Merchant of RecordWhat a Merchant of Record Does & Why You May Need One in Your Corner
In a Nutshell
You’re sitting in your office, trying to figure out your overseas sales. Who charges sales tax? What's the exchange rate for Turkish lira? You’re overwhelmed until a genie appears and says, “Let me handle this.” That genie is called a merchant of record, and in this post, we’re looking at how they work their magic.
How a Merchant of Record (MoR) Works: Benefits, Potential Drawbacks, & What to Know Before Signing On
For over 25 years, Amazon has been the largest eCommerce platform in the world. What started as an online bookseller now sells more than 600 million items online, 98% of which are listed by the platform’s over 9.7 million independent sellers.
For those third-party sellers, Amazon is more than just a place to find potential customers. The eCommerce platform also helps sellers collect payments, remit taxes, handle refunds, and respond to chargebacks. In those situations, Amazon becomes a merchant of record (MoR). What all does that entail, though? Let’s take a look.
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What is a Merchant of Record?
- Merchant of Record
A merchant of record (MoR) is an entity that assumes legal responsibility for financial transactions between buyers and sellers.
[noun]/mər • CHənt • ov • rek • ərd/
A merchant of record is a value-added middleman that makes it easier for merchants to accept payments, especially from other countries. Professional MoR providers sell goods or services and accept liability on behalf of the seller. They act as a customer-facing store serving multiple merchants.
Technically, a merchant can be their MoR, but in the global eCommerce market place, that’s nearly impossible. Every country, region, state, or even city can have different taxes, tariffs, reporting requirements, and more. On top of that, you’d need to deal with 180 globally recognized currencies, with conversion rates that can literally fluctuate from minute to minute.
A third-party MoR can handle all that for you. Many well-known two-sided marketplaces, including Airbnb, Uber, and Doordash, function as MoRs for their hosts, drivers, and partner restaurants, respectively. Some plug-and-play payment processors like Square (and more recently Stripe), are also MoRs. However, other platforms, like Shopify and Paypal, are not considered MoRs as of this writing.
What Does a Merchant of Record Do?
An MoR primarily handles payment processing. But, they can also manage currency conversion, collect, calculate and remit sales taxes, manage compliance with PCI standards, handle refund requests, and help respond to chargebacks.
At the heart of a merchant of record’s duties is payment processing. This includes authorizing and accepting payments, negotiating card processing fees, and ensuring that funds are settled correctly. MoRs may also generate and distribute receipts, invoices, and other payment documentation to buyers on behalf of sellers.
But MoRs aren’t simply processors. They’ll also manage currency conversions, collect and calculate sales taxes from buyers, and remit taxes to the proper departments of revenue. You can expect them to maintain compliance with PCI standards, manage cross-border transactions, handle refunds, and help address customer grievances.
We’re not done yet. In addition to the above, MoRs may deploy their own fraud detection and prevention tools to fight first-, second-, and third-party fraud. MoRs can even partner with you to handle refund requests and respond to chargebacks. If you were your own merchant of record, you’d have to do all of these jobs yourself.
Your MoR doesn’t just take on the tasks: they also assume the liability. As the legally recognized seller to the end customer, they’re responsible for all aspects of the sales transaction.
How the MoR Model Works
A merchant of record must interact closely with all stakeholders. We’re talking sellers, buyers, financial institutions, and other third-party vendors. In an MoR model, you transact directly with MoRs, and they interact with end buyers on your behalf. You sell directly to the MoR, who acts as a reseller and becomes your only direct buyer.
The merchant of record also contracts directly with banks to handle funds, and with payment gateways to accept card payments. The largest MoRs may also use their bargaining power to lower interchange fees charged by card networks. They also maintain a merchant account (necessary for accepting card payments), taking one more task off your plate.
With all of that in mind, the payment process in an MoR model can be thought of as a six-step process:
What's the Difference Between a Merchant of Record & a PSP?
A PSP only handles the processing of payments. A merchant of record provides a lot of additional services to sellers.
On one hand, you can think of a merchant of record as a robust payment service provider (PSP) that also offers additional services to sellers. That said, there are significant differences between the two.
A PSP functions exclusively as a payment processor. It handles the technical aspects of transferring money between the buyer’s issuing bank and your merchant account (domestically or cross-border). They operate digital and physical infrastructure to ensure that transactions are efficient and secure.
An MoR does everything a PSP does… and a lot more. Beyond handling payment processing, MoRs also assume legal responsibility for sales taxes, PCI compliance, and all the other things we spoke about earlier.
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What's the Difference Between a Merchant of Record & Seller of Record?
While an MoR can be regarded as a fuller-featured version of a PSP, the similarly-sounding seller of record (SoR) is a completely different animal.
Your merchant of record is the financial middleman between you and the end buyer, while the SoR is the operational frontman. Although it may have the power to set prices, the SoR generally doesn’t handle the money aspect of the sale. It’s responsible for inventory management, order fulfillment, shipping, and customer service. Some may even take on the responsibility of addressing errors in product or service quality.
While these responsibilities share little overlap, it’s not uncommon for SoRs and MoRs to actually be the same entity. For example, programs like Fulfillment By Amazon allow you to enroll in the eCommerce platform’s warehousing, picking, packing, shipping, delivery, and customer service capabilities in addition to its MoR features. Two-sided marketplaces like Airbnb or Uber can potentially also be regarded as sellers of record.
Benefits of Working With a Merchant of Record
If you’re a small-scale seller doing business in a single local, regional, or national market, you might do fine with a standard payment processor. But, if you have aggressive growth plans or global ambitions, you may be happier with a merchant of record. By working with an MoR, you can:
Potential Drawbacks & Risks of Working With an MoR
A merchant of record offers a full-service, “done-for-you” payments experience. This is generally a good thing, but you may potentially find the lack of flexibility or rigidity to be downsides. Some potential drawbacks include:
Loss of Control
Merchants using their own payments stack get to retain control and access over their transaction data. With an MoR, however, you’ll likely need to cede some control to the provider, since the transaction data and customer relationships technically don’t belong to you.
Dependence on Third-Party Providers
One overlooked drawback to using an MoR is that it creates dependency. For example, eCommerce sellers on Amazon often come to rely exclusively on the platform for sales. But this lock-in effect raises switching costs and can make it hard to service your market any other way.
Possibly Higher Processing Fees
MoRs typically charge higher fees than standalone payment service providers. The standard rate for fixed-fee PSPs, for instance, is 2.9% + $0.30 per transaction. For MoRs like Paddle or Lemon Squeezy, per-transaction fee is 5% + $0.50 – nearly double the rate for PSPs.
Additional Costs
If you don't need full-scale sales tax and PCI compliance services, you might be better off skipping a third-party MoR. Even if they negotiate lower processing fees, you’ll still end up paying more overall. A DIY system may be more cost-effective.
How to Choose the Right Merchant of Record
In addition to payment processing, a reputable merchant of record should offer a full suite of sales tax, data security, and regulatory compliance, refund and chargeback management, and fraud prevention services. Robust reporting and analytics surrounding sales, refunds, and disputes should also be included.
Before settling on a merchant of record, vet each provider thoroughly. Ask the following:
- What are your contract terms? Are there signup fees or minimum commitments?
- What are your processing fees? Do you offer volume-based discounts?
- What payment methods do you support? Can you handle cross-border issues such as currency conversion?
- What taxes (sales taxes, VAT, GST, etc.) will you collect and remit? Are there any jurisdictions you don’t support?
- What measures do you put in place to ensure PCI compliance?
- Have you dealt with businesses in my vertical? Are there any of your clients I could speak with?
- What does the signup process look like? Who is eligible, and how long does approval typically take?
- What fraud prevention and chargeback management services do you offer? Do you assess chargeback fees?
- Do you offer seller of record (SoR) services in addition to MoR services?
What to do Before You Sign With a Merchant of Record
Once you’ve decided on a merchant of record, there are still a few things to take care of before you sign that dotted line:
Future Trends in Merchant of Record Services
As cross-border eCommerce grows, MoRs must adapt to a broader array of national and international payment methods. They should also proactively prepare for the possibility of including other financial services while maintaining compliance with changing laws and regional mandates.
Cross-border eCommerce purchases today make up nearly one-third of online sales; in the coming years, international sales could get even more popular. According to Capital One Shopping, this segment of the market is “projected to grow at a 219% faster rate than global [eCommerce] as a whole through 2028.”
As cross-border transactions become more commonplace, so will merchant of record services. With shoppers from around the world, MoRs and MoR marketplaces will need to adapt by supporting a broad array of national and international payment methods. A single merchant, for instance, may need to support Apple Pay for US shoppers, PicPay for Brazilian buyers, and WeChat Pay for Chinese customers.
Similarly, financial services like lending and insurance products are also increasingly making their way into non-financial platforms. In addition to their compliance, tax, and fraud offerings, MoRs should be prepared to support a growing roster of embedded financial services.
Of course, tax laws, financial reporting guidelines, and data protection standards are in and of themselves constantly in flux. MoRs may need to adapt or even overhaul their operations to remain compliant and current with these ever-changing regulations.
Get Help Today
An MoR can assume some of the risks associated with return abuse and chargeback fraud. But that doesn’t mean you’re completely safe. Your MoR may levy restocking fees or chargeback fees, and others could even drop you altogether if you’re too high-risk.
Even if you work with an MoR, you could still need an end-to-end chargeback management solution like Chargebacks911®. We can help you detect, prevent, and represent friendly fraud chargebacks, lower your dispute ratio, and keep you in good standing with your merchant of record.
Interested in learning more? Contact us for a no-obligation ROI analysis today.
FAQs
What does being a merchant of record mean?
A merchant of record, or MoR, is the entity that assumes legal responsibility for payments on behalf of merchants. An MoR assumes transaction liability by handling tax payments, refunds, chargebacks, and PCI compliance.
Is Amazon a merchant of record?
Yes, Amazon serves as a merchant of record for purchases that occur directly on the Amazon platform. The company assumes responsibility for handling payments, remitting sales taxes, and staying in compliance with PCI standards.
Is PayPal a merchant of record?
No, PayPal is not a merchant of record. Instead, the platform is a payment service provider, or PSP. This means that PayPal only handles payment processing, but leaves tax payments, regulatory compliance, refunds, and chargebacks up to individual sellers to handle.
Who qualifies as a merchant?
Any individual or entity who provides, manufactures, or resells goods or services for sale on a for-profit basis will qualify as a merchant.
What is the difference between merchant of record and seller of record?
A merchant of record (MoR) handles the financial components of a transaction. MoRs assume liability for payments, taxes, PCI compliance, refunds, and chargebacks. Meanwhile, a seller of record (SoR) takes care of the operational aspects of the sale. They are responsible for shipping, handling, fulfillment, and customer service.
Is a merchant the buyer or seller?
In a transaction, the merchant is a seller, while the customer is a buyer.
What is an example of a seller of record?
An example of a seller of record is a business that sells products or services directly to buyers through the seller’s own website.
