A merchant of record (MoR) is a third party that acts on a seller's behalf and takes responsibility for managing many of the financial and legal aspects of a sale.
Many businesses choose to work with MoRs because they handle payments, refunds, chargebacks, and customer disputes. An MoR will also help businesses comply with sales tax laws and other regulations.
Using a MoR limits your risk, which is important as sales tax laws are becoming increasingly complex, especially for companies offering SaaS or other products in industries where regulations are still evolving.
This guide will explain what a MoR is, what responsibilities a MoR can take on, and how to find the right MoR for your company's needs.
A closer look at what an MoR does
A MoR acts as a middleman between a customer and a company selling products or services.
The customer may never be aware of the MoR, and your company will be shipping the goods or providing the service. However, the MoR will be the legal entity that's ultimately responsible for complying with key laws and regulations that the transaction entails.
A MoR assumes responsibility for:
- Processing payments: The MoR collects money from your customers and then sends funds to you, minus any required fees or taxes.
- Following payment security rules and regulations: The MoR assumes primary responsibility for complying with rules and local regulations that ensure that customers are offered safe and secure methods of payment. This includes complying with Payment Card Industry Data Security Standards (PCI DSS) and the Revised Payment Services Directive 2 (PSD2), where applicable.
- Providing invoices and receipts: The MoR is responsible for providing customers with bills and other sales-related documentation, as well as for complying with invoice requirements. This can be important in countries with a value-added tax (VAT), as these countries typically have strict requirements for invoices, especially in complex transactions such as those in which the reverse charge mechanism is used.
- Complying with tax obligations: The MoR determines whether a transaction is taxable under the rules where the buyer is located. If it is, the MoR will calculate the correct amount of sales tax, VAT, or GST; collect the correct tax amounts; and remit payments to the appropriate department(s) of revenue.
- Managing chargebacks and customer disputes: The MoR facilitates refunds, assumes legal and financial responsibility for chargebacks, and manages disputes, including submitting documentation to banks and credit card networks.
- Complying with other local regulations: The MoR is responsible for complying with any other local regulations that relate to the sale of goods and services.
Merchant of record vs. payment processor
A payment processor provides a much narrower range of services than a MoR.
A payment processor is a company or service that facilitates the transfer of funds. It handles the technical process of charging a customer's credit card, debit card, or digital wallet and facilitating the movement of the customer's money into your company's business account.
Companies like Stripe, PayPal, and Square are payment processors. They allow your business to accept digital payments but don't take on legal responsibility for your sales.
In some cases, the payment processor and the MoR are the same entity. If you sell on Amazon, Amazon typically processes the payment and is the MoR for most transactions on its platform
However, if a company only processes payments, then your business remains the MoR for the transaction unless you separately arrange for someone else to fill that role.
Merchant of record vs. payment gateway
A payment gateway is also different from, and narrower than, a MoR.
A payment gateway is a technology platform that enables the movement of money, for a fee. The gateway typically:
- Encrypts customer payment information so it can be transmitted safely.
- Connects with the payment processor and transmits the encrypted information to the bank or credit account so the issuing bank can verify details of the transaction and approve or deny it (usually based on whether the customer has available credit or enough money in their bank account).
- Alerts the merchant and customer about whether the payment is successful or not.
The payment gateway handles the technical process of moving money, but does not take over the role of MoR for your business.
Merchant of record vs. seller of record
The seller of record is responsible for the products or services being sold.
The seller of record sets the price of the product, earns revenue from the sale, and is responsible for issues with the product or service.
If you are selling your goods or services, you are the seller of record, even if you have a separate MoR.
How a sale works with a merchant of record
When you partner with a MoR for your sales, there are two transactions that take place during the process: a transaction between you and the MoR, and a transaction between the MoR and the customer.
Here's how the process works:
- The customer initiates a sale on your website or an e-commerce storefront.
- The customer goes through the checkout process. The transaction is routed to the payment gateway for the MoR.
- The MoR collects the payment. The MoR's name appears on the customer's bank or credit card statement.
- The MoR is responsible for collecting the required sales tax and complying with payment processing regulations. The MoR also assumes responsibility for any issues with the payment, including customer disputes, chargebacks, or potential issues with fraud.
- Your company transfers legal rights to the product or service to the MoR, which transfers them to the buyer — although this process happens behind the scenes, as your business generally provides the physical goods or services directly to the buyer.
- The MoR transfers revenue collected from the sale to your business, after subtracting their fees, the cost of processing payments, and the taxes collected.
Pros and cons
If you are considering using a MoR, there are both pros and cons to consider.
Pros
- Faster expansion: You can expand into new markets and pursue global expansion more quickly if you outsource compliance and payment processing. Your MoR should be already set up in the countries where you want to do business.
- Outsourced compliance: Tax and regulatory compliance are complicated, expensive, and require knowledgeable experts. When you work with a MoR, you don't have to learn and develop systems for complying with varying regulations in multiple jurisdictions.
- Improving conversion: Your MoR may make the checkout process easier and faster for customers by establishing payment processes geared for each location. It makes sense for them to invest in optimizing the payment experience since they are doing large volumes of transactions.
- Better fraud protections: Because of the large volume of transactions MoRs manage, they are able to invest in sophisticated fraud-prevention measures and can better recognize patterns that indicate fraudulent transactions.
- Reduced risk: The MoR is responsible if there are problems with sales tax compliance, chargebacks, or regulatory violations.
Cons
- Cost: MoRs typically charge between 2.5% and 8% of all transactions, and the cost does not go down as your company's revenue grows.
- Loss of control: The MoR controls billing, payment processing, and customer refunds and support. If the MoR doesn't provide good service, your brand's reputation may be affected. The MoR's name also appears on credit card statements.
- More limited data: You can't collect all of the data from the transaction directly and the MoR may provide more limited information, affecting your ability to effectively analyze all of the relevant information about sales when making business strategy decisions.
- Cash flow issues: Your MoR may hold your funds for a period of time, while you usually get your money within a matter of days when you use a direct payment processor. Delays in getting paid can affect your company's cash flow.
- Third-party relationships can create complications. Making a third party central to your business creates issues because changing your MoR can be complicated and require customers to migrate to new payment methods. Investors and buyers may also view your relationship with your MoR as a complicating risk factor if they're interested in buying a stake in, or acquiring, your company.
Why a business might choose an MoR
Companies often choose to work with a MoR because it allows them to focus on selling products and services to customers without having to assume the burden of complying with payment and sales tax regulations, or having to set up a payment infrastructure.
Setting up a MoR makes sense if:
- You sell your product in multiple states or countries: Your MoR can take responsibility for understanding and complying with complicated local tax laws and payment requirements.
- You want to reduce your risk: Failure to follow regulations can lead to significant penalties and fees. Fraud claims, legal disputes, and chargebacks can also be costly. You lessen your risk of audits, fines, and financial losses by outsourcing complicated and highly regulated tasks.
- You want to simplify operations: Your company may not want to set up arrangements with multiple payment processors, monitor sales tax rules across multiple jurisdictions, or keep up with evolving laws on sales tax, use tax, and VAT tax. You can offload all of these obligations to your MoR.
- Reduced costs: It can be expensive to set up in-house operations that are equipped to comply with complex regulations. Paying a MoR allows you to know and control your compliance costs and can reduce those expenses.
- Faster growth: Instead of having to set up operations in different locations where you want to do business and take the time to learn each new location's tax laws, you can focus on selling your product while your MoR takes care of the technical details.
More on taxes specifically
Many businesses in specific industries can benefit from a partnership with a MoR. For example:
- SaaS companies can sell their software products or services to anyone in any country if they have an MoR who can register with the appropriate revenue office, determine whether SaaS is taxable where the sale is made, and collect and remit the correct amount of tax.
- E-commerce and direct-to-consumer companies can sell in multiple states and countries without establishing local bank accounts, learning whether their products are taxable, and collecting and remitting tax at local rates. Companies like Amazon and Etsy make it simple to begin selling items on their marketplaces because they act as the MoR.
- Mobile app creators: App stores like Amazon or Google Play can act as the MoR for apps that are sold on their platforms. Gaming companies, too!
- Service providers: Service providers can also benefit from having a MoR. For example, Airbnb acts as the MoR when property owners list their rental units on the platform, and Airbnb will take responsibility for things like chargebacks, payment processing, and tax collection where applicable (how Airbnb functions may vary by jurisdiction).
Deciding whether to use an MoR
You'll want to carefully consider all of the pros and cons when deciding whether to use a MoR. Consider whether you have viable alternatives, whether you’ll be able to handle the cost of the MoR, and whether the MoR you’re considering offers the features (and country support) that you need, in addition to the pros and cons we’ve listed above.
MoRs tend to be a good option for fast-growing startups with lean teams that are eager to expand into new markets. For example, a new SaaS company that wants to offer its software in multiple countries and has no in-house compliance experts or established payment systems would benefit from a MoR.
On the other hand, cash-flow sensitive businesses, companies with complex customized billing requirements, businesses with small margins, and mid-market companies with existing payment methods may not want to use a MoR, especially when they could instead keep their payment infrastructure in-house but outsource the most complicated parts, like sales tax compliance, to services like Numeral.
[blog-post-inline-cta]
Final thoughts
A merchant of record can fulfill an important role for companies that are in the rapid expansion phase and that want to enter into new markets without establishing systems for payment collection and regulatory compliance.
However, be aware that using an MoR means handing off a key part of your customer experience to outsiders, entering into a partnership that could be complicated to exit, and incurring substantial ongoing costs.
Be sure to explore alternatives, including payment processors or a tax compliance service like Numeral, which can manage your sales tax obligations for you while allowing you to keep more control over your customer experience.
With Numeral, you can manage VAT and sales tax compliance in five minutes or less per month, expand into more than 70 countries, get support from trusted professionals with experience with SaaS companies, and avoid the complications and costs that can come with a MoR. Contact Numeral today to find out more about how we can help.
