Stripe’s global payments platform, which facilitates the receiving and making of digital payments, is going from strength to strength. Recent funding rounds have thrust the privately-held company among the world’s top ten most valuable startups, with a $35bn valuation that puts it on par with Airbnb. All that funding is good news for e-commerce entrepreneurs since Stripe has committed to using it to build more infrastructure that will further streamline online payments and billing.
One of the beneficiaries has been Stripe Connect, a payment platform specifically developed for online marketplaces. Connect is a complete payment ecosystem that covers:
[*Identity verification includes a “Know Your Customer” (KYC) process for the gathering and maintenance of Stripe account holder information as required by the banking and/or anti-money laundering regulations of the country where your marketplace platform is registered.]
This end-to-end functionality has made it a popular choice for well-known marketplace platforms. A list of users read like a Who’s Who of tech unicorns and include Amazon, Uber, Deliveroo, Spotify, Lyft, Shopify, Squarespace, Booking.com and Zillow.
In order to use Stripe Connect all sellers (anyone who receives money on your platform) need to have a Stripe account. These connected Stripe accounts can be created and managed by the sellers themselves or by your marketplace via the Stripe API (sellers don’t have to interact with Stripe). There are three account types that offer different levels of integration, features and costs: Standard, Custom, and Express.
Standard accounts are best for experienced online sellers who need the flexibility of the full Stripe Dashboard and best for platforms that don’t want to manage liability or seller Stripe accounts. Sellers are prompted to create their own accounts (if they don’t already have one) and connect them to your marketplace. They have full control over their accounts, which allows them to log into the Stripe Dashboard, process charges, and disconnect their account from your platform.
Standard accounts work best with direct charges where buyers transact directly with the seller’s account. Sellers are therefore responsible for Stripe fees, refunds, and chargebacks. This also means they require the lowest integration effort of the three account options. Use cases include e-commerce SaaS platforms like Shopify and Squarespace.
Note that with Standard accounts “Know Your Customer” (KYC) identity verification is done by the account holders themselves via their Dashboards.
Custom accounts can be seen as a white label option that allows full customisation of the payment process. This obviously requires the most development resources and a substantial integration effort with Stripe’s API. In return it offers a fully customisable user experience, which includes the onboarding, dashboard, and reporting interfaces. Sellers can’t log into Stripe and need to provide your platform with their banking details and identity verification documents.
A real world example occurred when Lyft’s drivers wanted to get paid on demand instead of weekly. Customising the payout schedule gave Lyft a unique value proposition that attracted more drivers.
Custom accounts work best with destination charges where buyers transact with the platform, but products or services are delivered by the seller account. Net payments (after deduction of commission or transaction fees) are automatically allocated to seller accounts.
In this scenario, your platform account is responsible for and manages the Stripe fees, refunds and chargebacks on behalf of the seller accounts. Note that it is also your responsibility to vet Custom accounts for fraudulent behaviour. “Know Your Customer” (KYC) information for user accounts must be collected by your platform and submitted via the Stripe API. Information that needs to be collected varies based on the capabilities of each account.
In 2017, Stripe launched Express accounts, a hybrid option which allows sellers to sign up to marketplaces within two minutes. Automated onboarding instead of manual KYC identity verification helps to speed up the process. Express includes a pre-built dashboard for sellers, which reduces development time significantly. Stripe also takes care of reporting and account management.
Platform owners do have control over some elements of the user experience such as managing payout schedules and customising the flow of funds. As with Custom accounts, Express works best with destination charges. The responsibility for fraud prevention rests on the shoulders of the platform owner.
By removing the need for lots of software integration, Express helps marketplaces to get started with payments in weeks instead of months. Prominent users include Github (to pay developers for code), Spotify (to pay artists every time their music is played) and Medium (to pay writers their portion of paywall revenue). Originally only available in the US and Canada, Express was expanded to most EU countries including the UK in September 2019.
In addition to direct and destination charges, Stripe Connect also allows separate charges and transfers to cater for scenarios that require split payments. Retail marketplaces like Amazon would be one use case. In this scenario, your platform allows buyers to check out with a single shopping cart containing products from multiple sellers. Your platform receives the full amount which is then manually distributed to the various sellers’ accounts (sans commission or transaction fees).
Another example of separate payment transfers would be a delivery service like Deliveroo where funds need to be split between the restaurant and the delivery person. Carpooling on a ridesharing service is an example of separate charges that need to be processed for one transaction.
Your revenue forecasts should take into account that Stripe fees vary for the different Connect account types. Standard accounts incur no platform fees, while there’s an additional cost for using Express or Custom accounts: £2 per active account per month plus 0.5% of payout volume plus £0.10 per payout.
Refunds are also handled differently depending on the account and charge type. With destination charges all three account types are treated the same way. Stripe will automatically process the refund once sufficient funds are available in your platform’s account.
With direct and separate charges refunds follow different paths depending on the account type. Stripe will automatically process the refund in the case of Standard accounts, once sufficient funds are available in the seller’s account. Refunds are also automatically processed in the case of Express and Custom accounts, but funds can be deducted from either the seller or the platform account.
Getting your marketplace payment system right is critical for success. It stands to reason that you have to weigh up your development resources, the needs of your users, and how urgent your speed to market is. That said, it’s worth investing in the best possible payment system, since marketplaces that focus on seller services tend to attract better quality sellers.
“Over 50% of sellers will leave a marketplace for another that offers faster payments, better payment management, or integrations with tax and accounting software.”Forrester report
Cobbleweb has successfully integrated Stripe Connect payment systems with several high-growth platforms. We can do the same for you. Get in touch for a free consultation.
Originally published November 20, 2019, updated July 21, 2020