Managing payment processing and compliance obligations can quickly become overwhelming for gaming companies, especially those with multiple revenue streams or international sales.
You not only need a payment processor to collect payments for games, microtransactions, and subscriptions, but also need to ensure that you're fulfilling sales tax and VAT (value-added tax) requirements in numerous jurisdictions.
Partnering with a merchant of record (MoR) is one way to take some of these tasks off your plate.
A MoR is a third party that handles many obligations and responsibilities related to selling your games: payment processing, sales tax compliance, chargebacks, customer refunds, and more.
This guide explains what a MoR is, why a gaming company may want to work with one, what the downsides of partnering with a MoR are, and what types of gaming companies may find working with a MoR beneficial.
Payment and compliance challenges
Most gaming companies have a business model that makes payment processing and sales tax and VAT compliance relatively complicated. Challenges specific to this industry include:
- High-risk business: Many payment processors categorize gaming as high risk because age restrictions vary by jurisdiction, regulations are inconsistent, and transaction volumes are high. If your processor determines that your fraud or chargeback rate is excessive, it may freeze or terminate your account. This can disrupt sales, damage your brand’s reputation, result in fines, and potentially place you on industry monitoring lists, making it more difficult to secure a new processor.
- Evolving rules: Regulations and revenue departments are still catching up when it comes to newer business models like games as a service (GaaS). While GaaS and digital-only goods are now taxable in most countries and states, the rules are still evolving and can be especially complicated when you sell bundled goods that include both physical and digital products. Lawmakers have also recently cracked down on some monetization strategies, such as loot boxes. It's important to keep up with the changing rules to understand your obligations.
- Multiple payment types: Gaming companies have multiple potential revenue streams beyond just charging customers for a game. You may offer downloadable content, in-game purchases, or subscriptions. This requires a flexible payment structure and complex reconciliation systems.
- High customer expectations for seamless payments: A frictionless checkout is key to sales, especially for in-app purchases. Gamers may also prefer multiple payment methods, including wallets and mobile banking. If you're selling in multiple countries, you also need to offer regional payment methods, for example, carrier billing in Asia. Systems that don't work smoothly could disrupt engagement and hurt conversions.
- Fraud risks: International sales, a young audience, and a high volume of small transactions are just some reasons why fraud risks are a significant concern in the gaming industry. Cybercriminals have also capitalized on the growing popularity of digital gaming, making account takeover a significant risk.
- High chargeback rates: Parents may file chargebacks due to unauthorized card use, accidental purchases can be an issue with in-app sales, and customers may file chargebacks because of purchase regret or forgotten subscriptions. When goods are delivered digitally, proving the legitimacy of a sale can also be challenging.
Managing these unique risks can be a challenge, especially for startups or gaming companies without a large legal and financial department in-house.
How an MoR can address gaming payment needs
When you use a MoR, for example, Xsolla, Paddle, or FastSpring, you transfer responsibility for many of the biggest legal and compliance challenges your company faces when making sales.
Your MoR becomes the seller in the eyes of the law. When the customer makes a purchase, they are actually buying from the MoR, even though you provide the gaming software or services. The MoR becomes responsible for:
- Payment processing: MoRs accept payments across multiple jurisdictions. They can offer local checkout options, collect payments in different currencies, handle currency conversions, and manage different payment approaches for different revenue strategies.
- Offering localized checkout experiences: MoRs can tailor the checkout experience to customers across borders, ensuring that the common payment methods in each location are accepted.
- Tax compliance: Most MoRs are registered in multiple states and countries to collect sales tax and VAT. They can determine whether your sale is taxable, charge tax at the correct rate, file tax forms, and make required payments.
- Detect and fight fraud and chargebacks: MoRs have established protocols to identify and stop fraudulent transactions and minimize chargebacks. Many large platforms that offer MoR services have entire teams dedicated to fraud prevention, including security experts who can identify suspicious patterns and activities.
- Invoicing and receipts: When invoices and receipts are required, your MoR will produce them. This includes VAT-compliant documents.
- Customer refunds, cancellations, and changes: The MoR takes care of refunding customers, applying usage credits when subscriptions are upgraded, and managing your customers' payment experience.
- Managing customer data: Your MoR collects key information on sales transactions and customer payments to help your company make data-driven decisions. MoRs also ensure compliance with regulations aimed at protecting private data.
Since the MoR assumes primary responsibility for these obligations, your company can reduce some of its operational burdens and legal risks.
Gaming-specific benefits
MoRs aren't just for gaming companies; they work across every industry (e.g., SaaS), facilitating transactions and simplifying compliance with strict and varied regulations.
However, gaming companies enjoy some specific benefits associated with working with a MoR, including:
- Faster market expansion: In 2024, the global gaming market was estimated at $187.7 billion, and the GaaS market was estimated at $4.91 billion. The GaaS market is also expected to grow by 24.9% per year on average through 2030. The rise of digital gaming provides an unprecedented opportunity to reach new customer bases. Working with a MoR allows you to quickly expand into new markets, including the EU (European Union) and Asia. In many countries, you must register for VAT from your first taxable sale. Choosing an MoR that is already registered in the countries you want to sell in means that you can expand much more quickly, since you don't have to spend time setting up entities or registrations and finding local fiscal representatives.
- Lower internal costs: You won't have to build out an entire finance and legal department to manage compliance obligations if you outsource to a MoR.
- Fraud prevention: MoRs are able to prevent fraudulent transactions that could damage your brand identity and bottom line, and put your relationship with payment processors at risk.
These are significant advantages, especially if you're a startup that wants to focus on game development and not filing tax forms.
Gaming-specific tradeoffs and limitations
There are also some downsides to partnering with a MoR, including the following:
- You'll have to pay the MoR: Fees usually range from 2.5% to 8%. On thin-margin microtransactions, these fees may eat up too much of your potential profit.
- You'll have less control over customer transactions: The MoR sets up your checkout, manages billing, responds to customer refund requests, and resolves customer disputes. Since you lose control over these processes, you give up control over key parts of your user interface and customer experience.
- You could weaken your brand: The MoR’s name shows up on invoices and on your customer's statements. This can weaken your brand identity and potentially create confusion if customers don't know who the MoR is or what they're being charged for.
- Delayed payment risk: With direct payments, money is usually in your account quickly. MoRs sometimes hold funds for days or even weeks, which affects your cash flow and operating budget.
- Limited data access: The MoR may not provide all of the customer data you need to analyze to make strategic choices about products and services.
- Lock-in effect: Once you start with a MoR, ending the relationship can be time-consuming and difficult, as your customers may have to change to different payment methods. This may be particularly problematic for customers who make regular payments via subscription or who have payment methods stored for in-game purchases.
You need to consider these disadvantages when you decide whether partnering with a MoR is right for your gaming company.
When an MoR makes sense
So should your gaming company partner with a MoR? A lot depends on your current stage of growth and business structure. Here are some examples of situations in which a MoR might make sense, and when it might not.
Working with a MoR may make sense for:
- Early-stage studios targeting global launch: Working with a MoR allows you to quickly enter into new markets because the MoR is already established. You get an integrated solution that enables you to accept local payments in multiple countries and manage your tax and legal compliance obligations, so there's no obstacle to entering multiple markets quickly.
- Companies without a payment infrastructure: If you don't have finance and legal departments, working with a MoR is a simple, affordable way to outsource the key functions these departments fulfill, for a much more affordable cost and without having to build a team.
When a merchant of record may not make sense
There are also some situations when working with a MoR would not make sense for a gaming company.
- Large AAA studios with internal payments and tax teams: AAA studios typically have established legal and tax teams in-house. Working with a MoR would duplicate the services these departments provide.
- Studios with proprietary monetization engines: When you've developed proprietary systems for monetizing your content, especially when your monetization engines are tightly integrated into gameplay, handing off transactions to a third-party could interfere with the user experience or may not be possible.
A few quick tips
If you decide to work with a MoR, look for one that can effectively handle the unique needs of gaming companies. Here are a few key tips to keep in mind when you’re evaluating providers:
- Consider how your MoR will be integrated into your systems: You want to avoid latency in payment flows that could have a negative impact on player engagement. To ensure a smooth user experience and confirm the MoR will integrate effortlessly with your game engine, look for one that supports APIs and SDKs.
- Fraud tools tailored for gaming: Gaming fraud often takes unique forms, including automated token testing, account takeovers, and friendly fraud when customers falsely dispute charges they made. You need a MoR that is experienced at fighting fraud in the gaming industry to address these issues.
- Support for local payment preferences: Make sure your MoR meets customers where they are, offering the types of payment methods that are used locally, including e-wallets, QR-based payments, carrier billing, direct debit, and local bank methods.
Final thoughts
Ultimately, gaming companies must decide whether they want to hand off fraud protection, payment processing, and compliance to a third party who will take a piece of all their transactions and perhaps put a dent in their brand identity, or if they want to build systems to manage compliance on their own.
Considering your team's capability, goals for expansion, and the complexity of tax rules for your products and services can help you make the right choice. You should also explore other partners who could provide support, as it’s possible to outsource things like tax compliance while still remaining your own MoR.
For example, Numeral helps gaming companies manage sales tax and VAT obligations across more than 70 countries.
