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The platform economy is coming

(Image credit: Image source: Shutterstock/everything possible)

Of the over two billion pounds spent by online shoppers around the world each year, around half now flows through trading platforms such as Amazon Marketplace, eBay, Farfetch or Tmall, one of the marketplaces operated by the Chinese industry giant, Alibaba. Experts from the US specialist information service ‘Digital Commerce 360’ estimate the gross value of goods handled by the 75 largest websites of this kind to have risen by around a third between 2016 and 2017.What is clear – marketplaces are currently expanding at a faster rate than online trade as a whole.

Competition is good for business

China and the USA are leading the charge in this area, followed by the EU, where the five European countries with significant market players are Germany, the UK, France, Spain and Poland. Most of these sites have a B2C business model and trade physical products, but others include travel and insurance portals which bring supply and demand together online with hotels and car hire companies often collecting payments from consumers. This synergy follows the marketplace principle: If you want to sell something, do it close to where your competitors are; after all, competition is good for business.

The advantage for digital marketplaces is that they are free from the constraints of a regional or national location –which means they are capable of much more, particularly for entrepreneurs, smaller suppliers or companies that want to expand into new geographical markets. Depending on the marketplace’s business model, they can delegate tasks such as logistics and payment processing to specialists which helps them to open up new markets.

A control panel for payment streams

This successful division of labour between traders and aggregators is boosting online marketplace growth.  According to Digital Commerce 360, 71 of the 75 largest online marketplaces experienced growth in 2017, 55 of them by over 15 per cent, and 22 of them by over 50 per cent. There is of course a world of difference between the top and bottom places in the rankings, but “Whether large or small”, the report claims, “these platforms are enticing shoppers.” In fact, they are doing much more than that. Revenue deferral is an unmistakable indicator of high conversion rates – without this, traders would neither be coming nor staying – and therefore also of customer-friendly business processes all the way to the checkout. The simpler these appear to the end customer, the more complex the interplay between the trader’s behind-the-scenes IT systems, the marketplace and the payment service provider involved. Where the trader sees a marketplace, the technician sees a container-terminal signal tower or a large control panel where goods and payment streams flow into each other and merge together, and the output is guided safely through the maze of interfaces to its respective recipient.

Until now, the traders that could serve customers exclusively via marketplaces have been the exception.  Internet pure plays usually take a two-pronged approach, i.e. they operate an independent shop that brings in a more-or-less-relevant portion of their turnover via the platform(s).  Disregarding the exceptional case of China, whose giant marketplaces distort the picture, the lion’s share of e-commerce in the B2C segment continues to be conducted directly between traders and their end customers. Customer loyalty is the trader’s traditional insurance policy. However, providing them with this security is neither the forte nor the main concern of a trading platform, which is more focussed on attracting price-conscious, rather than loyal, customers. For this reason, many traders use their presence on the marketplace in a carefully targeted manner, using special offers and good service to get their customers interested in their own, externally located shop.

Find out online, sort out offline

Of course, this could be a conventional brick and mortar retail outlet, although many established traders still only have a homepage that doesn’t show much more than an old photo of the shop window, the opening hours and perhaps a Google Maps window. Meanwhile, consumer surveys continue to reveal that even those who like to shop in brick-and-mortar businesses are just as likely to want to research online before they shop. Traders who have nothing to offer in this area are a no-no for this, often younger, clientele. Theoretically, it has never been easier to start trading online. Advances in networking, (open source) software and logistics have removed many of the barriers to entering the market. Investments and fixed costs are marginal – today everything is available ‘on demand’ or ‘as a service’. The digitisation of drop-shipping even enables entrepreneurs to operate a mail-order business from their own living room, without having to rent a single square footage of storage space, let alone get into debt creating a product inventory.

A needle in a stack of needles

The downside is that those who simply set up an off-the-peg online store can expect to be lost among the sheer mass of similar sites. Without intermediaries, platforms, online marketplaces and SEO knowledge, all providers would have an equally poor chance of achieving an acceptable rank in a search engine's results list. A product in a single shop in the endless vastness of the internet cannot be compared with the proverbial needle in a haystack, which could perhaps still be located using a magnet. A better analogy would be a needle in the middle of one of many packages of needles.  This is what makes entering the market via a marketplace a good option. If the products are good and the prices competitive, they have the chance to become visible by way of a ‘piggyback’ approach – even if this means being diverted from Google to Idealo, where in turn Amazon offers ‘from ...’ are listed among the search results.

EU support to boost conversion

Even the new Payment Services Directive (PSD2) could contribute to making platforms generally more attractive for trade, above all for those offering physical or intangible goods for international sale. The directive from Brussels creates a standardised regulatory framework for all online payments within the European Union and, to some extent, even affects trade with other continents. In the UK a solution that is compatible with PSD2 will need to be put in place post-Brexit. There are also provisions aimed at preventing money laundering and providing consumer protection. The scope is extensive. For small traders, implementing new requirements into their IT systems can involve relatively high costs. Meanwhile, these bureaucratic modifications must be measured against the gains made in terms of rationalisation and value, which can be leveraged more easily when many providers use one common infrastructure. If the platform works with a payment service provider that can offer a wide range of payment options for all major markets, this minimises the adaptation costs for the individual and, in principle, increases the chances of conversion for customer enquiries from overseas.

Intercultural trade

Cross-border online mail-order trade already has a high relevance. In 2017, (according to The Paypers) 42 per cent of online shoppers in Europe ordered something from abroad. Spanish (55 per cent), UK and Italian (48 per cent each) shoppers are especially likely to make use of this opportunity, with Germans (33 per cent) less likely to do so due to the wide range of products and stiff price competition on the domestic market. The picture was similar in the NAFTA (North American Free Trade Agreement) zone, with many Mexicans and Canadians ordering from the USA, although there is less traffic in the other direction.

The gap between Asia and the West, however, was even more stark. While both eBay and Amazon are now teeming with small traders from China who ship bulk-bought goods for retail sale all over the world via the B2B marketplace Alibaba, in Europe it is still extremely rare – whether in their own store or on a marketplace – to specify terms for deliveries to the Far East, let alone have your own Chinese version of their website. There is genuine demand for European consumer goods among the Chinese middle classes, however, and marketplaces can bridge the cultural and language gap that has previously made B2C trade difficult. These may well soon form part of the service that customers expect from platform operators, like reliable reconciliation of globalised payment streams via a globally networked partner.

By cooperating with a Payment Service Provider (PSP) like this, the marketplace company can offer its traders the widest possible selection of payment methods, without having to become a financial service provider or FinTech company itself. This means it does not need to deal with the regulatory requirements of the economic areas it covers, which can extend to obtaining a banking licence. This division of labour involves the interlinking of the marketplace's provider software and the PSP’s marketplace software. The PSP keeps a separate billing account for each affiliated trader, in which it reconciles payments and credit card authorisations from a wide range of sources with receivables. It can also split a customer payment among several vendors. This method is scalable and is suitable for large marketplaces with a wide product range, as well as their smaller, more specialised counterparts. In this way, for example, a company using a platform to ship car tyres can also offer the services of any number of independent garages. The customer pays one inclusive price for a complete package consisting of tyres and fitting. The PSP then splits the payment according to the commission agreement existing between the two parties. The tyre dealer therefore does not have to deal with payment at the garage, nor will they be held liable if the work is not carried out properly.

Platforms for purchasing professionals

On a final note, the B2B market, where online marketplaces are also on the rise, represents a significantly larger area of e-commerce overall than retail business. There is huge potential in purchasing departments for one-stop shopping, finding commodities in one place from several competing suppliers, which vastly reduces the work required by the purchaser. One thing to look out for, however, is payment, not just in terms of legal requirements or agreements with financial institutions in cross-border trade, but in managing the frequency and size of individual transactions in comparison to B2C marketplaces, and because every country has its own customs when it comes to payment. Complex payment terms with discounts, which in turn entail compliance with certain payment targets should also be considered. Reconciliation for B2B is a much more long-winded process than it is for B2C, and represents a real challenge for PSPs.

Ralf Gladis, CEO, Computop
Image source: Shutterstock/everything possible