One of the biggest challenges when building an online marketplace is deciding which technologies to integrate with your platform and how to do it. Stripe’s popular Connect payment system for marketplaces is a good case in point.
Choosing the wrong Stripe Connect account type can lead to a dead end, which means additional costs and lost time to rectify the situation. [ Read our article on the different Connect account types ]
A common mistake when choosing a Connect account type, is to not consider how charges are handled when buyers make payment.
Stripe Connect offers three charge types: direct charges, destination charges, and separate charges and transfers. Selecting the right charge type will depend on your buyer funnel and business model.
Direct charges handle transactions between buyers and sellers (i.e. without a marketplace intermediary) and work best with Standard accounts. That means sellers create their own Stripe accounts, which removes the onboarding burden for your platform.
Stripe’s Connect Onboarding automates the seller onboarding process and can be customised to match your branding. Watch the demo here. Sellers can also use their existing Stripe accounts.
Direct charges do not only move the onboarding burden onto sellers. It also makes them responsible for Stripe fees, refunds, and chargebacks.
Marketplace owners can still collect revenue by charging sellers a separate advertising or listing fee. Alternatively, direct charges allow marketplaces to automatically deduct an application fee from the transaction amount.
Important! It is not possible to migrate from Connect Standard to Connect Express to access different charge types. All seller data will have to be recreated in new accounts. So make sure you map out the requirements of your payment flow first.
Destination charges are mostly used with Express or Custom accounts. They allow your marketplace to take payments, deduct fees (e.g. commission), and transfer the balance to a single seller or service provider. Examples include ride-hailing apps like Uber or service marketplaces like Upwork.
With destination charges your marketplace is responsible for Stripe fees, refunds, and chargebacks.
Important! In the world of Stripe Connect ‘transfers’ mean the moving of funds into another Stripe account. Payouts occur when funds are moved by the marketplace from the seller’s connected Stripe account to their bank account.
Separate charges and transfers also work best with Express or Custom accounts. Like destination charges, the platform takes payments from buyers and makes transfers to sellers. The big advantage of this charge type is that it allows marketplaces to split payments and make transfers to multiple sellers or service providers.
Popular use cases are delivery apps like Deliveroo that need to pay restaurants and drivers, and retail marketplaces like Amazon that use shopping carts to sell goods from multiple sellers to one buyer (one-to-many transactions).
There are limitations on where separate charges and transfers can be used. At the moment only marketplaces with accounts in Australia, Canada, Europe, Japan, Malaysia, New Zealand, Singapore or the US qualify. Additionally, both the marketplace and the seller accounts have to be in the same region.
Also keep in mind that your marketplace, as the payment gateway, is responsible for Stripe fees, refunds, and chargebacks.
With the above mentioned details in mind, start with these questions to determine which charge type is most appropriate for your business model.
Here are a few common scenarios that work best with a specific combination of Stripe Connect account types and charge types.
Some marketplaces may not want to take on the administrative responsibility of onboarding sellers (bank details, KYC requirements) or dealing with refunds. In that case, use direct charges with Standard accounts.
Examples include auction sites where the auction fee is deducted as an application fee from the sales price. Standard accounts with direct charges allow storefronts on e-commerce platforms like Shopify to collect their own payments.
Gumtree is another example of a marketplace platform that doesn’t get involved in the buyer-seller transaction by charging sellers a separate advertising fee.
If the marketplace and sellers are all based within the EU you could use separate charges and transfers with Express accounts.
US-based marketplaces can make cross-border transfers to a limited list of countries via destination charges coupled to Express accounts.
For marketplaces that do not fall in the above scenarios, e.g. a UK-based marketplace with sellers in Australia, Singapore and Canada, there are two options.
They can create marketplace Stripe accounts in each seller country and use separate charges and transfers (if the seller regions are on the permitted list), otherwise destination charges apply. This obviously entails quite a bit of legal red tape, such as registering a subsidiary company in each country.
The second option would be to use direct charges with Standard accounts. Just remember that sellers will only be able to take credit card payments.
Allowing buyers to donate to a relevant charity upon checkout is a great way to push your marketplace’s social responsibility profile. The easiest way to do this is via separate charges and transfers combined with Express accounts for sellers. Funds will be split between the marketplace, the sellers and the charity.
Remember to make sure your seller and marketplace accounts are in the same permitted country.
Event marketplaces like FanPass don’t require shopping carts or split payments, but still want to control the payment flow (e.g. delayed payments to prevent fraud). Destination charges with Express or Custom accounts provide the best solution for this use case.
Many marketplace startups only start thinking about their payment flow when their developers get stuck. By then the damage is done in the shape of inevitable delays and cost escalations.
The best way to avoid this is to make sure you partner with a development team that asks the right questions about your buyer funnel and payment flow from the get-go.
CobbleWeb offers proven insight into marketplace user onboarding, payment flows and Stripe Connect integration.
Originally published February 8, 2021, updated March 2, 2021