Regulation May 3, 2022

Four years on, why it’s urgent marketplaces embrace PSD2

By: Oliver Sumnall

Back in 2017 we predicted that PSD2 would open up a world of opportunities for marketplaces, and since coming into effect in 2019, it has. Yet despite being over three years old, some online marketplaces are still not operating in compliance with PSD2. As a result, these marketplaces not only risk significant fines – but also risk missing out on a revenue opportunity and a chance to grow their business.

A PSD2 refresher: What it is and what it has changed

The original Payment Services Directive (PSD) came into force in 2007, defining the framework for the single payment market across the EU. Then, to make online and cross-border payments more innovative, competitive, and safer, in 2013 the European Commission proposed an amendment to the PSD. In 2017 Payment Services Directive 2 (PSD2) was introduced, going into full effect two years later.

However, just like when you see a great movie and refuse to see the sequel – ignoring it completely when it comes out – this is what’s happened with many online marketplaces and PSD2. With the first PSD, marketplaces were happy. This was because they relied on the ‘commercial agent exclusion’ to say they negotiated or concluded the purchase of goods or services on behalf of either the buyer or the seller. Using this loophole meant that they weren’t providing a regulated payments service for which they’d need a license, with all the time and cost that went with it.

Different national regulators didn’t help matters, with the commercial agent exclusion applied differently throughout the EU. In addition, many regulators began to view marketplaces, in bringing both buyers and sellers together in a website or app, as acting for both the payer (receiving orders and payments from the buyer, offering buyer-related discounts), and the payee (sending orders and payments received to the seller).

Something had to change. That’s why today we have the revised Payment Service Directive (PSD2).

PSD2 explicitly clarifies that the commercial agent exclusion only applies when the commercial agent very clearly acts solely on behalf of either the payer (buyer) or the payee (seller) – and not both. By their very online nature, this arrangement is rarely the case in most marketplace contractual models, regardless of whether or not they are in possession or control of funds. If acting for both, a marketplace is only able to avoid a licensing requirement if it relies on a licensed payment service provider to control their funds.

Why PSD2 matters, right now, for marketplaces

According to Digital Commerce 360, B2B marketplace sales grew 130% year on year in 2021 to $56 billion globally, 7.3 times quicker than total B2B ecommerce sales over the same period. As explored in our cross-border ecommerce blog, this growth means that it is only a matter of time until marketplaces will need to embed payments into their proposition so they can totally own the end-to-end customer journey, be competitive in an increasingly crowded market, and best monetize the cross-border payments they’re processing.

A pyments.com survey revealed that 88% of surveyed small businesses selling on marketplaces reported they are paid through the marketplaces on which they display their listing. So the majority of marketplaces are dealing with payments directly, meaning they likely have to comply with PSD2.

Growth in the marketplaces sector isn’t going away. And PSD2 isn’t going away. The loophole that some marketplaces exploited, however, has. So now is a good time to look at why marketplaces should comply with PSD2.

The reality is that there are marketplaces that are not operating in compliance with PSD2 and the FCA is increasingly likely to take a closer look at the fast-growing online marketplaces industry to ensure customer data and funds are protected. The FCA states, “If a business acts on behalf of both the payer and payee then it is likely to require our authorization or registration.

So, that’s one side of the coin as to why marketplaces should ensure they are complying with PSD2. The other, less punitive side, is that being in-step with PSD2 allows marketplaces to take control of and monetize the entire customer journey. By embedding payments into their platform rather than buyers completing the “payments step” externally, marketplaces can open up an additional revenue stream and build the customer journey they want. In doing so, they can monetize the payment flow they’re facilitating – in a compliant way.

How marketplaces can capitalize on PSD2

There is no single approach to monetizing your marketplace within the bounds of PSD2. For example, Etsy uses a commission model (taking a listing fee and a percentage from each sale) while Amazon uses both a commission and a subscription model. Whatever model a marketplace uses, they need to have a clear strategy for who they’re charging: is it the buyer or seller – or both?

Working with a regulated payments provider like Currencycloud is key for marketplaces who want maximum control and flexibility over their platform and the customer journey. If a marketplace is not regulated or not working with a regulated provider, there is a significant chance their service model is not compliant with PSD2, or they are losing significant revenue to payments made outside of their platform. So for marketplaces that want to handle payments, and enjoy the revenue opportunity and control over the total customer experience, they can partner with a third party and become a Fintech-enabled marketplace.

When assessing payment providers, marketplaces should check if the provider offers multiple ways for them to take all the opportunities available.

They should ask if the provider:

  • Facilitates cross-border transactions so that the marketplace can grow their business globally
  • Can embed a payments system within the marketplace platform in a compliant way, so the marketplace controls the entire customer journey
  • Enables the marketplace to monetize FX where currency conversion is involved through market-leading FX rates
  • Offers multi-currency wallets so the marketplace can hold and pay out in a number of different currencies, without having to set up local bank accounts
  • Provides access to competitive FX rates 24/7 – so the marketplace can access low FX rates and offer a great service, even over the weekend
  • Has no hidden fees and competitive local payout routes – letting the marketplace give its customers an excellent service

If you’d like to see how compliance with PSD2 can be an opportunity to add an extra way of monetizing your marketplace, reach out to a payments expert. We will be happy to help you make the most of your cross-border payments.

By: Oliver Sumnall
Oliver’s previous experience at Tech start-ups, including Mintago, makes him well placed to consult Paytechs, Marketplaces and Tech Platforms on the benefits of embedded finance and cross-border payments. Away from work, Oliver spends his time learning to speak Arabic and supporting his beloved Arsenal Football Club.

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