Secrets of Amazon’s Third-Party Seller Compensation Policy

Amazon founder Jeff Bezos ran his e-commerce company out of his home garage in the early 1990s. Amazon evolved over the decades to transition from a bookseller to an everything seller and is valued by the public market at more than $1.5 trillion. Put in perspective, very early investors who bought just $1,000 worth of Amazon’s stock during its late 1990s initial public offering are sitting in a small fortune of around $1.8 million.

Amazon’s incredible growth story over the decades is multifaceted and complex. One of the strategies that Amazon counted on to help spur growth was opening its platform to individuals and small business owners — known as Amazon Marketplace.

What Is Amazon Marketplace?

Amazon’s annual paying customers exceeded more than 100 million members in 2018 yet very few of which are familiar with the company’s business model. All they care about is receiving the product they ordered in two days or less. What goes on in the warehouse and in the delivery trucks is not something that crossed their mind.

In reality, the majority of goods listed on Amazon today are fulfilled by third-party businesses on the Amazon Marketplace platform. The size of these businesses ranges from a single-person operation to other publicly listed corporations.

Companies can sell on Amazon in one of two ways. The first is known as a first-party (1P) relationship whereby the business acts as a wholesale supplier to Amazon. In this case, the business receives a purchase order whenever a client buys a product and they would handle the rest of the transaction, including packaging and shipping. Companies must be invited by Amazon to take part in its 1P platform.

The second relationship is known as third-party (3P) and is a much more convenient option for smaller businesses. Amazon maintains inventory on behalf of the small business and handles packing, shipping, and returns whenever a customer places an order.

Amazon Handles Hundreds Of Billions Of Dollars

Amazon collects the full payment from the buyer and remits payment to the seller. Of course, Amazon keeps a portion of the revenue for itself as a fee.

According to one study titled “Amazon Data 2020/21,” third-party marketplace sellers account for 62% of Amazon’s total Gross Merchandise Volume (GMV) that reached half a trillion dollars. These third-party vendors paid Amazon 26% of their sales on average as a fee to Amazon.

While this may seem like a large commission, keep in mind that these businesses gain immediate access to Amazon’s large and loyal customer base. Amazon also handles all logistical aspects of the transaction, including ensuring it is delivered in a timely manner.

Amazon made new changes to how it pays its millions of third-party vendors in 2021. As part of a new policy, Amazon will only pass along money to third-party sellers that bank with one of a handful of approved payment service providers.

Sellers can use their local bank but this payment method is subject to a waiting period of up to 21 days.

Given Amazon’s global reach and scale, it is inevitable that a very small fraction of the hundreds of billions of dollars flowing in and out of the company will be subject to fraud and theft. To limit its liability and exposure, Amazon decided to work with a small handful of payment processors as part of its new Payment Service Provider program.

Amazon asks that the approved payment service pass along information about a client’s identity. In return, Amazon will share information about the selling account as part of an initiative to reduce fraud and abuse.

It isn’t clear what response payment processors had to the request but one would assume it would put them in an uncomfortable position. Financial institutions of all shapes and sizes strive to keep their customers information private and Amazon requesting information upfront is certainly an unusual proposition.

Payment processors likely balanced Amazon’s strict privacy requirements with the benefits associated with being one of a select few approved partners for one of the world’s most recognizable e-commerce companies.

Source: Statista

How Amazon Paid Sellers In The 2000s And Early 2010s

Back in the late 2000s, payment processors were a mostly unknown business entity. At that time, the ability to move money quickly and efficiently was limited by technological factors. We can see just how much payment processes advanced over the past 15 years by looking at how Amazon handled payments to third-party vendors in its early days.

Amazon noted in a very early information page that commission income can only be paid via direct deposit to a bank account or via check in the mail. Amazon also offered the option of paying vendors through Amazon.com Gift Certificates. Amazon paid third-party vendors on a consistent basis with the option to request a manual disbursement.

According to a 2012 forum discussion, third-party vendors in the United Kingdom and elsewhere across the world had the option of receiving a check in the mail. However, they had to pay a $15 processing fee and there was no other option but to receive payment in US dollars.

This led to unfavorable exchange rate transfers at banks and unnecessarily erased a seller’s profit margin. The reality is this was the best system Amazon could have offered at the start of the century.

Amazon Introduces A Payment Processor Model In 2015

Amazon outsourced a more convenient payment solution to vendors on its platform in 2015. Payoneer announced in 2015 it was selected by Amazon to act as its first-ever third-party payment processor.

Sellers across 24 countries who list their goods on various Amazon marketplaces worldwide were given the option of signing up for a Payoneer account directly on Amazon. Instead of accepting a US-dollar bank transfer, check or gift card, sellers were able to accept money through a virtual Payoneer account or credited directly to a Payoneer-branded MasterCard.

“We make it possible for Amazon to make the payments locally in each market and we catch those payments and deliver them to the merchants wherever they are in the world,” Payoneer CEO Scott Galit told The Business Journals. “We take care of all that complexity in the market.”

Over the years, Amazon started accepting additional payment processors on its platform. As of 2021, the full list of approved processors include:

LianLian Pay.
NetEase Global Pay.
Payoneer,
PingPong.
WorldFirst.
AirWallex.
OFX Global Currency.
IPaylinks.
Skyee.
Zhejiang Chouzhou Commercial Bank.

Conclusion: Amazon Is The Gateway To The World

Amazon said in its first ever letter to shareholders in 1997 that a vision for a dominant leadership position will translate directly to superior revenue, profit, capital velocity, and stronger returns on invested capital. Despite Amazon founder Jeff Bezos stepping down from his role in 2021, nothing at all has changed when it comes to management’s focus on the long-term.

Amazon planned out its vision for 2020 in 2000 and in 2021 it is planning its vision for 2030 and beyond. Third-party sellers should consider themselves very lucky to be invited to join for the wild ride ahead as e-commerce momentum is showing zero signs of slowing down.

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