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 ecommerce continuing to grow at a staggering pace, many businesses are turning to a specialized 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 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 authorized 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 ecommerce transactions and can fundamentally shape the process and experience of online payments.
What is a merchant of record responsible for?
In an ecommerce setting, a merchant of record is responsible for several key aspects of the financial transaction process. Here are the key responsibilities of an MoR:
The merchant of record is responsible for managing and processing customer payments. From the moment a customer enters their payment information to the moment the funds reach the business’s bank account, the MoR ensures payments are accurate and secure. It also handles refunds and chargebacks.
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 payments are processed smoothly.
In order to ensure 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.
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 ecommerce 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:
This includes accepting, processing, and securing all customer transactions as well as handling chargebacks and refunds.
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.
The MoR plays an integral role in detecting and preventing fraudulent transactions.
A payfac, on the other hand, is a service provider that simplifies the merchant account enrollment 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.
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 ecommerce space or accept digital payments. Here are a few examples of the types of businesses that could benefit from having an MoR:
Online businesses that conduct digital transactions require an MoR to handle all aspects of their payment processing, regulatory compliance, tax remittance, and fraud management.
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.
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.
Online platforms that connect buyers and sellers, such as ecommerce marketplaces or gig economy platforms, often use an MoR to manage complex payment dynamics.
Nonprofits 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 ecommerce 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 authorization and capture to settlement and refunds. This can help businesses deliver a smoother, more effortless customer experience.
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.
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.
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 behavior, and more—helping businesses make data-driven decisions.
Many MoRs offer easy integration with popular ecommerce 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?
Stripe is an MoR, but only for its Stripe Connect platform. With Stripe Connect, businesses can create platforms or marketplaces that process payments for third-party sellers. In this case, Stripe serves as the MoR, processing payments and assuming the associated responsibilities on behalf of the third-party sellers.
However, 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.