Merchant of record: What it is and why you (don’t) need it

When done right, selling internationally enables fashion and lifestyle brands to reach new customers in new markets and discover untapped revenue streams. However, it also poses a new range of challenges for modern ecommerce platforms – managing local tax requirements, applicable VAT, customs, and the risk of fraud.

Handling all these requirements creates additional work for the brand – multiplied by the number of new markets the brand is serving. However, the benefits of cross-border ecommerce clearly outweigh the effort. 

Many ecommerce businesses looking to launch in new markets seek to partner with a merchant of record (MoR) to ease the transition by outsourcing certain financial and legal responsibilities.

What is a merchant of record?

A merchant of record is a company that handles the entire payment process, including transaction processing, tax management, and compliance, on behalf of an online retailer. In essence, the MoR serves as an intermediary between the retailer and its customers, taking responsibility for the financial aspects of ecommerce transactions.

A merchant of record’s responsibilities include:

• Managing transactions, cancellations, disputes, and refunds.

• Supporting shoppers as the first point of contact.

• Assisting in financial dispute resolution.

• Monitoring of products and services to make sure they are not illegal, prohibited, or counterfeit.

The merchant of record allows you to focus on growing your business and developing great products instead of worrying about the tax and compliance issues involved with accepting payments overseas.

How does a merchant of record work?

A merchant of record doesn’t impact the buying process for your users. They still visit your website, purchase goods, and make payment as usual. The MoR is the entity that receives the initial payment, then deducts fees and taxes, after which it transfers the remaining amount to you.

The role of merchant of record in a transaction (source: Verifone)

The customer's bank statement will show the merchant of record's name, not your business' name. The MoR is also the party that has to be contacted if there is a dispute with payment.

There are a few merchant of record models, but the most common is the direct model. In this scenario, the ecommerce company works with a single MoR that processes and settles all payments on the company's behalf. This can be a great option for smaller businesses without the time or resources to manage payments themselves.

What difficulties will I face without a merchant of record?

Without a merchant of record, you will need to handle various aspects of payment processing, tax management, and regulatory compliance by yourself. This may involve dealing with the complexities of setting up and managing relationships with payment gateways, acquiring banks, and other financial institutions. Handling multiple currencies and payment methods can be challenging, potentially limiting your ability to expand into new markets.

Calculating, collecting, and remitting sales taxes, VAT, and other applicable taxes across different jurisdictions can be a complex and burdensome task. Ensuring compliance with local financial regulations, such as anti-money laundering (AML) and know your customer (KYC) requirements, can be demanding and require significant expertise.

Managing chargebacks, disputes, and transaction-related fraud prevention can be time-consuming and may necessitate specialized knowledge. Without an MoR, your business may be more exposed to financial risks and liabilities, as well as penalties for non-compliance with tax and regulatory requirements.

Allocating resources to manage these tasks in-house can divert attention away from your core competencies, potentially hindering your business's growth. Additionally, without an MoR, providing a seamless, secure, and consistent payment experience for customers could be more challenging, which may impact customer satisfaction and conversion rates.

Partnering with a merchant of record can relieve you of many of these burdens, allowing you to focus on growing your business and improving your core offerings.

What are the benefits of a merchant of record?

Retailers need a merchant of record for several reasons, and there are multiple benefits associated with using this service:

Simplified payment processing

MoRs facilitate seamless payment processing, allowing retailers to accept multiple payment methods, including credit cards, debit cards, and digital wallets. This simplification helps improve the customer experience and increase conversion rates.

Compliance and regulation management

MoRs ensure that retailers comply with relevant financial regulations and industry standards, such as PCI-DSS, GDPR, and KYC. By doing so, they help retailers mitigate the risks associated with non-compliance and avoid fines or penalties.

Fraud prevention and security

MoRs typically have robust fraud detection and prevention systems in place to help protect retailers and their customers from fraudulent activities. By monitoring transactions and employing advanced security measures, MoRs can reduce the risk of chargebacks and maintain a secure shopping environment.

Tax management

MoRs handle the complexities of sales tax, VAT, and other applicable taxes across multiple jurisdictions. They calculate, collect, and remit the required taxes on behalf of the retailer, ensuring compliance with local tax laws and reducing administrative burdens.

Global expansion

Partnering with an MoR makes it easier for retailers to expand their businesses into new markets. MoRs support multiple currencies, languages, and local payment methods, enabling retailers to cater to customers in different regions and adapt to local preferences.

Streamlined operations

By offloading the responsibilities related to payment processing, compliance, and tax management to an MoR, retailers can focus on their core business activities likeproduct development, marketing, and customer service.

Improved cash flow

MoRs can help improve cash flow by consolidating transactions and ensuring timely settlements. This enables retailers to better manage their finances and allocate resources more effectively.

Extended customer support

MoRs often provide dedicated customer support for payment-related issues, saving retailers time and effort in addressing customer inquiries and resolving disputes.

What features should an MoR platform provide?

An effective merchant of record platform should provide a range of features to simplify payment processing, tax management, and regulatory compliance for businesses. Essential features to look for in an MoR platform include:

Payment processing

Support for various payment methods (credit/debit cards, digital wallets, bank transfers) and multiple currencies to facilitate global transactions.

Tax management

Automated calculation, collection, and remittance of sales taxes, VAT, and other applicable taxes across different jurisdictions.

Compliance

Robust measures to ensure compliance with local financial regulations, including anti-money laundering (AML) and know your customer (KYC) requirements.

Fraud prevention

Advanced fraud detection and prevention tools to minimize chargebacks and protect against unauthorized transactions.

Chargeback management

Assistance with handling chargebacks, disputes, and related customer inquiries to minimize revenue loss and maintain a healthy merchant account.

Reporting and analytics

Comprehensive reporting and analytics tools to help merchants monitor transactions, revenue, taxes, and other key metrics.

Integration capabilities

Seamless integration with popular ecommerce platforms, content management systems, and other relevant third-party tools to streamline operations.

Global expansion support

Features and resources to support merchants in expanding their businesses into new markets, including currency conversion, localization, and region-specific payment methods.

Customer support

Responsive and knowledgeable customer support to assist with issues and inquiries related to payment processing, tax management, or compliance.

Security

Strong security measures, including encryption and tokenization, to protect sensitive customer data and payment information.

When evaluating a merchant of record platform, prioritize these features and consider the platform's pricing, ease of use, and overall reputation to find the best fit for your business needs.

What are the popular providers of merchant of record services?

Merchant of record services are provided in part or in full by many different vendors – from payment providers to dedicated end-to-end MoR service providers.

Stripe Tax is a service offered by Stripe that helps businesses automatically calculate and collect the appropriate sales tax, value-added tax (VAT), or goods and services tax (GST) on their products or services. Stripe Tax simplifies tax management for businesses by taking into account the customer's location, product type, and any applicable tax laws or exemptions. Stripe also offers MoR services through its Stripe Atlas program, which helps companies incorporate and set up payment infrastructure and establish a legal entity in a new market.

Adyen offers MoR services as part of their comprehensive payment processing platform. As a merchant of record, Adyen handles various aspects of payment processing, tax management, and regulatory compliance on behalf of the merchant. This allows businesses to focus on their core operations while Adyen takes care of complex aspects related to payments.

Global-E is a technology company that offers an end-to-end Direct-to-Consumer (D2C) fully integrated software platform for online ecommerce merchants, enabling them to sell their products across international geographies by overcoming transactional challenges associated with cross-border ecommerce such as local pricing, payment collection, taxes, import duties, and other complexities. 

BlueSnap is a global payment processing platform and merchant of record that provides businesses with a comprehensive solution for accepting payments, managing transactions, and expanding their ecommerce operations. BlueSnap supports a wide range of payment methods, currencies, and languages, making it easier for businesses to sell products and services to customers worldwide.

FastSpring is a full-service ecommerce platform and merchant of record that specializes in providing end-to-end solutions for businesses selling digital products, software, and SaaS applications. FastSpring helps businesses manage various aspects of the online sales process, such as payment processing, tax management, regulatory compliance, and global expansion.

Paddle is a comprehensive software and SaaS commerce platform that also acts as a merchant of record for businesses. Paddle simplifies the process of selling digital products and services by handling various aspects of the sales process, such as payment processing, tax management, regulatory compliance, and global expansion.

2Checkout (now rebranded as Verifone after its acquisition in 2020) is a global payment processing platform and merchant of record that provides businesses with a comprehensive solution for accepting online payments, managing transactions, and expanding their ecommerce operations. 

What are the popular pricing models used by merchant of record providers?

The pricing model for merchant of record services can vary depending on the provider, the services offered, and the scale of your business. Some common components of MoR pricing models include:

Transaction fees: A percentage of each transaction or a fixed fee per transaction, or a combination of both. This is the most common cost associated with MoR services and can vary depending on factors such as transaction volume, currency, and payment method.

• Monthly or annual fees: Some MoR providers may charge a monthly or annual subscription fee for access to their platform and services. This fee can be tiered based on the features or level of support provided.

• Setup fees: Some providers may charge a one-time setup or onboarding fee when you start using their services.

• Chargeback fees: MoR providers may charge a fee for handling chargebacks or disputes. This fee is usually applied per chargeback case.

• Currency conversion fees: When processing payments in multiple currencies, MoR providers may charge a fee for converting funds to your preferred currency.

• Additional service fees: Providers may charge extra fees for optional services, such as advanced fraud prevention, premium customer support, or access to additional features or tools.

• Cross-border fees: Some MoR providers may charge additional fees for processing international transactions, especially when dealing with certain countries or regions.

When evaluating MoR providers, it is crucial to understand their pricing models and any additional fees that may apply to your specific situation. Consider factors such as your transaction volume, target markets, and desired features to find an MoR provider with a pricing model that aligns with your business needs and budget.

For example, Global-E charges a percentage of the total transaction value for its services, which includes payment processing, tax and duty calculation, and currency conversion. The exact percentage may vary depending on the specific services being used and the location of the customer.

In addition to transaction fees, a merchant of record provider may also charge setup fees or integration fees for businesses that are just starting to use the platform. These fees may vary depending on the complexity of the integration and the level of support required. 

Some vendors (e.g. Global-E) offer online calculators that allow businesses to estimate fees and charges upfront, which can help them plan and budget for cross-border ecommerce.

Does my business need to work with a merchant of record?

Not every business needs to work with a merchant of record. The need for a MoR depends on the type of business, its payment processing requirements, and its goals.

For example, for a small startup with low transaction volumes, it may be more cost-effective to use a payment service provider or payment gateway instead of a merchant of record. On the other hand, a larger business with high transaction volumes and complex payment processing needs may benefit from the services of a merchant of record. Some companies switch to Stripe from a MoRin order to enjoy greater control over the checkout experience and pricing.

In general, a merchant of record is more commonly used by businesses that operate in highly regulated industries such as financial services, healthcare, or telecommunications, where there are strict requirements for processing payments and managing sensitive data. A merchant of record can help ensure compliance with industry regulations and provide expertise in managing payment processing and data security.

The decision to work with a merchant of record will depend on the specific needs and goals of the business. It is important to carefully evaluate the options and choose a payment processing solution that is reliable, secure, and cost-effective.

Alternatives to a merchant of record

There are several alternatives to a merchant of record, depending on a business’s specific goals and needs. Some of the most common alternatives include:

Payment providers which offer merchant of record services

Payment providers like Adyen and Stripe offer a range of services typically attributed to merchant of record service providers. 

Adyen

Adyen offers MoR services as part of their comprehensive payment processing platform. As an MoR, Adyen handles various aspects of payment processing, tax management, and regulatory compliance on behalf of the merchant.

Stripe

While Stripe is primarily a payment processing platform, they have expanded their offerings to include some MoR-like features through services like Stripe Atlas and Stripe Tax. However, they do not offer full MoR services in the traditional sense.

Adyen offers full Merchant of Record services, while Stripe has some MoR-like features. 

Ecommerce platforms that support cross-border sales

A growing number of ecommerce platforms incorporate a range of merchant-of-record features and processes. Let’s look at some examples:

Centra

Centra allows fashion brands to manage taxes natively and use transparent pricing to sell more. This includes validation and calculation of EU VAT and US sales tax, including origin state, destination state, and hybrid state tax.

With Centra, each local ecommerce store can use a checkout with local payment methods, delivery options and price lists based on the customer's location. Centra also allows retailers to create separate price lists per territory or currency, and route buyers to the best PSP depending on their location in order to optimize conversions.

Centra natively handles global taxes, including: 

• European VAT, including real-time validation of EU VAT numbers and using the results to decide what taxes to apply

• US sales tax, including origin state, destination state and hybrid state tax calculation and support for sub zip-code roof-top precision without plugins

• Canadian sales tax, including presenting the needed tax breakdowns on commercial documents issued

Security

Centra’s core data storage, where personal information is stored, can be decided by each brand, to comply with the most strict regulations applied to handling personal information. Centra uses edge data centers globally to speed up access, but only for non-sensitive information. All data is protected with multiple layers of security and the potential attack surface is constantly monitored. The system is backed up continuously and restore procedures are regularly tested. Centra is fully compliant with both GDPR and CCPA, and it is possible to extract customer data and to anonymize customers. 

Features for cross-border commerce

Centra offers a range of features facilitating international transactions – across both its DTC and wholesale modules.

How does Centra cover the functionalities and features of a merchant of record service?

The features and services commonly attributed to merchant of record providers are either natively offered by Centra or can be easily integrated into the platform.

Shopify Markets

With Shopify Markets, you can manage and expand your global sales by centralizing international selling tools and adding new functionalities. With Shopify Markets, you can create tailored online shopping experiences for different buyer segments by setting up markets that target specific countries or regions, or you can group countries and regions together to simplify your expansion efforts. What’s worth noting, Shopify and DHL each have a more than 5% stake in the merchant of record provider Global-E.

What’s the difference between a merchant of record and a payments solution?

Payment service providers (PSPs) are third-party companies that provide payment processing services, including payment gateway integration, fraud prevention, and payment data management. PSPs can handle online payments on behalf of the business and help ensure compliance with payment industry regulations.

The main difference between PSPs and MoRs is the level of responsibility they assume for payment processing. While PSPs provide the infrastructure and tools for payment processing, the business remains responsible for managing the payment process and assumes financial and legal responsibility for the transactions. MoRs take on full responsibility for payment processing and assume financial and legal liability for the transactions, which can provide businesses with greater peace of mind and simplify the payment process.

Ultimately, the choice between a PSP and a MoR will depend on the specific needs and goals of the business, as well as the level of responsibility and control the business wants to assume for payment processing.

What’s the difference between payment facilitators (PayFacs) and merchant of record?

Examples of PayFacs include Square and Stripe. These companies allow businesses to accept payments without the need for a merchant account. PayFacs aggregate multiple merchants under a single merchant account, which can simplify the payment process and reduce costs. 

Payment facilitators (PayFacs):

• Act as intermediaries between merchants and acquiring banks or payment processors.

• Provide a streamlined onboarding process for small and medium-sized businesses to accept payments.

• Aggregate multiple merchants under a single master merchant account, simplifying the process for smaller merchants.

• Handle payment processing, but may not take on the full range of responsibilities related to taxes, compliance, and risk management.

PayFacs focus on simplifying payment processing and onboarding for smaller businesses, while merchant of record service providers take on a wider range of responsibilities related to payment processing, taxes, and regulatory compliance. Depending on the specific needs of a business, partnering with a PayFac or MoR can help streamline operations and reduce the complexity of managing payments, taxes, and compliance.

Direct merchant accounts vs merchant of record

Some businesses choose to establish their own merchant accounts with payment processors or acquiring banks. This gives the business more control over the payment process, but also requires more resources and investment upfront.

Direct Merchant Accounts and merchant of record (MoR) are two different approaches to payment processing for businesses. Here are the key differences between them:

Direct Merchant Accounts:

• A unique merchant account is established for each business with an acquiring bank.

• Businesses are responsible for managing all aspects of payment processing, including compliance, risk management, and fraud prevention.

• Merchants have greater control over payment processing, customization, and the customer experience.

• Often require a more complex and lengthy setup process, as well as a more stringent underwriting process.

• May offer potentially lower payment processing fees, depending on the business's size and transaction volume.

• Better suited for larger businesses that have the resources to manage payment processing and related responsibilities in-house.

Merchant of record (MoR):

• A third-party service provider handles payment processing and financial transactions on behalf of the merchant.

• Manages relationships with payment providers and acquiring banks.

• Ensures compliance with local financial regulations, such as anti-money laundering (AML) and know your customer (KYC) requirements.

• Collects and remits sales taxes, VAT, and other applicable taxes.

• Handles chargebacks, disputes, and transaction-related fraud prevention.

• Provides a seamless and secure payment experience for customers.

• Simplifies payment processing for businesses, allowing them to focus on their core competencies.

• Better suited for smaller businesses or those looking to outsource payment processing and related responsibilities.

In summary, direct merchant accounts provide more control and customization but require businesses to manage all aspects of payment processing, while a merchant of record service provider simplifies payment processing, taxes, and compliance. The choice between the two models depends on the specific needs, resources, and capabilities of the business.

White-label payment solutions

Some payment processors offer white-label payment solutions that allow businesses to brand their own payment processing system. This can be a good option for businesses that want to maintain full control over the payment process while still using a third-party payment processor.

Payment gateways

Payment gateways provide a secure connection between the business's website and the payment processor. They can handle payment processing and data security while allowing the business to maintain control over the checkout process.

Overall, the choice of an alternative to a merchant of record will depend on the specific needs and goals of the business. It is important to carefully evaluate the options and choose a solution that is reliable, secure, and cost-effective.

Seller of record vs merchant of record

Due to their similarities, sellers of record and merchants of record are often confused. A seller of record is referred to and identified as the online payment system that sells a product to the end consumer. As a third party, a merchant of record does not assume the identity of the company selling the goods.

It is possible to trace the transaction back to the business that owns the store or website where the goods were sold, even if a merchant of record appears on the customer's bank statement. In contrast, a seller of record is an entity that’s already representing the business – it assumes the identity of the business for the sake of the payment process and takes responsibility for the brand reputation of the business they are partnered with.

Seller of record (SoR) and merchant of record are two terms often used in the context of ecommerce and online transactions. They have distinct roles and responsibilities:

Seller of record:

• Refers to the entity that sells goods or services to the end customer.

• Responsible for product quality, order fulfillment, and customer support.

• Handles product returns, refunds, and warranty claims.

• May need to manage inventory, warehousing, and shipping logistics.

• Ensures compliance with local laws and regulations related to the products or services sold.

Merchant of record:

• Refers to the entity that handles payment processing and financial transactions.

• Manages relationships with payment providers and acquiring banks.

• Responsible for collecting and remitting sales taxes, VAT, and other applicable taxes.

• Ensures compliance with local financial regulations, such as anti-money laundering (AML) and know-your-customer (KYC) requirements.

• Handles chargebacks, disputes, and transaction-related fraud prevention.

• Provides a seamless and secure payment experience for customers.

In some cases, a company may act as both the seller of record and merchant of record, handling all aspects of the sales process. In other cases, businesses may choose to partner with a third-party MoR service provider to simplify payment processing, tax management, and regulatory compliance.

Why is a merchant of record not enough to go global?

Simply partnering with a merchant of record will not solve all your cross-border problems. While an MoR will allow you to outsource certain legal liabilities and customer recourse, giving you more time to focus on your daily operations and growing your business, that’s certainly not enough. 

For a fashion ecommerce business, going global is a nuanced process that should cover many areas of your store, not just billing, taxes and legal compliance. Launching on new markets will boost your sales, but only if you go the extra mile and add a local flair to your online store. 

Localization is much more than translation, which simply changes the text from one language to another. Localization weaves cultural sensitivity and local preferences into the process. This empowers you to build engaging relationships through cultural connections with your international consumers.

Localized consumer journeys

Great consumer experience matters during every stage of the consumer journey, from awareness to post-purchase. Many fashion and lifestyle brands take brand awareness for granted and focus localization efforts on site content. 

An effective multilingual content strategy involves identifying keywords and phrases that will drive your sales and reputation in markets different from your own. Use SEO techniques in all language versions of your store. 

Search terms require localization. Translation isn’t enough, because people think and search differently. A key phrase in one language may have a different equivalent in another, or a popular product in one region might be unknown in another.

Also, as a fashion and lifestyle brand, align keywords to seasons and weather in various regions. Optimize content campaigns for phrases like sunglasses, swimsuits, and flip-flops in warmer countries like Spain. In colder countries like Norway or the UK, target terms like waterproof, raincoat, and fleece jackets.

Merchant of record summary

In summary, using a merchant of record service: 

• Can simplify various aspects of the ecommerce process for retailers

• Facilitates certain ecommerce processes for retailers

• Supports global expansion with minimal friction

• Allows brands to focus on business growth

• Eliminates challenges posed by shipping fees, local taxes, and customs fees

• Ensures legal compliance and security

• Provides seamless customer experience

• Is not the only way for brands to enter new markets. Some modern ecommerce platforms and payment solutions like Adyen incorporate MoR features that simplify international payment processing and facilitate compliance with local financial and legal regulations, and make it easier to prevent money laundering.

FAQ: merchant of record