When I started MentorCruise in late 2017, I thought the payment logic behind marketplaces would be no big deal. Surely I could just collect the money through PayPal, collect the splits and then send it on to the mentors?
And that worked for a while! But as MentorCruise grew from a small marketplace on the sidelines to processing a couple of $100s to a couple of $1,000s every month, so grew the issues with this approach.
First of all, it’s not exactly compliant. Taking money from one place, collecting it all in an account, and sending almost all of it to somewhere else gets you in trouble with Anti Money Laundering (AML) laws surprisingly quickly!
Then, there’s the issue of refunds! Once you’ve sent money away on PayPal, there’s no way to get it back. You’re out on your own! A costly mistake, how I’d learn.
And lastly, you’re very reliant on a non-supported use case. The collaboration with PayPal ended when they shut off our account and held all funds. Years later, Wise would do the same.
Luckily, Stripe came along and introduced Connect. The idea is fairly simple: If everyone involved has a Stripe account, you should be able to fairly easily move money between them. Not only that, you could program it into the source transaction to where the money is supposed to go.
Therefore, sometime in 2019, I shifted 80% of our billing to Stripe Connect. We’re now processing beyond $100,000 every month through their channel.
But why is this so much better? Well, it solves all the issues we had before this:
- You are no longer receiving all the money yourself. There’s a paper trail, getting you out of the visor of AML laws and also simplifies your taxes by a lot!
- Since all transactions have a flow, a refund or dispute will retrieve the money from all connected accounts again
- Stripe is a good partner to have and explicitly serves marketplaces
But when people try to set up Stripe Connect, it’s not always the easiest thing to explain. There’s a variety of integration options for the system and each of them has its pros and cons. Ready? Let’s take a look!
The Account Types
Connect offers you to set up three types of accounts to use with their system: Standard, Express and Custom.
The Standard account is the concept of “bring your own”. All users have fully fledged Stripe accounts. They either already need to have them – or you can help them to create their own during onboarding.
Because it is a fully-fledged account, the user will have to submit all necessary data and information to Stripe directly. The whole process is Stripe-owned and -branded. Once the person has a fully-fledged account, they can then connect it with your platform.
The advantage of this approach is its speed and ease of setup. It also takes a lot of pressure off your shoulders as issues with compliance, chargebacks and refunds are organized directly between Stripe and the connected account. This is also free to use.
The disadvantage is your loss of control. Users have full control of all settings and could for example mess around with retry schedules, subscriptions and prices.
With the Express account, users receive a “light” version of Stripe. You can create Stripe accounts directly through the API and give users access to a light version of the dashboard with payout options and not much more.
The benefit of this approach is how easy it is to set up and integrate. You also hold control over things like payout schedules and billing settings. Stripe will still make sure you hold all necessary compliance documents.
The downside is that refunds and chargebacks now rest on your shoulders! The integration also costs a flat fee of $2/mo per user.
I don’t know much about the Custom accounts, except that some big players in marketplaces use them. With this account type, Stripe is essentially invisible in the process beyond actual payment processing. You hold the keys, but also have to care about things like compliance. It also has a flat cost per user.
Once you’ve chosen your account type – we went with Standard at the time and silently wish we could go with Express today – there’s another step – the payment flows.
Once again, you have three options to how you want to process payments. No matter what you choose, the capabilities are about the same. The difference often comes down to the trade-off of ease and control. Your options are:
- Direct charges
- Destination charges
- Separate charges and transfers
A direct charge is made between your supplier and customer directly. In our case, this is a transaction that’s directly between a mentor and a mentee. MentorCruise is not in the loop.
As a platform, however, you can create the transaction and also take a fee out of the charge. That’s about all the control you have over this, though. The invoice is created between supplier and customer and your supplier will generally have the power to refund it again, as well as see customer data.
The benefit of this approach is the ease you’ll have in managing your earnings. All you’ll see in your account are commissions, which makes taxes of all sorts extremely easy.
The downside is the loss of control over all parts of the customer experience, starting with invoices and payment descriptors. If your platform is present, customers generally expect to buy from you. If then the vendor’s name is on invoices and your credit card, it can be quite awkward.
Destination charges are the other way around. Payments are delivered to your account first. You can take fees from there and also control the schedule until funds are released to another account.
Meanwhile, your vendor will see a payment coming from you, as opposed to from a client directly. This is often more expected in common marketplaces.
However, you might also need to gut higher fees and are generally responsible for refunds or chargebacks being requested from you.
Last but not least, with separate charges and transfers, you collect a simple payment and are then able to distribute the money to other accounts however you’d like.
This is a wildly different use case from simply taking a cut from a transaction, so if the use case needs it, this is the way to go. It’s a step up over the initial PayPal strategy mentioned earlier because you can reverse these transfers again.
One thing to consider, however, is that the transfer underlies rules about “cross-border transfers", where you are not allowed to send funds across Stripe entities. In practice, this means you are unable to send funds from Europe to outside of Europe, from the US outside of the US, and similar. It might still be worth settling the transaction via direct or destination charge first, then consider creating an additional transfer and/or paying outside of Stripe.
I hope this quick dive around the surface of Stripe Connect and into the world of payments for marketplaces was not too boring. I’ll be back very soon with more growth-related topics as we’ve broken a variety of milestones at MentorCruise, leading me to learn a lot more about marketplaces!