The increasing importance of ecommerce in retail sales is a fact that all of us are very familiar with. Some industry sources claim that, during the pandemic alone, roughly USD 5 trillion in retail sales have migrated from offline to online globally. What is arguably less known is the huge role that marketplaces play in the facilitation of ecommerce business.
Marketplaces are virtual spaces that connect buyers and sellers to enable 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, and Etsy. As we explore later, these digital marketplaces do not just sell their own products. Additionally, several traditional brick-and-mortar stores also have online marketplaces on their websites, allowing third-party sellers to list products alongside their offerings. A few examples include Tesco, B&Q, Castorama, Walmart, and the high-end department store Nordstrom, which launched its online marketplace called Nordstrom Market in 2020. Such marketplaces can be referred to as proprietary marketplaces or platforms.
Creating online marketplaces is seen as 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 of horizontal versus 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 and clothing.
Online marketplaces have revolutionised ecommerce by creating a vibrant and accessible environment for both buyers and sellers. Online marketplace sales represent a significant portion of ecommerce, with estimates suggesting they account for most of the online sales globally. According to estimates, 40% to 60% of all ecommerce sales take place via marketplaces.
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 the 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 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 in their functionality, just to make it a little more confusing. There are business-to-consumer (B2C) marketplaces, the ones that connect businesses directly with consumers – ASOS 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 marketplaces – and the most challenging to size – is business-to-business (B2B), which connects businesses for wholesale purchases or specialised services. Several B2C marketplaces also offer B2B offerings. eWorldTrade, headquartered in the US, is an example of a full-service B2B marketplace. It now has over half a million registered members, and it 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, its gross sales volume was close to USD 2 trillion.
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 ecommerce strategy. It operates three main business models for sellers – which can be called first-party, second-party, and third-party.
A first-party seller is a brand manufacturer that sells inventory directly to Amazon, which 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) – the legal owner of the inventory before it changes 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 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, but 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-party sellers acquire their inventory by purchasing it directly from the manufacturer or other retailers.
The available statistics as to how much is sold via the marketplace on Amazon vary significantly and depend on the information source and the research perspective. According to Amazon’s latest financial reports, the company’s current revenue is USD 575 billion, and there are over 2.5 million third-party sellers on the Amazon marketplace. As to what proportion of these revenues is attributed to the marketplace is unclear. EDC estimates that 60% to 70% of Amazon consumer sales are carried out via the Amazon marketplace.
As more and more marketplaces target similar consumer groups, the industry 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 Farfetch’s acquisition of the sneaker and streetwear marketplace Stadium Goods in 2018. Also, Foot Locker invested in GOAT in 2019, 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. In the future, it is anticipated that marketplaces will create ancillary revenue streams, which will boost their margins.
This is where embedded payments and Embedded Finance come in. What this means is that the marketplace is not just a platform bringing buyers and sellers together, but that it also expands into delivering access to financial services. This will typically start with the provision of payment acceptance and processing – meaning that the operator of the marketplace would partner with a financial services entity (an acquirer or payment gateway) to facilitate the processing of payments required to complete the sales transaction on the platform.
Based on our research, we have 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, sought-after financial services include 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 with the sales completed on the marketplace. Insurance products or virtual card issuance are other financial services that are part of the Embedded Finance ‘revolution’. In 2022, the Embedded Finance market was worth approximately USD 60 billion, according to Global Market Insights, with an annual growth rate of 30% expected over the next ten years. Embedded Finance will be an essential component of marketplaces in the future.
Especially in this context, it would be wrong to describe the future of marketplaces without mentioning Shopify. Shopify is a user-friendly, technically advanced ecommerce platform that helps businesses build an online store and sell through a well-organised 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. 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.
Visual soft, based in the Northeast of England, originally a web development company, is an example of an integrated ecommerce platform that has embedded value-added services, including payment acceptance and processing. Although Visual soft is not currently supporting marketplaces, it is an example, as is Shopify, of embedding payments into its proposition.
Moving forward, two key success factors for a seller on a marketplace are 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. Social media platforms will continue to integrate shopping features more optimally, allowing users to discover and purchase products directly within their social feeds.
Finally, at EDC, we believe that online marketplaces will leverage artificial intelligence 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 that online marketplaces will continue to evolve, grow, and innovate.
This editorial piece was first published in The Paypers' Fintech for Marketplaces and Platforms Report 2024 which taps into the fast, ever-expanding ecommerce industry, being the ultimate source of information for businesses looking to expand and grow their consumer base.
Mark Beresford, the lead author of this article, is a Director at Edgar, Dunn & Company and has over 25 years of strategic consulting experience in the payments sector. He is responsible for the company’s retailer and merchant payments practice, working with omnichannel merchants and payment service providers across the globe.
About Volker Schloenvoigt
Volker, the co-author of this article, is a Director at Edgar, Dunn & Company based in the London office, and he heads the European Acquiring Practice. Volker has provided consulting advice in payments for over 20 years – and has developed significant experience in digital financial services from working with banks, merchants, card payment schemes, technology vendors, and regulatory bodies in various geographies. He has a track record in strategy development and deep expertise in profitability improvement, strategic planning, financial modelling, and benchmarking.
About Edgar, Dunn & Company
Edgar, Dunn & Company (EDC) is an independent global payments consultancy. The company is widely regarded as a trusted adviser, providing a full range of strategy consulting services, expertise, and market insights. EDC’s expertise includes M&A due diligence, legal and regulatory support across the payment ecosystem, fintech, mobile payments, digitalisation of retail and corporate payments, and financial services.
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