The increasing importance of e-commerce in retail sales is a fact that all of us are very familiar with. Some industry sources claim that during the pandemic alone, roughly $5tr in retail sales has migrated from offline to online globally. What is arguably less known is the huge role that marketplaces play in the facilitation of e-commerce business.

A marketplace definition

Marketplaces are virtual spaces that connect buyers and sellers to facilitate online transactions. They are effectively a digital intermediary, offering a platform for a wide variety of products and services. Marketplaces can be categorised in different ways. Some of the most common consumer examples include, Amazon, eBay, Allegro, Rakuten, Vinted, Alibaba or Etsy. As we explore later, these digital marketplaces do not just sell their own products. In addition, several traditional brick-and-mortar stores also have online marketplaces on their websites, allowing third-party sellers to list products alongside their own offerings. A few examples include Tesco, B&Q, Castorama, Walmart, and the high-end department store Nordstrom, which launched its own online marketplace called Nordstrom Market in 2020. Such marketplaces can be referred to as proprietary marketplaces or platforms. Creating online marketplaces is seen to be a strategic move for brick-and-mortar businesses to adapt to changing consumer habits and yet remain competitive in the digital age. An alternative way of distinguishing marketplaces is the differentiation horizontal vs. vertical. Whereas horizontal marketplaces sell a diverse set of products, vertical marketplaces tend to focus on a specific category or industry vertical. To illustrate this by using some of the examples above, Amazon would be classified as a horizontal marketplace whereas Vinted would be a vertical marketplace due to its focus on second-hand fashion & clothing.

Online marketplaces have revolutionised e-commerce by creating a vibrant and accessible environment for both buyers and sellers. Online marketplace sales represent a significant portion of e-commerce, with estimates suggesting they account for most of the online sales globally. Estimates range from 40% to 60% of all e-commerce sales takes place via marketplaces.

How big is big?

It's important to note that when we try to size online marketplaces there are different methods by which they are measured. These include Gross Merchandise Value (GMV), which is the total value of goods sold through the marketplace platform. Alternatively, there is the transaction volume, which is the total number of purchases made on the platform. Lastly, there is number of active sellers, i.e., the number of businesses or individuals actively selling on the platform. At EDC, we regularly assess the size of online marketplaces, and we rarely find a consistent and reliable metric for size based on secondary research. The challenging factor is not only how to measure the size but how to categorise an online marketplace. We believe there are three different types of marketplaces and there is some overlap of their functionality just to make it a little more confusing. There are Business-to-Consumer (B2C) marketplaces, these marketplaces that connect businesses directly with consumers. eBay is a great example that we are all familiar with. There are Consumer-to-Consumer (C2C) platforms that facilitate transactions between individual sellers and buyers. Facebook Marketplace or Depop are two great examples of C2C marketplaces. Lastly, and probably the most elusive category of online marketplace, and the most challenging to size is the Business-to-Business (B2B) marketplace which connect businesses with other businesses for wholesale purchases or specialized services. Several B2C marketplaces also offer a B2B offerings.  eWorldTrade, headquarters in Dallas, USA, is an example of a full-service B2B marketplace. This B2B Marketplace now has over half a million registered members and is rapidly growing its database of manufacturers, suppliers, and businesses from across the world. Alibaba is said to be the world’s largest B2B marketplace. In 2022, Alibaba’s gross sales volumes was close to $2tr.

Amazon Marketplace

The 800-pound gorilla in the room is Amazon. As the biggest online retailer by far and one of the largest online marketplaces, Amazon is often at the forefront of any brand's e-commerce strategy. It operates three main business models for sellers – which can simply be called first-party, second-party and third-party. A first-party seller is a brand manufacturer that sells inventory directly to Amazon, who then sells it to the customer. For shoppers, these items appear on the platform with the label “Ships from and sold by Amazon.com”. In this case, Amazon is the merchant of record (MOR), meaning the legal owner of the inventory prior to it changing hands with the consumer.

A second-party seller is an Amazon supplier that is not the manufacturer of the product; Amazon is the MOR but it has sourced the inventory through a reseller. A second-party seller is less common and is typically used by Amazon to supplement their inventory. These items also appear with the label “Ships from and sold by Amazon.com”.

A third-party seller uses Amazon as a marketplace to sell directly to consumers; the third-party seller is the MOR. These items appear with the labels “Fulfilled by Amazon” or “Ships from and sold by [retailer name]”. Third-parties acquire their inventory by purchasing it directly from the manufacturer or buying it from other retailers. The available statistics as to how much is sold via the marketplace on Amazon varies significant and depends on the source of the information and the research perspective. According to Amazon's latest financial reports the company's current revenue is $575 billion and there are over 2.5 million third-party sellers on the Amazon marketplace. As to what proportion of these revenues are attributed to the marketplace is unclear. EDC estimate that 60% to 70% of Amazon consumers sales are via the Amazon marketplace.

The future of online marketplaces

As more and more marketplaces target similar consumer groups the market seems ready to consolidate in the next few years. Larger players are acquiring or investing in marketplaces close to their core businesses. One interesting example of this was the acquisition of the premier sneaker and streetwear marketplace Stadium Goods by Farfetch in 2018. Also, Foot Locker invested in GOAT in 2019. GOAT is an American online marketplace offering sneakers, luxury apparel and accessories through primary and resale markets. Founded in 2015, GOAT claims to have more than 50 million unique consumers and over one million sellers across 170 countries on its marketplace.

The success of any marketplace is largely down to attracting lots of sellers and buyers creating liquidity in the ecosystem. Marketplaces are looking to offer value-added services to entice sellers, such as training for their top sellers or offering specialised marketing activities. There is also a need to differentiate themselves to stand out from a crowded competitor landscape. This could involve offering unique product selections, unique customer service, or innovative features that can enhance the shopping experience. However, one of the biggest trends that we have started to see is that marketplaces want to differentiate their offering so that they can hold onto and generate liquidity, creating high transactional flows and growing revenues for the sellers. Ancillary revenue streams are expected to be created by marketplaces in the future that will boost their margins.

Embedded Proposition

This is where Embedded Payment and Embedded Finance comes in. What this really means is that the marketplace is not just a platform bringing buyers and sellers together but it expands into the provision of financial services in an integrated and seamless way. This will typically start with the provision of payment acceptance and processing; meaning  the operator of the marketplace would partner with a financial services entity (acquirer or payment gateway) to facilitate the processing of payments required to complete the sales transaction on the platform. Based on our own research we have gathered plenty of evidence that especially smaller-sized merchants trading on marketplaces have a real need for wider financial services because they are looking for a one-stop solution as well as an alternative to their traditional banking relationship (there is a common perception that smaller businesses are not very well served by the traditional retail banks). The most relevant financial services sought after are in the area of short-term financing and working capital support. Here the marketplace operator, via a partnership with a regulated financial entity, provides a lending product or short-term financing to a retailer with repayments being coupled to the sales completed on the marketplace. Insurance products or virtual card issuance are other financial services that form part of the Embedded Finance ‘revolution’. In 2022, the Embedded Finance market was worth approx. $60bn according to Global Market Insights with an annual growth rate of 30% expected over the next 10 years. Embedded Finance will be an essential component of marketplaces in the future.

Technologically Integrated Platforms

Especially in this context, it would be wrong to describe the future of marketplaces without mentioning Shopify. Shopify is a user-friendly, technically advanced, e-commerce platform that helps businesses build an online store and sell through a well-organized dashboard. Shopify merchants can integrate a modern online store and sell via social media sites, seller marketplaces, other blogs, and websites and via email, text, and chat. Tech-savvy providers, such as Shopify, support online businesses to maximise sales and marketplace potential. With the help of Stripe, Shopify has extensively moved into Embedded Payments and Embedded Finance. They have been doing this since 2016 with products such as Shopify Payments, Shopify Capital and Shopify Balance, a money management account.

VisualSoft, based in the Northeast of England, originally a web development company, is an example of an integrated e-commerce platform that has embedded value add services, including payment acceptance and processing.  Although, VisualSoft are not currently supporting marketplaces they are an example, as is Shopify of embedding payment into their proposition. One of the keys to success for a seller on a marketplace is the integration with social commerce platforms and the ability to facilitate payment transactions with other marketplaces and platforms, such as Facebook Marketplace. The line between social media and online marketplaces is expected to continue to blur. The social media platforms will continue to integrate shopping features more seamlessly, allowing users to discover and purchase products directly within their social feeds.

Finally, at EDC, we believe that online marketplaces will leverage artificial intelligence (AI) and machine learning to personalise the shopping experience. This would involve customised product recommendations, curated search results, and targeted promotions based on individual user preferences and purchase history.

The future of online marketplaces is expected to be driven by personalisation, technological advancements, embedded payment acceptance and processing, as well as evolving business models. There is no doubt, online marketplaces will continue to evolve, continue to grow, and innovate.

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This article was first published in the Paypers May 2024 report “Fintech for Marketplaces and Platforms” which can be downloaded here.

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The content of this article does not reflect the official opinion of Edgar, Dunn & Company. The information and views expressed in this publication belong solely to the author(s).

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