What Is a Merchant of Record (MoR)? Responsibilities, Benefits, and Considerations

Today’s eCommerce businesses face complex challenges, including ever-evolving tax regulations and stringent compliance standards. Not to mention that as digital marketplaces expand, so does the complexity of managing financial transactions across borders. Many businesses turn to third-party models to manage these issues, including a Merchant of Record (MoR). In this post, we’ll explain what a Merchant of Record is, how it compares to other payment models, and what you need to know when evaluating or becoming a MoR.

• A Merchant of Record helps reduce a business’s financial and legal responsibility for transactions. It manages payment processing, compliance, and taxation.
• An MoR can help reduce your business’s liability, simplify regulatory compliance, and support expansion into new markets.
• When becoming an MoR, you may encounter several legal, regulatory, and financial hurdles, which is why working with a PCI-compliant partner can be beneficial.

What Is a Merchant of Record?

The Merchant of Record is the legal entity responsible for processing payments and taking on the financial and legal risks tied to sales — like collecting taxes, following regulations, and dealing with chargebacks. However, the underlying business may retain risk in certain jurisdictions, such as data protection or misrepresented products. It’s not a blanket transfer of all liabilities.

Many well-known companies act as the Merchant of Record for transactions on their platforms. Amazon, Airbnb, and Uber each operate as the MoR for those selling goods or services on their platforms. These platforms handle the payment processing, tax collection, and compliance aspects for third-party sellers, home renters, and drivers on their respective platforms.

What Are the Benefits of Using a Merchant of Record?

Here’s why businesses choose to work with a Merchant of Record for payment processing:

• Simplified Tax and Regulatory Compliance: An MoR simplifies calculating, collecting, and remitting sales taxes, VAT, and other applicable taxes. Compliance can be incredibly complex for small business owners, but an MoR navigates diverse regulatory requirements.
• Reduced Legal and Financial Liability: Merchant of Record services include the responsibilities for payment processing, fraud, and compliance — reducing your financial and legal obligations.
• Faster Market Expansion: A globally-capable MoR can facilitate expansion into international markets. However, expansion into some markets may still require local entity registration or local acquiring banks.
• Streamlined Payment Processing: Like other payment providers, a Merchant of Record provides access to online payment processing, fraud prevention, and account reconciliation.
• Enhanced Security and Fraud Management: A reputable MoR will offer robust security measures and fraud detection systems. These may include encryption, tokenization, and two-factor authentication.
• Chargeback Handling: Chargebacks and payment disputes can be a major hassle for businesses, but MoRs do the heavy lifting in these processes.

Key Responsibilities of a Merchant of Record

A Merchant of Record handles the entire payment lifecycle, from capturing and securing the payment information to transaction settlement. Beyond processing payments, MoRs take on these key responsibilities:

• Tax Handling: MoRs calculate, collect, and remit all applicable taxes. This includes sales tax, VAT, and other taxes based on jurisdiction.
• Regulatory Compliance: MoRs adhere to various financial regulations, including data privacy laws, Payment Card Industry (PCI) standards, and consumer protection laws to help keep your business compliant.
• Chargeback Management: A Merchant of Record services, manages, and resolves chargeback disputes initiated by customers by investigating claims. MoRs also process refunds when necessary.
• Fraud Prevention: MoRs should adhere to regulations and implement best practices to achieve PCI compliance. They may also provide robust fraud prevention and security tools. 

MoR vs. Other Payment Models

A Merchant of Record may have some things in common with other payment models, but there are also some key differences. Again, an MoR is the legal entity empowered to sell goods or services and assume transaction liability for an underlying business. This includes processing payments, ensuring regulatory compliance, and managing chargebacks. Other payment models differ in a few important ways:

• Payment Service Providers (PSPs) are third parties that provide the technical infrastructure for businesses to accept electronic payments, but they do not assume the legal and financial responsibilities of the transaction. The business that uses a PSP typically remains the MoR.
• Payment Facilitators (PayFacs) allow a business to accept payments without a merchant account. Instead, PayFacs have sub-merchants under their master merchant account to facilitate payments from customers to businesses. PayFacs may sometimes act as an MoR, but the business utilizing the PayFac usually retains some of the MoR responsibilities.
• Sellers of Record (SoRs) are legally recognized entities that make a sale and transfer ownership of goods or services to a customer. The SoR and MoR are often the same entity in many transactions, but it gets murkier in complex models like marketplaces or dropshipping depending on how the platform operates. 

Should You Become a Merchant of Record?

Marketplaces, platforms, and other organizations considering becoming an MoR need to bear several considerations in mind:

• Regulatory Landscape and Compliance Burden: You must determine if you have the ability to navigate complex payment regulations, data privacy laws, and consumer protection laws.
• Risk Management and Underwriting Expertise: You’ll assume more risk regarding fraud, chargebacks, and legal liability. You should have a robust underwriting and risk department to proactively assess the risk of sellers or service providers on your platform.
• Tax Management Capabilities: Any MoR payments service must be able to accurately calculate, collect, and remit taxes across its jurisdictions.
• Customer Support for Payment Issues: As an MoR, your platform will become the point of contact for payment-related inquiries and disputes. This means you will need to establish adequate customer support processes and train staff to handle these issues efficiently.
• Complexity of Seller Onboarding: Becoming a MoR allows you to simplify payment processing for individual sellers on your platform. However, you’ll need a robust team and streamlined systems to support sellers who utilize your services.

If you want to become a Merchant of Record, you’ll need to follow these steps:

1. Establish a legal entity in all relevant jurisdictions.
2. Obtain necessary merchant accounts with acquiring banks or payment processors.
3. Integrate with payment gateways to facilitate the transmission of payment information while ensuring PCI compliance.
4. Build tax calculation and remittance systems in all relevant jurisdictions.
5. Develop customer service processes for payment issues with clear procedures to handle payment-related inquiries, refunds, and chargebacks.
6. Establish Foreign Exchange (FX) management, if applicable.
7. Continuously monitor changes in payment regulations, tax laws, and data privacy requirements. Update internal systems and processes accordingly.

If you’re interested in offering Merchant of Record payment services, working with a merchant services provider can streamline this transition and help ensure you maintain compliance. 

Empower Your Business with the Right Payment Model

Becoming a Merchant of Record is a significant undertaking that requires carefully considering your platform’s resources, expertise, and long-term strategic goals. It can give you greater control over your marketplace, platform, or service and can provide benefits to both your business and your end customers. However, it can also carry risks. Working with an experienced, PCI-compliant partner like PaymentCloud can alleviate these concerns and support you transition with SaaS payment processing.

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