Several years ago, I met with the CTO of a promising online marketplace that was just beginning to get traction. Let’s call them “Sharing Economy, Inc.” In our first meeting, I asked him, “Do you want to be in the business of growing your ecosystem, or in the business of processing payments?” He responded that it was imperative to their success to be “masters of both domains.”
Although I understood his initial strategy, I also had a payment insider’s view of the real challenges they would be facing. As I spoke with him about the opportunity costs of trying to build a marketplace and navigate the complexity of payments, I asked, “Why be on the hook for payment risks? For fraud? And customer service? Why focus on payments instead of building your business?” Finally, I asked the more direct question, “What business do you really want to be in?”
The point I was trying to make to the CTO was simple. Electronic payments are more complex than they seem, and as a business grows, managing payments will take more time, energy and resources. As an entrepreneur and founder, I know that every company is in a race to dominate their respective industries and that it will take every ounce of effort to be successful. Companies need the right strategy and the financial resources to build a business. For this reason, I told the CTO, he should consider that the time and resources spent dealing with the complex issues of electronic payments is time and resources that could have been used growing their business – faster.
The old eCommerce model (circa 2000-2012) was simply defined as a merchant and consumer transaction. For example, I (the consumer), want to buy something online, and the website (the merchant) provides the simple interface I need to complete the purchase. In the new economy of online marketplaces, the reality is very different and increasingly more complex. For an online marketplace, the transaction has fundamentally changed because both sides of the transaction are unknown. The reality is that the service provider and the consumer are unknown to the online marketplace.
Think about today’s popular online marketplaces: there exists a buyer and a seller… driver/passenger, owner/renter, landlord/tenant. In every transaction, the only reputable participant is the online marketplace itself. The same is true for the underlying payment system. Successful online marketplaces know that the payment experience is integral to the entire trust equation because today’s consumer fully expects the marketplace to manage the payment process quickly, easily and securely. If the payment process breaks down anywhere along the way, then the consumer will move on to a new service. Yet, many online marketplaces do not take into account the complexity of validating both buyer and seller, verifying credentials needed to pay, processing the payment and then dealing with post-transaction issues like chargebacks or fraud.
This is serious business. While a simple eCommerce solution may work in the small transaction worlds of virtual cows and downloads, it will not work in the complexity of online marketplaces where hundreds, if not thousands of dollars, are being exchanged. For example, when processing a large payment for a luxury vacation property rental, the marketplace will be responsible for navigating complex processing rules for deposits, half payments and disbursement of payments – often with different amounts to multiple parties. Marketplaces that are not equipped to handle the growing complexities of these transactions may well put their business at serious risk. And, in the case of fraud, they may be risking their reputation. Eventually, a marketplace that doesn’t have the sophistication to manage more complex payment issues at scale will incur losses that impact both reputation and revenue.
In my experience with marketplaces and payments, there exists a classic disconnect between the user experience and the business. As a marketplace becomes more successful, it must strike the right balance between a simple user payment experience and solid business logic. These businesses also need to understand that their very success will make the company a target for fraud. The hidden truth is that the most cost-effective way to grow the business in the long-term is to work with a reliable and secure payments provider to integrate the payment logic into the overall user experience.
As I advised the CTO at the Sharing Economy, Inc. – if you are a startup or growing online marketplace – focus on your strengths to build your business. In today’s competitive environment, you can’t afford to have a critical part of the trust equation – the payment system – to be broken.