Is this payment/business method feasible?

I want to change the payment system on my website, to increase confidence in buyers and allow me to take a commision cut.

Buyers used to pay sellers directly for items. Sellers would advertise via payed classified ads.

What I want to implement now is:
Buyer Sends Me (the website) the Money > Seller sends item (with tracked postage) > (next stage has 3 options) >>

  1. If buyer is happy with received item I release payment (minus commision fee) to Seller.
  2. If Buyer is unhappy new fee is settled upon between buyer and seller, and I send part of the money/return some to buyer.
    3.buyer returns item to original seller and I refund the seller.

Any help advice on how this works, legalities, things to consider, and whether to use PayPal etc would be much appreciated …

[FONT=verdana]Sounds too complicated. If I was a buyer, I’d rather deal directly with the seller. And vice versa.

Also, you’re taking on responsibility for holding money that doesn’t belong to you. Depending on where you are based, there might be legal issues involved with that (you might need to operate a separate ring-fenced client account, like a lawyer does).

You’re also going to get involved in disputes between client and seller. That could cause all kinds of headaches.

And one other thing. If you are registered for VAT (or the equivalent in your country), you will have to charge VAT on your commission, and that will ultimately mean that either the customer pays more or the seller receives less.

If you are interested in running a classified ads site, I’d argue in favour of charging a simple fixed fee to the seller. That’s the most common model, and it’s one that all parties will understand.

Mike[/FONT]

What you’re offering sounds a lot like an “escrow” service. Essentially you are taking on board the risk of a transaction in return for a fee from either the buyer or seller (or both). This can work as a business model, but it is certainly a complicated model with various legal formalities depending on where you live and possibly where the buyer and seller live.

Google around for some other escrow services and see how they work and then decide whether this is the right option for you.

Thanks for your advice guys… very useful insights and as you mention there are various complications and headaches which I know could be problematic.

ATM the business model is not working well and that’s why I’m looking at Escrow style options etc…

The big issue is that it’s an industry where fraud is common.
The trading commodity is not standardised.
This naturally creates wary buyers.
These wary buyers would therefore prefer to purchase from certified companies/organisations as oppose to individuals. But there is definately a market for the individual seller selling to the commercial buyer.

Buyers would certainly prefer to pay after receiving the item and have direct indemnity if there is a problem. This would reduce fraud by the seller. But I’d need to verify the buyers somehow. ATM they have to sign up to use the website but there is no verification method.

Any experience or advice on how to verify buyers/ any other business model ideas would be great…

I’m currently setting up a marketplace style web site where buyers purchase directly from the third party sellers, I just provide a venue for the transaction. We’ll be using Paypal Adaptive Payments which gives you some great options. Basically the customer uses your checkout system, but it can be configured in a few ways behind the scenes:

  1. Parallel payment: the customer pays directly into the 3rd party vendor’s paypal account. If they buy from multiple vendors, PAypal ensures the payment is split correctly and sent to all vendors simultaneously (identical tot he way Ebay works if you are buying from multiple vendors). Contract of sale is between customer and vendors, not you.

  2. Chained Payment (probably the one you want): Customer pays you, but you can configure the payment to then automatically be sent to multiple third parties minus your commission. You can also automatically delay those secondary payments if required (i.e. once the customer confirms they are happy)

Using chained payments, you get your commission immediately, and control when the third parties get their money. However, customer is paying you so the buck stops at you - so make sure it’s worth the extra hassle and adjust commission accordingly!

With option 1, you can create an additional party in the parallel payment, i.e. yourself and get your commission paid that way, but the customer will see this, which may be confusingy. otherwise you’ll have to bill the vendors for your commission separately.

As for VAT, we discussed his with HMRC recently and all they care about is who the contract of sale is with (i.e. who the invoice is from). So with chained payments as long as you invoice the customer directly on behalf of the third party vendors (like Amazon do with amazon Marektplace), the VAT on the initial transaction is charged by the vendor, not the marketplace owners. You simply charge VAT on your commission to the vendor.

So customer pays £100 for a product via chained payments.
This £100 already includes the VAT From the vendor.
You are charging vendors 10% commission + VAT = £12
So you set up chained payments to forward the vendor £88 while you keep the £12 for yourself.

What I am not sure of yet is what happens when the customer requests a refund/chargeback in chained payments - does the the marketplace owner pay it and then recover it from the vendor(s) involved, or do Paypal claw it back from everyone in the chain? Hopefully the latter, but we’re still looking into that.

[FONT=verdana]LR500,

You say it’s an industry where fraud is common. The trouble with your proposal is that you are transferring the risk of fraud from the buyer to yourself. Are you sure that’s the only solution? And, if so, is your transaction fee going to be high enough to cover that risk?

You also say your present model isn’t working. It might be helpful if you could tell use what your present model is, and in what sense it’s not working. In particular, are you sure that it’s the fear of fraud that’s preventing it from working?

Mike[/FONT]

shadowbox, the options you mention here are exactly what I wanted to know about, and I’ll be looking closely into Paypal Adaptive methods… thanks for taking the time to put together this incredibly useful response

Mike,

The transaction fee I’d receive would be a considerable step up, whether it’s enough to justify accomodating the extra risk I can’t say. It would be an attempt to reduce fraud as the seller knows they won’t get payed if the goods turn out to be not as described.
The buyers would feel more confident buying if they know they can get their money back.
It’s definately not a picture perfect solution though…however the Paypal Adaptive methods listed above would help its success.

But as you rightly say let’s have a look at the present business model…
It is simply a classified ads style site for a very specific niche but on a worldwide scale

If people have a commodity in that niche, they buy a classified ad on my site for a set fee for 3 months and advertise it.
Buyers browse the site, contact the seller directly if they find something they want, agree a fee and pay through Paypal.
Seller sends item directly to buyer and removes classified ad.

The problems…
buyers don’t want to pay before receiving/inspecting the item as the commodity quality can vary greatly.
sellers can falsely advertise (fraud)
sellers won’t want to ship goods without payment

buyer fraud: if a system is set up where buyers pay after receiving/inspecting item they can avoid paying, or claim the item is not as described. As mentioned earlier I’d need to verify the buyers somehow. ATM they have to sign up to use the website but there is no verification method.

In conclusion the main reson it isn’t working effectively is buyers reluctant to pay upfront due to fraud means fewer successful sales…lack of successful sales leads to potential sellers not bothering…where as a successful and importantly safe marketplace would create better, increased all round trade.

Very interesting and informative post from Shadowbox, especially the HMRC bit.

However…

Maybe it is just not a marketplace that can ever be turned into a viable business for you, if trust between buyers and sellers of this commodity is apparently so lacking?

If the problem boils down to untrustworthy, dishonest people, whether buyers or sellers, then I would want to distance myself from people like this, not get intimately involved in their squalid transactions on a daily basis!

Some things just don’t work, whatever you do. :frowning:

Paul

I appreciate the input Unit7285 however I believe with the right measures these obstacles can be over come…I already feel more confident following the discussion here.

If it is the sellers that are so untrustworthy (or at least considered so), then it would be worth considering how to keep them in line rather than taking on the risk yourself.
You could possibly offer some form of accreditation for example. Here buyers would only trust sellers that are accredited, and so it would be in the sellers’ best interests to get and keep this accreditation. At the start this may mean you swallowing some of the risk, it could be as simple as forcing the sellers to put up the value of one of their sales into an escrow account managed by you to receive accreditation before they have a history.

Then, if one of their sales goes south then you have the value covered out of their escrow account and they would be banned for good. You have basically passed the cost of the risk onto the risky group.

I’m not saying this is necessarily the right way for your niche, but you should look into passing the risk/cost to the group most likely to be risky.