Stripe Connect can be considered Stripe’s infrastructure for marketplaces. It is meant for moving money between multiple parties, for example, moving funds between a buyer and a seller and the platform itself. Stripe Connect allows businesses to collect payments from customers, along with that, take a platform fee, and also make payouts to sellers or service providers. All of this is done within one system.
Marketplace businesses and operators should definitely use Stripe Connect when they need to split the payments and manage multiple seller accounts and also when they want to automate payments to third parties at a high scale. Stripe Connect is a wonderful tool and definitely makes sense when your business model involves the money flowing to third parties and not just to your own account only.
The common use case for this type of platform includes freelance and service marketplaces such as Fiverr, Freelancer, or Upwork. On such service-based marketplaces, various providers offer their services, and the funds collected from the customers are split between the parties, that is, the marketplace and the seller.
Another example would be an e-commerce marketplace where multiple sellers list their tangible products. An example of such a thing can be Amazon.
On-demand platforms for paying drivers, cleaners, or contractors can also use Stripe Connect. Crowdfunding or event ticketing platforms that distribute funds to organizers may also explore this solution.
Specialized SaaS platforms monetizing on behalf of their customers may also explore Stripe Connect.
Remember, if you are simply selling your own products or services, then you basically don’t need Stripe Connect. A regular Stripe account will work fine for you.
With Stripe Connect, marketplaces can efficiently operate.
Irrespective of what kind of payment platform you use, whether you use Stripe Connect or you use any other MOR solution, it is important for you to keep certain factors in mind. When you become the merchant of records (MOR), that means you have the responsibility to ensure that the KYC and AML checks are done as per the requirements of the acquiring bank and card companies.
Along with that, merchant of record businesses are responsible for fraud loss, compliance issues, and platform security. You should have a proper team that regularly views the sales and the return ratio of the sellers on your platform.
If the returns and chargeback ratio of the sellers increase, then eventually it will hit your MOR account, no matter which acquiring company you work with.
For high-volume marketplaces, it is important to look at the rates as well. Some platforms charge the standard processing fee, plus additional charges for the marketplace feature. All of this can actually increase the per-transaction fee, and also, don’t forget, there will be payout charges as well.
For high-volume marketplaces, this can definitely eat away a lot of profits, and that is why it is important for you to negotiate the terms directly with the acquiring partner.
Another thing that is worth knowing is that if you operate in the medium-risk or high-risk marketplace that sells supplements or digital goods, or you offer online coaching, or you offer firearms accessories, then you might need a specialized merchant of record solution powered by a high-risk PSP that might be able to support your industry type.
Always be transparent to your acquiring partner about the kind of sellers you are going to onboard on your platform. And yes, larger marketplaces should have multiple solutions. To avoid the situation wherein one processing solution gets closed and they are left without any payment processing option.
Stripe Connect is definitely a very powerful and well-documented tool for marketplace operators that are looking forward to accepting split payments and payouts to multiple sellers within a fully compliant and truly scalable system.
It works extremely well for low- and medium-risk platforms.
If you are a payment service provider, ISO, merchant acquirer, or payment consultant with experience in building and migrating marketplace payment stacks, especially in the high-risk industries or international verticals, then we would love to hear your insights in the comments below. What has worked and what has not worked for you? Also let us know what marketplace operators should know before they say yes to Stripe Connect.