Is Working with a Merchant of Record Right for Your Small Business?
As the United States’ digital economy continues its rapid expansion, payment card usage has shown especially dynamic growth. Payment card types include consumer and commercial credit and debit cards. Prepaid general-purpose cards, along with popular private-label offerings, round out the payment cards category.
The Nilson Report’s October 2021 edition predicted that this powerhouse sector would achieve $12.862 trillion in purchase volumes by 2025. This impressive number includes aggregate goods and services, and it is expected to increase 61.3% over 2020’s figure.
In this article, we’ll explore what a merchant of record is and how it can help small businesses with payment processing.
What is a merchant of record (MoR)?
A merchant of record (or MoR) is a legal entity that sells goods or services to the end customer. The MoR receives the customer’s credit card or debit card payment and assumes all liability associated with each transaction.
For example, each relevant financial institution holds the MoR liable for processing the customer’s credit card payments. The card-issuing bank (or customer’s bank) and acquiring bank (or merchant bank) are both involved in the transaction.
The merchant of record also bears responsibility for merchant account maintenance and remittance of all relevant credit card processing fees. Further, the MoR handles any chargebacks and complies with all Payment Card Industry Data Security Standards (or PCI-DSS Standards). Finally, the merchant of record stays current on applicable laws in jurisdictions in which the transactions take place.
Each business can decide to be its own merchant of record. This means they must choose a payment service provider (or PSP) and a payment gateway. The business must also select the right menu of payment methods for its needs. Many businesses would rather outsource these functions to a merchant of record, leaving the company free to better serve its customers.
Businesses that can benefit from a MoR
Many retailers, hospitality providers, and service businesses accept credit card and debit card payments from their customers. Examples include big box stores, restaurants, day spas, and hotels. Mobile plumbers and dog groomers regularly accept field-based card payments. These businesses can benefit from outsourcing their payment processing functions to a merchant of record (or MoR).
If a business sells to customers in other states, the company is an especially good candidate for the MoR model. The merchant of record is intimately familiar with local jurisdictions’ financial and legal compliance rules. For example, the MoR stays apprised of sales tax and tax calculation issues at the county and state levels. Chances are, sellers based in other locations are not likely to possess this localized knowledge.
Companies that are handling payment functions internationally have additional compliance headaches. A merchant of record can resolve currency conversion logistics and VAT tax compliance issues for their clients. Either of these functions can present troublesome complications for a foreign business. Companies based in other countries are likely unfamiliar with a country’s business operations landscape.
Good MoR model candidates
Specifically, an MoR model offers benefits for three types of online businesses. These companies typically sell products or services across state lines or international borders. The businesses do not typically have local bank accounts or physical operations in those jurisdictions.
- E-commerce and DTC businesses: Companies that sell products or services online can benefit from an MoR’s services. Examples include online retailers and direct-to-consumer (or DTC) businesses.
- Digital download services: Businesses that market downloadable products such as games or eBooks often sell to international customers. A merchant of record can take over all credit card processing functions for these clients.
- SaaS providers: Software-as-a-Service (or SaaS) companies often cultivate a worldwide customer base. Attempting to comply with varied countries’ billing, taxes, and legal requirements would be almost impossible. Here’s where a merchant of record can turn a frustrating exercise into an easy transaction.
How a merchant of record model works
From the customer’s perspective, an MoR sales transaction is very similar to a non-MoR sales transaction. The customer (or cardholder) buys the product on the online retailer’s website. Next, they are routed through the normal checkout sequence. Finally, the customer arrives at the online payment stage of the order process.
Here, the merchant of record acts as the product’s reseller. Therefore, two transactions take place at essentially the same time. The merchant and MoR engage in one transaction. The MoR and the end customer complete a second exchange.
What occurs after the transaction
The merchant of record is allocated a designated portion of each transaction’s proceeds. This amount covers the MoR’s fees and taxes. The merchant receives the remainder of the proceeds and has no further transaction responsibilities.
After the transaction wraps up, the MoR’s name displays on the customer’s credit card statement. If the customer requests refunds or chargebacks, they will deal strictly with the merchant of record. Stated another way, the MoR bears financial liability for the transaction’s outcome.
How an MoR differs from a payment service provider
There is one major difference between a merchant of record (or MoR) and a payment service provider (or PSP). As previously noted, a merchant of record handles every aspect of the order process and sales transaction.
The MoR assumes the financial liability, pays the sales tax, and ensures PCI-DSS compliance, among other functions. The MoR also verifies that all transactions comply with a jurisdictions’ financial and legal requirements.
The function of a payment service provider
In contrast, the payment service provider’s sole function is to coordinate a business’ payment card transactions and customer card payments. Typical PSP payment solutions include credit cards and debit cards, contactless payments, and mobile payments, among others. The PSP (such as Stripe or PayPal) does not get involved in the financial, legal, or taxation aspects of any transaction.
Certain payment service providers accept payments in varied currencies. Businesses that deal with these payment processors are well-positioned to work with global customers, an advantage in today’s interconnected digital marketplace.
However, know that PSPs do not determine other countries’ taxes or legal requirements. An MoR is well equipped to obtain that information and ensure that its clients’ transactions comply with all relevant criteria.
Merchant of record vs seller of record
The terms “merchant of record” and “seller of record” sound similar in function. However, there is one important distinction.
As previously noted, a merchant of record (or MoR) acts as a product reseller who sells a product to the end customer. The MoR’s name appears on the customer’s credit card statement. However, it’s possible to trace the transaction to the merchant who owns the brick-and-mortar store or e-commerce website.
In contrast, a seller of record (or SoR) legally takes on the seller’s identity and is called the “original seller.” The seller of record has the legal right to sell the merchant’s product under their name.
Every payment transaction will state that the seller of record was the original seller when the transaction took place. As such, the seller of record must respect a customer’s legal rights in case of refunds or chargebacks.
The seller of record is responsible for other vital payment processing functions. The SoR must put a payment processing system in place. The SoR must also select a payment processor and ensure that other components of the payment system are operational.
Working with a merchant of record: The advantages
By partnering with a merchant of record, your business will be outsourcing many laborious functions. You’ll free up time and resources for product development, sales, and marketing work that benefits your bottom line.
- Merchant account provider or PSP selection: Deciding whether to use a merchant account provider or a payment service provider is a big decision. Making the wrong choice can result in paying excessively high fees and/or being locked into a long-term contract.
- Payment-related fee negotiation: Determining and monitoring all the payment processing fees can be a maddening exercise. Again, making the wrong choice about credit card processing fees can be an expensive mistake.
- Payment data security compliance: If a business accepts credit cards and debit cards, it must comply with relevant card data security standards. In certain situations, these PCI-DSS Standards may be in addition to other data security criteria.
- Payment disputes and outcomes: Credit card and debit card transactions sometimes lead to payment disputes, often through no fault of the merchant. Issuing refunds, processing chargebacks, and executing payment reconciliations are time-consuming tasks.
- Credit card fraud investigations: Credit card fraud is a huge problem in today’s digital marketplace. Identifying and reviewing potentially fraudulent orders takes time, and multiple cases may be pending at once. To stay on top of potential fraud issues, you (or an employee) must closely monitor transactions daily.
- Sales tax management: If you do business in multiple states, determining the jurisdictions’ sales tax rates can take considerable research. Filing the taxes on time is important, and failure to do so can result in penalties.
International transaction processing
Let’s say your business works with international customers. If so, you must ensure compliance with each country’s business operations criteria. A global MoR is equipped to handle each of these functions.
- Local entity establishment: Most importantly, you must create a local business entity within each country in which you do business. This involves setting up a merchant account and firming up the payments infrastructure. You must also comply with all tax calculations and payment requirements. It’s not uncommon for this process to take more than a year (for a single country).
- Legal and financial considerations: Every country has its own ever-evolving sales and commerce laws and regulations. Foreign companies that do business there must also meet these requirements. This often requires guidance from an expensive lawyer well versed in the country’s business climate.
- Currency conversions: When international customers make payments in foreign currencies, your business must convert each currency to your country’s official currency. This can be a tricky process, and errors can result in your business losing money.
Finding the best payment solutions partner
By using a merchant of record, a small business owner can hand off all responsibilities related to the sales transaction. This enables the merchant to focus solely on developing and marketing their products.
This may be an especially good option for businesses that accept online payments. These transactions are subject to many complex laws and regulations.
Small businesses that serve customers in other states or countries may also find a merchant of record very helpful. The MoR maintains knowledge of all applicable laws, regulations, and requirements in the customer’s geographic location.
However, maybe your business wants to maintain direct control over its sales transactions and related issues. In this case, a payment service provider may present a good solution.
Payment Depot is a subscription-based PSP that offers wholesale pricing and no long-term contracts. The company also maintains an industry-wide reputation for excellent customer service. Contact us today to learn how Payment Depot can streamline payment processing for your small business.