In the past, payment processes were relatively straightforward — cash exchanges or checks in the mail sealed the deal. Today, the payments landscape has evolved, with an exciting array of electronic payment options and new regulations designed to keep everything secure and seamless. While these options can feel daunting, they also open the door to innovation and improved transaction management efficiency.
To navigate this dynamic environment, some businesses turn to a merchant of record model — a solution that simplifies payment processes while ensuring compliance and efficiency. In this article, we’ll dive into what a merchant of record is, how it works, and the valuable benefits it can bring to your business.
What is a merchant of record (MoR)?
Within a business transaction, the merchant of record is the party held legally responsible for overseeing the actual sale — along with any corresponding liabilities — of the relevant goods or services to the buyer. In more detail, they are the entity that:
- Receives payments
- Processes chargebacks and refunds
- Oversees currency exchanges for global transactions
- Collects relevant taxes (e.g., sales, VAT)
- Manages subscriptions
- Ensures data security for both customer and payment information
- Promotes compliance with industry financial standards (e.g., PCI, ISO 20022, SWIFT)
The organization that produces the good or service will often serve as its own MoR. However, depending on the size and nature of the business, it may outsource this responsibility to a third party — a merchant of record service provider.
How does a merchant of record service work?
Simply put, an MoR service provider serves as an intermediary in the sales process, behaving as a buyer to your business and a seller to the end customer. So, for every individual sale, two actual transactions will occur. Your business will transfer ownership of the relevant goods or services to the MoR provider, and they will subsequently transfer that ownership to the buyer. Conversely, the buyer will render their payment directly to the MoR service provider, who will subsequently provide payment to your business (after deducting any relevant taxes or fees).
As such, the seller will only have one customer: the merchant of record service provider. Meanwhile, the name of the MoR company will appear on any documentation — such as bank records and credit card statements—connected to the end customer. For any issues with the delivered product or service, the customer will need to resolve these with the service provider.
What businesses net the most benefit from MoR services?
While any organization can benefit from this strategy, certain classes tend to extract more value from this outsourced relationship. In particular, those that deal with:
- Heavy regulation: operators in the financial, healthcare, and telecommunications sectors often need to navigate a complex web of ever-changing regulations and standards when handling payments
- High or variable transaction volumes: managing compliance can prove costly, particularly if you don’t do enough business to leverage efficiencies of scale or if your transactions are predominantly clustered into a handful of weeks during the year
- Global payments: each region you do business in will have its own regulations and currencies that you will need to accommodate, and this burden will only grow the more markets you enter
How is a merchant of record different from a payment service provider?
A payment service provider (PSP) is a specialized, third-party business that facilitates the electronic exchange of funds between a buyer and seller. This provider exclusively manages the transaction process, typically providing the necessary payment gateway to receive and process multiple payment types — such as a credit card, digital wallet, wire transfer — in a centralized framework. In addition, the PSP is often responsible for maintaining compliance with industry and government data security standards as related to payment information.
As such, there is some overlap in the relevant responsibilities between these two third-party services, but an MoR provider delivers more holistic support for the sales process. So, while a PSP is involved with the specific transaction, they have no involvement in other areas that would concern a merchant of record, such as taxes or dispute management.
7 reasons why you should use an MoR
1. It simplifies your compliance management
As we’ve already discussed, one of the primary advantages of working with a merchant of record service provider is that you can offload the oversight responsibility tied to both governmental and industry guidelines. Instead, the service provider will invest the necessary resources to monitor these rule sets, noting when they are amended and modifying processes to align with these ever-shifting expectations.
2. It can harden your security and fraud prevention efforts
Similarly, criminals and scammers constantly search for and employ new attack methods. Staying ahead of these schemes demands constant vigilance and an eye for detail that most accounting teams don’t have the resources to dedicate. However, a specialized third-party — particularly one that bears at least some legal responsibility—will likely have access to better detection tools and be much more efficient and effective at frustrating these ne’er-do-wells.
3. It lets you share your risk
Given the legal structure of MoR agreements, you offload not only management responsibilities but also the corresponding liability and risk. This diffused accountability means that if something payment-related goes wrong, your business is unlikely to spend time or money fixing it.
4. It makes it easier to support global business
Once you start accepting orders from outside your native country, you’ll need to account for many new legal and logistics challenges. At the same time, you’ll also need to convert payments to and from foreign currencies, which, depending on the favorability of the current exchange rate, could quickly begin eating into your profits. MoR providers, however, will have strategies and relationships in place to navigate these international purchases cost-effectively.
5. It diversifies your payment options
The MoR service provider will assume responsibility for the entire payment process, from authorizations to validations to settlements. And since they are now managing these transaction channels, you can support a broader range of payment methods without incurring additional labor costs. The service provider will now be the one negotiating for lower credit card processing fees.
6. It expands your knowledge
Commonly, MoR service providers will — alongside their outsourced functions — offer you access to powerful reporting and analytics tools that can help you draw new insights from your payment data. Rather than merely tracking who has and hasn’t yet closed out their invoices, you can review revenue trends, cash flow projections, tax liabilities, and other key metrics to facilitate data-driven decisions. Further, these detailed records will place you in a much more advantageous position for review or compliance auditing efforts.
7. It lets you focus
Building out an effective payment program — particularly if your business handles any complex transactions or needs to accommodate extensive regulations — is both a time-consuming and costly endeavor. You need to secure the knowledge of experts. You need to purchase the relevant technology. You need to identify, introduce, and iterate solid, efficient business practices. However, when you outsource these efforts, you can instead dedicate your staff and attention to your business’s core competencies.
How Invoiced’s software can help simplify payments and compliance
Whether you’re serving as your own merchant of record, you’re an MoR service provider, or anything in between, our Accounts Receivable Automation software will make the payment processes you’re responsible for a breeze. Our AI-powered Cash Application feature can accelerate your payment matching efforts, while our automated invoicing workflows further help to shorten the procure-to-pay timeline.
If you’re dealing with overly complex compliance challenges, our Advanced Reporting add-on will let you precisely track and document your performance based on hundreds of objects and field types. If you’re growing globally, our solution leverages Flywire’s broad integration capabilities and global payment support, making receiving or sending payments in over 140 currencies easy.
Whatever your payment challenges, our solution can help. Schedule a demo today.
