In recognition of a rapidly changing ecommerce environment, Visa has created a new category of payment aggregator – a “marketplace” – for entities that bring “together Cardholders and retailers on an electronic commerce website or mobile application.” The new marketplace designation will have an immediate impact in the ecommerce market by clarifying the status and requirements applicable to ecommerce sites looking to add payment processing services to their platforms. While this model is likely to grow in popularity, it raises a number of regulatory and compliance issues that must be taken into account.
What Is a Marketplace?
A marketplace is a type of ecommerce site that facilitates the sale of products or services by multiple third-party retailers through an online platform. While the main function of a marketplace is facilitating sales by bringing buyers and retailers together, this activity necessarily requires that a payments system be included in the platform. Traditionally, many of the largest marketplaces have incorporated payments by partnering with more traditional payment processors to handle the nuts and bolts of acquiring, clearing, and settlement. The new marketplace category will provide these websites with additional flexibility to offer their own processing solutions.
Among other requirements, to qualify as a marketplace under the Visa rules, a company must:
- Offer a website or mobile application that brings together retailers and buyers;
- Enter into a contract with each retailer governing the marketplace’s processing of transactions on behalf of the retailer;
- Prominently display the name or brand of the marketplace on the website or application;
- Manage transactions (sales and refunds) for the retailers and receive settlement for transactions on their behalf; and
- Resolve or accept financial liability for cardholder disputes.
There are a number of other important limitations for marketplaces, including that no retailer on the marketplace may exceed $10 million in annual Visa volume through the marketplace, and no retailer may exceed 10% of the marketplace’s annual Visa volume. Further, the rules prohibit certain retailers from processing through a marketplace, including franchises, travel agents, and certain high-risk retailers.
What Do I Need to Know about Marketplaces?
The announcement of the marketplace designation comes at a time when “payment facilitation” has become a driving force in merchant acquiring. Under the card brand rules, a payment facilitator is a merchant service provider that is permitted to process for a group of identified sub-merchants through its own merchant account. The new marketplace designation is similar in concept, but tailored for ecommerce platforms that host numerous different retailers.
While the payment facilitator model has grown in popularity as a way to board merchants quickly and with minimal friction, it comes with a number of compliance and regulatory challenges. The same are likely applicable to the new marketplace designation.
First, as noted, Visa has established a number of rules for marketplaces. Failure to comply with these rules can result in Visa penalties and even expulsion from the network.
Second, Visa’s requirements state that a marketplace must receive settlement funds for distribution to its retailers, exposing the marketplace to federal and state regulation as a money transmitter. Payment facilitators face similar issues, but are not required to receive settlement funds. In fact, many processors now offer direct settlement to sub-merchants in part to avoid this very issue.
Third, federal regulators like the Federal Trade Commission will expect marketplaces (like other acquirers) to engage in robust due diligence of retailers and to monitor their transactions for signs of fraud or unlawful activity. The FTC, in particular, has raised concerns about the payment facilitation model and the concept of frictionless underwriting – concerns that would seem to apply with equal force to marketplaces.
The concept of payment aggregation has exploded in recent years, with acquirers looking for faster and more efficient ways to sign up merchants, particularly those that operate in an ecommerce environment. Visa’s new category for marketplaces will likely accelerate these developments and provide ecommerce platforms additional flexibility to board retailers quickly and with minimal friction.