From Alibaba and Amazon to Uber and Vinted, digital marketplaces have become increasingly commonplace. And alongside startups spanning a variety of different industries, established companies are increasingly setting their sights on the marketplace model.

In recent years, major retailers including Macy’s, Walmart and JD.com have created third-party marketplaces, giving their customers the ability to access a range of different brands via a single platform. But for companies seeking to adopt this approach, it’s important to be aware of the scale of the challenge and the possible pitfalls.

“We’re talking to more players now that are interested in going into marketplaces,” says Dr Stephen Whitehouse, Managing Partner, Head of Payments at Oliver Wyman. “And what’s really obvious is that many of them underestimate the amount of regulation and compliance that has to be understood and addressed at the beginning.”

As Whitehouse explains, the decision to create a marketplace is often driven by marketing strategy. “There are a number of major UK retailers that are currently thinking about moving into this space, and what’s really clear is that for some of them the vision, the understanding and the customer engagement and all the local trends within the UK around marketplaces are well understood – but the linkage with finance and risk gets overlooked a lot,” he says. “I do feel that finance, risk and treasury need to be more involved in these early conversations in framing the strategy.”

In practice, companies keen to pursue a marketplace approach may be reluctant to spend too much time and money developing their approach. “And that’s fraught with financial and reputational risk.”

Legacy vs startup

Enrico Camerinelli, Strategic Advisor at Datos Insights, notes the success of a digital marketplace is contingent on various elements, spanning the platform’s quality, the degree of trust established between purchasers and vendors, and the marketplace creator’s capacity to present competitive pricing, along with a diverse array of products and services.

“Successful digital marketplaces incorporate features like user authentication and validation, customer reviews and ratings, and mechanisms for resolving disputes, all aimed at fostering trust and guaranteeing equitable transactions,” he says.

According to Whitehouse, many of the startups moving into the marketplace space have a clear understanding of the regulatory and compliance requirements involved, and of how to make the best use of technology. “In many cases, they’re partnering with other firms to leverage the newest capabilities – few of these platforms are proprietary,” he says.

On the other hand, major merchant brands with legacy technology may not have fully considered the regulatory and compliance demands of creating a marketplace. “So there is a big step change, not only in terms of technology capability, but also in terms of education, and immersing the executive team on a journey that allows them to operate in a space that’s highly scrutinised by regulators.

“That’s the big, fundamental difference: one group has already immersed themselves in that engagement, and the other hasn’t been engaged, which can make it difficult to then achieve a change in mindset.”

Cross-functional team

For companies looking to adopt a marketplace model, Whitehouse says it’s important to create a consortium team which can understand topics such as Know Your Customer (KYC) and anti-money laundering (AML). He argues this team should include treasury as well as areas such as risk, compliance, legal and finance, together with the commercial owners and the executive team.

“I feel that in some of these traditional models there are silos around the executive team – whereas a marketplace really requires a fusion of talent, experience and capabilities in order to answer the problem that has been presented,” he adds.

Crucially, Whitehouse argues this cross-functional team needs to be brought in from the beginning of the initiative in order to play a proactive role in helping to create the value proposition.

“In the existing paradigm, the team often comes in a little later in the value chain, when things are about to get up and running,” he concludes. “But really, the financial, legal and compliance consequences of adopting a marketplace need to be understood from day one.”