What is a Merchant of Record (MoR)?
In today’s global e-commerce landscape, businesses face a complex web of financial regulations, payment processing requirements, and tax obligations.
One way to address these challenges is to outsource these responsibilities to a Merchant of Record (MoR). But what exactly is an MoR, and how does it work?
A Merchant of Record (MoR) is a legal entity responsible for processing customer payments, ensuring regulatory compliance, and managing financial liabilities such as refunds, chargebacks, and tax obligations.
In a Merchant of Record (MoR) arrangement, the MoR acts as the 'agent' to the seller (principal), meaning the MoR handles all payment processing and customer interactions on behalf of the seller, taking on the legal responsibility for transactions while the seller retains ownership of the goods or services being sold.
It’s worth noting that companies can choose to act as their own MoR. However, many businesses find it easier to work with a MoR provider, which helps free up time and resources that would be spent on operational tasks, leaving them with more time to focus on growing their business.
Many online marketplaces, such as Amazon, also operate as a MoR, providing the seller with the platform and means to reach a wider audience while assuming liability for all transaction-based activity.
How does a Merchant of Record work?
A Merchant of Record acts as a middleman between the buyer (customer) and the seller (merchant). Effectively, this makes the MoR a reseller of goods and services.
When a customer makes a purchase, the MoR’s name appears on their bank statement instead of the merchant's. In the case of payment disputes with the customer, as the liable party, the MoR is responsible for resolving the dispute.
Once the payment has been collected from the buyer by the MoR, it will deduct fees and tax before settling the payment with the seller.
The Merchant of Record streamlines payment processing and compliance through a structured process that includes:
- 1. Processing payments: The MoR collects customer funds through various payment methods, including credit and debit cards, Direct Debit, Alternative Payment Methods, and BNPL providers. Transactions are processed through the MoR’s merchant account with an acquiring bank. The MoR may also assume responsibility for currency conversion, as well as negotiating payment processing fees.
- 2. Ensuring compliance: The MoR follows the requirements of PSD2’s Strong Customer Authentication (SCA) by implementing two-factor authentication for secure transactions. It also manages tax collection and remittance under the One-Stop Shop (OSS) system for cross-border EU sales and adheres to GDPR regulations for secure data processing.
- 3. Managing financial risks: The MoR assumes liability for handling refunds and chargebacks under UK and EU consumer protection laws. This includes responding to disputes, preventing fraudulent transactions, and ensuring compliance with PCI DSS requirements to maintain security and reduce financial risks for businesses. Additionally, the MoR often works with payment service providers (PSPs) to help minimise the risk of fraud.
- 4. Settling payments to suppliers: After receiving funds from customers, the MoR pays third-party sellers or service providers. Payments are processed and settled after the MoR has deducted applicable commissions, taxes, and other fees.
- 5. Customer service support: MoRs may also handle customer queries and complaints relating to their purchases.
Key compliance requirements for MoRs in the UK and EU
Adhering to regulations can quickly become a headache for merchants as they expand into new territories. By working with a Merchant of Record, merchants can ensure compliance with various legal and financial regulations, including:
- Payment Card Industry Data Security Standard (PCI DSS): Ensures the secure handling of cardholder data through encryption, tokenization, and other security measures to protect against fraud and unauthorised transactions.
- EU Payment Services Directive (PSD2): Requires Strong Customer Authentication (SCA) to enhance payment security. This typically involves two-factor authentication to verify the identity of customers during transactions.
- General Data Protection Regulation (GDPR): Mandates the secure processing and storage of customer data, ensuring businesses handle personal information with a high level of security and transparency.
- Sales tax regulations: Manages cross-border tax collection, such as the One-Stop Shop (OSS) system for EU VAT reporting. The MoR is responsible for correctly applying and remitting applicable sales taxes in different jurisdictions.
What are the advantages and disadvantages of using a Merchant of Record?
Before deciding whether to work with an MoR, businesses should consider the pros and cons.
Advantages:
- Regulatory compliance: The MoR handles all tax, PSD2, GDPR, and PCI DSS requirements, ensuring businesses remain compliant with UK, EU, and global financial regulations.
- Simplified payment processing: Businesses do not need their own merchant accounts or payment processing infrastructure, as the MoR takes care of these aspects.
- Reduced financial liability: The MoR assumes the risk associated with chargebacks, fraud, and financial disputes, protecting businesses from unexpected financial losses.
Disadvantages:
- Higher costs: MoRs incur costs related to tax obligations, chargeback management, and regulatory compliance, which can result in higher service fees for businesses.
- Limited seller control: Businesses must adhere to the MoR’s pricing structures and refund policies, as well as using the payment methods it offers, potentially limiting their flexibility.
- Delayed payments: Sellers and service providers receive funds only after the MoR deducts relevant fees and completes payment processing, which may result in cash flow delays.
When should a business use a Merchant of Record?
A Merchant of Record model can serve businesses operating across a wide range of industries, including retail, digital goods and services, and travel.
Regulated businesses, such as those operating in financial services or gambling, are unlikely to be able to partner with a MoR due to their complex legal and regulatory requirements.
- Expanding internationally: Businesses selling across multiple markets can alleviate some of the pain points that come with currency conversion, and offering multiple local payment methods. An MoR streamlines these processes, reducing the complexity of managing international transactions.
- Avoiding chargeback and fraud risks: E-commerce businesses that experience frequent chargebacks or fraud-related issues can mitigate financial risks by shifting responsibility to an MoR, which handles dispute resolution and fraud prevention measures.
- Selling digital products and services: Companies offering software-as-a-service (SaaS), digital subscriptions, e-books, online courses, and other digital services can benefit from an MoR’s ability to manage global payments and tax compliance efficiently.
- Reducing administrative burdens: Companies that lack the resources or expertise to handle global payment processing, tax compliance, and financial risk management can offload these responsibilities to an MoR, allowing them to focus on core business operations.
Is the Merchant of Record model right for my business?
The Merchant of Record model is particularly useful for e-commerce merchants selling cross-border, online marketplaces, and platforms selling digital goods and services. Businesses considering working with a MoR should carefully evaluate the benefits of compliance, liability protection, and operational efficiency against the costs and potential limitations associated with the model.
