What is a Merchant of Record (MoR)?
A merchant of record is the entity authorized and held liable by the financial institution to process end customer transactions. Traditionally, this referred to a business selling directly to its customers.
Today, however, it’s used to describe a reseller relationship, whereby a business sells its products or services through a merchant of record service provider. Here, as the reseller, the MoR takes on the responsibility for:
Taking payments (via credit card, wire transfer, or other local payment methods).
Honoring refunds and chargebacks.
Payment card industry (PCI) compliance.
This is different from payment service providers (PSPs) like Stripe or PayPal. Here, the PSP is acting as an ‘agent’, whilst financial compliance remains with the software company.
How does the merchant of record model work?
When a business chooses to sell through a merchant of record, from the customer perspective, the purchase is no different, as the sale still goes through that business’ website.
However, with the MoR acting as a reseller, there are actually two transactions taking place. One between the customer and the MoR and the other between the MoR and the software company.
When the transaction is complete, the MoR deducts the necessary taxes and fees – leaving the seller with a net amount and no financial admin.
What does the MoR model mean for software businesses?
Unlike other billing and payment solutions, the merchant of record model enables software businesses to manage checkout payments, subscriptions, and financial compliance from one platform – and takes care of a lot of the hard work for you.
For example, the MoR will already have its own relationships with payment service providers and will process transactions for you and thousands of other software businesses. This means you benefit from a trusted payments infrastructure, fewer false fraud signals, and higher payment acceptance.
Responsible for the payments, a merchant of record will also honor the customer’s right to a refund (in accordance with your refund policy) and help maintain a low chargeback rate.
Some MoRs also offer support services that manage any customer queries regarding orders and payment.
A Merchant of Record will also ensure that the user card data it possesses is Payment Card Industry (PCI) compliant and that sales are tax compliant in each territory that the software business sells into.
In practice, this means that businesses selling through a MoR have full visibility over finance processes and reporting, without any of the financial admin or tax liability that comes with it.
Merchant of record vs Payment service provider (PSP)
The main difference between a MoR and a PSP is that a merchant of record handles your entire billing process, where a payment service provider will only handle the transaction process (getting the funds from your customer’s bank to your business’ account).
With a PSP, businesses are left to manage the rest of the billing and payments infrastructure. This requires internal finance and development resources as well as a number of additional (and often costly) tools to build a sufficient billing stack, including:
Subscription management software.
Revenue recovery tools.
Multiple payment providers to enable local payment methods and/or currencies.
With a merchant of record the entire billing and payments process is managed from one platform and the MoR, as a reseller, is responsible for payment transactions and financial compliance. This has many advantages for the businesses selling through it:
A centralized platform: There is one cost for a solution that solves multiple problems. You’ll know how much you’re paying every month, without dealing with multiple providers. You can also track your revenue more easily because the correct taxes and fees are deducted before you receive the payout.
Transparency: With all of your data and reporting in one place, you can readily identify trends in your sales and subscriptions and make data-driven decisions more quickly.
Flexibility: With the billing and payments process in one platform, you can easily manage subscriptions or run tests, without having to update multiple systems.
Free of tax liability: Any obligations to register, file, and remit sales tax sit with the merchant of record, leaving you free of any tax liability. This is a big plus for companies looking to expand into new markets, where sales tax processes quickly become extremely complex.
How Paddle can help
Paddle is the all in one SaaS commerce platform – acting as a merchant of record for thousands of software businesses around the world.
We handle all payments, taxes, currencies, financial compliance, and billing support queries, so you focus on growing your business.