For businesses that operate in the digital commerce space, handling transactions is not always as straightforward as it might seem. A complex web of financial processes, legal obligations and regulatory requirements underpin every purchase, and how a business deals with these elements directly affects customer experience, brand credibility and its bottom line.

With e-commerce continuing to grow at a staggering pace, many businesses are turning to a specialised entity known as a merchant of record (MoR) to manage the multifaceted task of processing digital payments.

Below, we'll explore the MoR concept, the roles and responsibilities of MoRs, and the wide-ranging benefits that they can bring to businesses.

What's in this article?

• What is a merchant of record?
  
• What is a merchant of record responsible for?
  
• Merchant of record vs. payment facilitator (payfac)
  
• Which types of businesses need a merchant of record?
  
• Benefits of having a merchant of record
  
• Is Stripe a merchant of record?
  

What is a merchant of record?

The term "merchant of record" refers to the entity that is legally authorised and responsible for processing customer payments– including credit and debit card transactions and digital wallet transactions – for goods or services on behalf of a business. The MoR is liable for the financial, legal and compliance aspects of transactions, and its work includes dealing with banks, card networks and regulatory bodies. The MoR is an important actor in e-commerce transactions and can fundamentally shape the process and experience of online payments.

What is a merchant of record responsible for?

In an e-commerce setting, a merchant of record is responsible for several key aspects of the financial transaction process. Here are the key responsibilities of an MoR:

• Transaction processing
  The merchant of record is responsible for managing and processing customer payments. From the moment that a customer enters their payment information through to the moment that the funds reach the business's bank account, the MoR ensures that payments are accurate and secure. It also handles refunds and chargebacks.

• Payments infrastructure
  The merchant of record oversees the setup and management of the payment gateway and merchant accounts that are needed to process transactions. It interfaces with payment service providers and banks to ensure that payments are processed smoothly.

• Regulatory compliance
  In order to ensure that transactions remain secure and legal, the merchant of record must comply with a multitude of financial regulations, such as the Payment Card Industry Data Security Standards (PCI DSS). It is also responsible for adhering to Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations.

• Sales tax management
  The merchant of record is responsible for the calculation, collection and remittance of sales tax, value-added tax (VAT) or goods and services tax (GST). It must ensure that it collects and remits these taxes to the correct tax authority, based on the location of the business and the customer.

• Fraud management
  The merchant of record plays an important role in detecting and preventing fraudulent transactions. It must have systems in place for identifying potential fraudulent activity, which protects the business and its customers.

• Customer data management
  The merchant of record often manages customer data related to transactions, which can include personal information and purchase histories. In this role, the MoR must handle data in compliance with privacy laws and regulations.

• Reporting and reconciliation
  Often, the merchant of record must handle reporting and reconciliation tasks, which includes generating reports detailing sales, refunds and chargebacks and making sure to record and reconcile all transactions accurately in financial records.

In short, the merchant of record allows businesses to devote minimal internal resources toward financial and payments management, giving businesses more bandwidth to focus on their core products or services. At the same time, the MoR ensures that financial transactions are secure and efficient and remain in compliance with all necessary regulations and standards.

Merchant of record vs. payment facilitator (payfac)

MoRs and payfacs both play significant roles in the e-commerce payment process, but their responsibilities and the scope of their services differ. Here's how:

Merchant of record

The MoR is responsible for processing customer payments on behalf of the business, taking on numerous legal and financial liabilities related to these transactions. The key responsibilities of the MoR include:

• Transaction processing
  This includes accepting, processing and securing all customer transactions as well as handling chargebacks and refunds.

• Payments infrastructure
  The MoR ensures seamless transaction processing through payment service provider (PSP) integrations, merchant account management and payment gateway setup and maintenance.

• Regulatory compliance
  The MoR complies with relevant data security standards, such as PCI DSS, AML and KYC regulations.

• Tax collection and remittance
  The MoR is responsible for collecting the appropriate amount of sales tax, VAT or GST at the point of sale and later remitting it to the relevant tax authority.

• Fraud management
  The MoR plays an integral role in detecting and preventing fraudulent transactions.

Payment facilitator

A payfac, on the other hand, is a service provider that simplifies the merchant account enrolment process by aggregating multiple merchant accounts under one master account. Payfacs enable businesses to accept digital payments without needing to set up individual merchant accounts, a particularly attractive option for small businesses and microbusinesses that may not have the resources or transaction volume to justify opening an individual merchant account.

While a payfac takes on some MoR roles, it does not assume the same level of responsibility. For instance, while a payfac will handle transaction processing and certain aspects of fraud prevention, it does not assume responsibility for tax collection and remittance, which often remains the responsibility of the individual business. Similarly, the payfac may help ensure PCI compliance at a technical level, but the ultimate responsibility for data security may still lie with the business.

Comparison

An MoR takes on more comprehensive responsibilities and liabilities in the transaction process compared to a payfac. As an MoR, a business assumes full responsibility for the entire payment process and compliance, while a payfac simplifies and facilitates the payment process for individual businesses but doesn't take on the broader range of responsibilities associated with MoRs.

A business's decision to partner with a payfac or become (or partner with) an MoR depends on various factors, including the business's size, transaction volume, resources and strategic objectives. Larger businesses, or those operating in multiple tax jurisdictions, might benefit from an MoR, which can handle complex tax issues, while smaller businesses might prefer a payfac's ease and cost-effectiveness.

Which types of businesses need a merchant of record?

An MoR is beneficial for a wide range of businesses, particularly those that operate in the e-commerce space or accept digital payments. Here are a few examples of the types of businesses that could benefit from having an MoR:

• E-commerce businesses
  Online businesses that conduct digital transactions require an MoR to handle all aspects of their payment processing, regulatory compliance, tax remittance and fraud management.

• Subscription-based services
  Businesses that offer services based on subscription models (like streaming platforms, SaaS providers and digital newspapers) benefit from using an MoR to manage recurring payments and ensure exceptional, consistent transaction experiences for customers.

• International businesses
  Businesses that sell products or services across borders could use an MoR to navigate the complexities of international payment processing, tax laws and regulatory environments.

• Startups and small and medium-sized businesses
  Startups and small and medium-sized businesses might lack the internal resources or expertise to handle the complexities of payment processing and regulatory compliance. An MoR can streamline these processes, allowing such businesses to focus on their core offerings.

• Marketplace platforms
  Online platforms that connect buyers and sellers, such as e-commerce marketplaces or gig economy platforms, often use an MoR to manage complex payment dynamics.

• Non-profit organisations
  Non-profits that accept donations online can benefit from an MoR to handle their payment processing and ensure compliance with financial regulations.

Benefits of having a merchant of record

Having an MoR comes with numerous benefits, particularly for businesses operating in the digital or e-commerce space. Here's a detailed overview of the benefits that come with having an MoR:

• Streamlined payment processing
  An MoR provides a comprehensive solution to handle all aspects of payment processing, from transaction authorisation and capture to settlement and refunds. This can help businesses deliver a smoother, more effortless customer experience.

• Compliance management
  An MoR shoulders the responsibility for complying with a wide array of regulations, which can help businesses reduce their risk exposure and avoid potential penalties.

• Fraud prevention and security
  Usually, an MoR has robust systems in place to detect and prevent fraudulent transactions, which protects both the business and its customers. An MoR also ensures that sensitive payment information is handled securely, in compliance with data protection regulations.

• Tax management
  An MoR is responsible for accurately calculating, collecting and remitting sales taxes, VAT or GST on behalf of the business. This is particularly beneficial for businesses that operate in multiple jurisdictions – or countries – where tax laws can vary significantly.

• Reduced operational burden
  By outsourcing the complexities of payment processing and compliance to an MoR, businesses can focus on their core operations. This can help improve operational efficiency and reduce administrative overhead.

• Global scalability
  For businesses looking to expand internationally, an MoR can simplify the process of accepting payments in different currencies and complying with local regulations. This can make it easier for businesses to scale operations across borders.

• Improved cash flow management
  Typically, an MoR ensures that transactions are settled in a timely manner, which can help improve cash flow management for businesses.

• Customer dispute and chargeback handling
  An MoR usually handles any customer disputes or chargebacks on behalf of the business, including liaising with banks or credit card companies as necessary. This can help businesses resolve issues more effectively and maintain good relationships with customers.

• Reporting and analytics
  Many MoRs provide businesses with detailed reporting and analytics related to their transactions, and this information can help unearth valuable insights into sales trends, customer behaviour and more – helping businesses make data-driven decisions.

• Easy integration
  Many MoRs offer easy integration with popular e-commerce platforms, shopping carts and other business systems, making it easier for businesses to get up and running.

An MoR can help businesses navigate the complexities of online payment processing and ensure a smooth, secure and compliant transaction experience for the business and its customers.

Is Stripe a merchant of record?

When businesses use Stripe to process payments for regular direct transactions, the business itself remains the MoR while Stripe acts as a payment processor or payment gateway. This means that the business is responsible for transactional compliance, tax obligations, and managing refunds and chargebacks—while Stripe handles the technical aspects of transaction processing.

With Stripe Connect, businesses can become platforms or marketplaces that process payments for third-party businesses or sellers. Connect gives these platforms options: if they integrate with direct charges, individual businesses on their platform or marketplace will be the merchant of record. If they integrate with destination charges or separate charges and transfers, their platform or marketplace will be the merchant of record. You can learn more about different considerations and examples by reading our docs.

However, Stripe is an MoR for crypto onramp. Many Web3-native businesses are not set up to sell crypto directly yet operate on-chain—requiring their customers to transact with cryptocurrencies. With crypto onramp, Stripe assumes the responsibility of being a merchant of record to make it easier for customers to make crypto purchases directly in a checkout flow. You can learn more about crypto onramp in our docs.