorised to negotiate or conclude the sale or purchase of goods or services on behalf of the payer or the payee. PSD2 introduces a subtle but important difference in that an agent is authorised to negotiate or conclude the sale or purchase of goods or services on behalf of only the payer or only the payee. This addition of “only” means that marketplaces that relied on this exception can no longer do so.
Other exceptions are also being removed. Previously, if a marketplace processed under €3 million each month, there was no need for a license. This limit will be lowered to €1m — and in certain markets such as Germany and France the limit is disappearing altogether, so if marketplaces want to provide payment services at all they will need to be licensed.
International marketplaces that relied on the “one leg out” exception can no longer do so. Before PSD2, if part of a transaction took place outside of Europe, it was out of scope and not covered by European regulations. Again, it’s a subtle change that means that these transactions will be covered by European law and may take a marketplace over the limit that requires a payment license.
Obtaining a payment license
The answer seems simple — marketplaces need to apply for a payment license in order to be compliant with PSD2 regulation.
In fact, it’s anything but simple. Obtaining a license can cost more than €200,000 and can take over a year to get, and even putting the required policies in place will take six months with the assistance of a specialist law firm. There’s also a requirement to provide regular reporting information and notify the local regulatory body when there’s a significant change in the firm’s circumstances. Getting the application information wrong could lead to a delay of another six months. Non-compliance can lead to heavy fines, or even a directive prohibiting individuals from carrying out regulated activities — essentially terminating the business.
To deal with PSD2 regulations, marketplaces would be better advised to outsource payments processing, thus removing the burden of compliance. Outsourcing payments mean not only not handling this aspect of PSD2 regulation, but other aspects of compliance. The right partner can onboard sellers seamlessly, help convert browsers to buyers, hold payment until delivery, and pay out to sellers without delays or high fees.
A focus on technology
Marketplaces are essentially technology companies, building platforms to match buyers and sellers. Their focus needs to be on these platforms and not peripheral parts of the business such as payments, where others have already built specialist technology. With the right partner, marketplaces can meet PSD2 regulations and also benefit from value-added services such as insights into customer payment patterns.
The growth in marketplaces will inevitably lead to increased competition, as new platforms look to disrupt the disruptors, and retailers and other businesses pivot to a marketplace model. Those that focus on creating the best technology and offering the best experience — engaging partners for everything else — have the best chance of success. The changes that PSD2 will bring is an opportunity for marketplaces to ensure they have the right partners on board.