Online lending is getting more and more popular every year. Fintech, steadily disrupt the market after the market, and lending is not an exception. We all are familiar with the concept of online lending, but there is one aspect that can be a little bit overwhelming. Here we are speaking about payments and how they are managed on the lending platforms. It can be difficult to understand how cash flows from one user to another, how fees are charged and other money-related questions. In this article, we would like to shed some lights mainly on the payment flows between the lending process participants.
How Lending Platforms Deal with Payments
To make clear how money transactions are facilitating on the Internet, let’s have a look at some categories that are more understandable, like e-commerce. In the e-commerce, transaction flow is straightforward. There act multiple buyers and one seller. Money goes from buyers credit cards to the seller account. This payment process is relatively simple, from many to one.
In the case of the marketplace, the process looks a little bit more complicated. To understand the payments within a marketplace, you have to know there are two flows: paying in and paying out.
Pay-in occurs when someone wants to buy something and pays for that. Pay-out happens when payments are distributed to those, who are selling something.
To perform those flows, you have to meet your customers, where they are. When it comes to payments, you should accept credit cards. Therefore, for pay-ins, there is a need to offer an easy-to-use credit card processor. It’s better to work with ACH transfers to deal with payouts.
Frequently, in the marketplace platforms, roles of sellers and buyer are intersected. So, every seller can act like buyer and vice versa. Therefore, the marketplace should be suitable for those changes and provide pay-in and pay-out in both directions. Here we have to manage one-to-many payments and many-to-many fund flows.
To some extent, the lending platform is kind of a marketplace, where lenders and borrowers gather to fulfil their needs. You can attempt to treat payments on marketplace and lending platforms as identical. In the lending, also, exist two money flows.
To manage those money transactions, online lenders prefer to accept loan payments through an ACH transfer directly. ACH (The Automated Clearing House) is an electronic system that performs funds moving between bank accounts. There are two types of ACH transfers: ACH debit and ACH credit. To complete ACH debit, you allow a third party (it can be a vendor or lender) to have direct access to your account to withdraw funds.
To make this work for your lending site, you can use immediate solutions, which payment gateways providers offer or to use their API to initiate payouts to your users on the backend of the transaction. We want to describe some gateway providers to give you an understanding of what you can expect.
Here we chose three options that can suit the lending platform. Please, keep in mind that you should choose the payment gateway that meets the needs of your business.
What options are available on the market?
Stripe is a widely used payment gateway all over the world. It works for e-commerce, platforms, and marketplaces. Stirpe offers two solutions that meet the needs of the lending platform. First one is a newly introduced product called Stripe Connect. This tool is designed to deal with marketplaces and platforms. The second one is Transfers API. It enables users to collect money into Stripe account and transfer funds through the ACH with API call.
Regardless of your needs, you can choose either one or another solution.
In the case of Stripe Connect, Stripe will take care of all transactions made through the platform. When the user is going to make a payment, he/she will be transferred to the Stripe. There are two options: either to use existing Stripe account or, create a new one. After that, you as a middleman will have access to their accounts and will be able to collect the payment on your account via their respective API keys. Also, your users will have access to the full Stripe dashboard including reporting, analytics, and payment management functionality.
From the other side, the transaction process with the Transfers API looks a little bit different. You, as the middleman, will have your Stripe account, where all of the payments from both sides accumulate. Payees will submit their bank account details directly to the loan platform. You’ll have the ability to manage ACH transfers to their bank account via the API.
On the one hand, using Transfers API, you will have control over all money transaction from your Stripe account. But keep in mind, this also means that you’ll be responsible for keeping track of how much every user has to pay and trigger payouts.
The lending firm, Affirm, perform its payment with the usage of Stripe. Affirm allows users to split the online purchase into manageable monthly payments. The online store gets the money in full at once from the investor. Cross River Bank, in this case, acts as a lender. And borrower, later on, repays the loan to the Affirm.
Dwolla is another option to manage payment through your platform. As well as Stripe, it allows you to deal with a transaction using its API. Additionally, Dwolla enables compliant operations with an account manager and Slack channel to ensure all processes go well.
To facilitate bank transfers and payouts, the Dwolla API integrates into your lending platform. Dwolla has excellent bank transfer infrastructure. It comes with an admin dashboard and provides insight into payments integration. Also, Dwolla provides a ready-built mass payment tool, and you can send thousands of payments at once without any technical support.
Additionally, you will have an opportunity to provide access to multiple members. If you have a team, they will have seamless access to the admin dashboard and managing transactions.
Dwolla is an excellent tool that offers great user experience and smooth documentation. However, it has one considerable disadvantage. Dwolla doesn’t support international payouts at all, all parties, using Dwolla must be located in the US. This fact brings significant geographical limitation to your business.
PayPal is a monster and indeed the pioneer among payment systems. Newly, PayPal introduced the solution for marketplaces called PayPal for Marketplace. This comprehensive payments solution works for the lending solution and crowdfunding platforms. PayPal supports users in over 160 countries. No other payment provider on the Earth can boast about such volumes.
Besides, PayPal supports mass payments. One way to implement payments is to perform credit card transactions with your payment gateway. When the operations have cleared, you can use mass payments to payout the partners.
As well as, Stripe, PayPal offers two solutions: connected path and managed path. Connected path assumes that users will perform payment transaction via PayPal business accounts, while Managed path doesn’t require users to own the business accounts. In the first case, PayPal undertakes payments related processes. And in the case of the Managed path, all process will be under the control of the lending administrator. An excellent example of the lending platform using PayPal for payments can be AbleLending. This service offers affordable loans for small local business. Thus, helping entrepreneurs to stay afloat.
If to speak about downfalls, PayPal gets pretty bad feedbacks from users. The main negative point deals with PayPal implementing subscriptions with Adaptive Payments with “Pre-Approval” Pre-Approval is a regular checkout flow where users are sent to a PayPal checkout page and agree to pay a recurring fee. The problem lays in the fact that Payment Pre-Approval has a limitation up to $2,000. If the amount, your users have to pay exceeds the limit, they will have to divide the sum and re-subscribe to go through the PayPal checkout flow. Also, users apprise problems with the documentation and API/SDKs.
To sum up
All payment systems offer relatively the same functionality. But there are some moments you have to take into account. First of all, where are you going to perform your operations? All payment methods are not created equally in all places. Be cautious when dealing with companies that are not native to the regions you want to operate.
To deal with all those issues, carefully learn the market you are going to enter. Find out about all possible pitfalls that occur during your operation and have a plan of how to overcome it.
Check out our article about things to consider before starting a FinTech startup: http://sombrainc.com/Things-to-consider-before-starting-a-fintech-startup-in-the-USA