August 19, 2014
The growth of e-commerce has been explosive and well documented and the array of products available online is ever expanding. But, for one class of consumable, online trade is fraught with concerns for buyer and seller: very high-priced items. Certainly there are luxury items like electronics and jewelry being offered by established retailers that don’t present a large problem. The reputation of the retailer and the zero-liability policies of major credit cards are the mechanisms by which trust is established.
And, for companies like this, traditional merchant acquirers or online payment providers like PayPal or Stripe work well. But around the world there is a growing segment of buyers and sellers being connected through online marketplaces who are strangers to one another and don’t enjoy that level of trust. There is an entire e-commerce payments infrastructure that such marketplaces could take advantage of, but a lack of trust makes it difficult on both sides to risk selling or buying very expensive items.
Enter Protecti , the brainchild of Australian Simon Lenton. Lenton began his career as an attorney specializing in banking, finance and commercial litigation. And, if there is one thing an attorney becomes accustomed to, it’s resolving disputes, especially over money. Lenton had a close friend order and pay for an expensive item online, never to receive it. He knew there was a way to structure a transaction so that each party had the proper incentive to hold up their end of the bargain. When he noticed the rise of online classified sites connecting buyers and sellers for things like cars and even large-scale home improvement projects, he knew his idea had a home.
Lenton cites a popular auto sales marketplace in Australia called CarSales.com as an example. As an online entity, the site was connecting people as far away from each other as the east and west coasts of Australia, more than 2,000 miles apart. Once the connection was made online, however, payment was made using offline methods. Lenton sees Protecti as a way to close the loop and take advantage of the efficiencies of e-commerce all the way through payment.
“We’re continuing the flow of the online process and building in the safeguards to make that effective,” he says.
In the case of CarSales.com, instead of a buyer having to hire an inspection service to inspect the car on the other side of the country or flying there themselves with a check (and perhaps flying back empty handed if the deal was not what they thought), a buyer could make the purchase online using a credit card or direct bank debit. When the purchase happens with Protecti integrated into CarSales.com’s back end, the parties agree to terms of the purchase in advance and the funds go into an escrow account managed by Protecti. The product is released to the buyer, who has an inspection period to decide whether or not it meets expectations. When the buyer gives approval, the funds are released to the seller. Where Protecti really improves the process is when that approval is denied.
“In the event of a dispute we freeze the funds,” Lenton says. “We say, ‘look, we hold the money and you guys work out what we’re going to do with it.’ We need unanimous instructions from them to tell us where to send the funds and we’re not going to do anything until they agree. That forces the parties to move toward a resolution really quickly. We have found that to be extraordinarily effective. It’s no longer one party clawing back funds from another party. It’s now two parties, none of whom have the funds but both who want their money or product. Suddenly, the parties become extremely receptive to resolving the dispute.”
Both buyer and seller are protected and the risk of losing your money or not getting paid is eliminated. In the case of purchases worth tens or even hundreds of thousands of dollars, it enables buying online without being required to trust an unknown party on the other end of an anonymous transaction.
“It’s simple,” says Lenton. “We have built in a very clear process that forces the parties to make sure they agree what it is to be done at the outset.”
In its first three months of operation after launching in July, Protecti processed around AUD 2 million (USD 1.7 million) and it has chosen to keep its focus within Australia, though it has received interest from overseas (the company has licensed its solution to Paycorp, the largest non-bank card issuer in South Africa).
Though he points to the company’s experience with an offshore issuer and notes that payment companies may be the ones that “actually understand what we’re doing and want to partner with us,” Lenton says Protecti’s focus will remain on the burgeoning world of online marketplaces and their potentially huge user base that needs a safe way to conduct high-value transactions while mitigating risk.
“Our plan is to partner with online marketplaces that have the volume to make us a success,” he says. “Payments is a low-margin, high-volume business. You need the volume of transactions to make yourself cash-flow positive. We’re in talks with a number of marketplaces that have that volume.”