It is increasingly common for marketplaces to connect buyers and sellers. Marketplaces for services (e.g. Airtasker) typically allow a service seeker to find and then book a service provider. Customers will typically make payment when they book, and the market operator will only transfer the funds once the service provider has provided the service.
This means that the market operator will need to hold the funds in escrow for a short period. For example, when a guest books on Airbnb, the company collects the total fees at the time of the booking request or on the host’s confirmation. Airbnb will then pay the host the accommodation fees within 24 hours of the guest’s scheduled check-in time.
Organising payment is one of the most important decisions when setting up a marketplace. How a marketplace operator decides to arrange payment will determine the level of risk they accept. Marketplace operators can engage the services of a payment service provider, act as a limited payment collection agent or hold money in escrow. Below, we unpack the advantages and disadvantages of these three payment structures.
|Payment service providers||Simple to set up, low involvement in the payment process.||Low|
|Acting as a limited payment collection agent||More accounts work, more involvement in the payment process.||High|
|Holding funds in escrow||Escrow and payment work, more involvement in the payment process.||High|
Payment Service Provider
Third party payment service providers are businesses such as PayPal, Stripe and Pin Payments. These businesses help marketplace operators take payment from one party and distribute it to other parties in the marketplace. The third party payment provider can split payment to two different entities. For example, a marketplace operator can direct 90% of the payment to the service provider and 10% to the marketplace operator. It is often the simplest to set up, and reduces the marketplace operator’s risk, as the payment service is outsourced.
Any business accepting credit card payments needs to comply with the PCI DSS, a set of industry standards designed to limit credit card fraud. The standards outline the level of security a business must deploy to keep credit card details and credit card payments safe. Third party payment service providers are attractive because they are PCI DSS compliant.
By using a third-party payment service provider, the marketplace operator is less likely to be viewed as a payment agent. Operating as a payment agent can be risky and burdensome. The business will need to keep records of each transaction entering the business account, tracking when to release funds, and then (where applicable) splitting the payment between the marketplace operator and the service provider/seller. Another downside of using a payment service provider is that transaction fees will be charged, usually per transaction and payment split.
Acting as a Limited Payment Collection Agent
Broadly speaking, acting as a limited payment agent means that a business takes payment from one party and distributes it to another, using its own bank account without the assistance of a third party payment services provider. Becoming a limited payment collection agent can be complex. For example, if the marketplace operator takes credit card payments, it will need to ensure it is PCI DSS compliant. The safety and security standards the PCI DSS mandates are comprehensive and the business may be responsible if it breaches these standards.
Acting as an ‘agent’ is also a legal relationship, where the agent has certain obligations to the principal. In the payment context, the person who accepts the money is the agent (e.g. marketplace operator), and the person who ultimately receives the money is the principal (e.g. service provider). If an agent breaches any of its duties, it is liable to the principal for any damages suffered.
Practical problems also arise. If a service provider offers a refund because a customer had a bad experience, then the marketplace operator is responsible for providing the refund. The operator can claim these funds back from the service provider. If, however, the service provider is bankrupt or cannot be found, then the marketplace operator is left with a shortfall in its accounts. The marketplace operator also needs to maintain adequate records of every single payment flowing in and out of an account, increasing the administrative workload.
Holding Funds in Escrow
Holding funds in escrow involves holding funds in an account for a period of time on behalf of another person. Usually, businesses in regulated industries have escrow accounts, such as real estate agencies and law firms. Businesses use escrow accounts to facilitate transactions, such as the sale or purchase of property.
Holding funds in escrow can be risky because of the potential to be seen as providing a financial service. The Corporations Act 2001 (Cth) (the Act) regulates the provision of financial services.
If a person holds and controls funds, such as in an escrow situation, this can be seen as providing a “depository or custodial service” under the Corporations Act 2001 (Cth). Businesses providing a depository or custodial services are “financial services” and require a licence under section 911A(1) of the Act. If a marketplace operator is found to be providing an escrow service without an Australian Financial Services Licence, then it may be in breach of the Act and face penalties.
While every marketplace operator has its own model, the most straightforward approach for arranging payment in a marketplace is usually to engage a third party payment services provider. Payment service providers comply with relevant rules and regulations. They also remove much of the risk of acting as a payment agent or taking funds in escrow.