Streamlining Payments and Compliance: The Power of the Merchant of Record

In today’s fast-paced, globalised e-commerce landscape, businesses face increasing pressure to expand into new markets while navigating complex regulatory, compliance, and operational challenges. The Merchant of Record (MoR) model, which has been around since the late 1990s and early 2000s, emerged as a solution to meet the growing need for handling global payments, tax compliance, and risk management. As digital payments and global trade expanded, so did the demand for a third-party service to take on these responsibilities, allowing businesses to focus on growth and customer experience. Today, the MoR model is essential for companies looking to streamline operations and simplify compliance, especially as they scale across international markets.

This article stems from a recent discussion I had with a vendor at the North America PCI Community meeting. We explored potential strategies for descoping an organisation’s PCI compliance obligations, particularly when the payment process is outsourced to a Merchant of Record Service Provider. The conversation sparked a deeper interest in how businesses can leverage MoRs to streamline their operations and reduce PCI scope. Shortly after, I encountered a related query in my own business, where we are contracting with an organisation for a specific sales channel. They requested our Attestation of Compliance (AOC), and it prompted me to ask a critical question: who is the actual merchant of record?

In our case, even though the sale originates from us, the contracting organisation was handling the payment process through their own MoR. This led me to question the validity of requesting an AOC from us when we’re not involved in the payment process. If the payment is handled entirely by the MoR, it means we’re not responsible for processing any cardholder data. This highlights a key consideration: when a third-party MoR is responsible for payments, the merchant may not need to be PCI compliant for that transaction flow, which could significantly reduce the compliance burden.

What is a Merchant of Record (MoR)?

A Merchant of Record is a third-party entity that assumes responsibility for selling goods or services to an end customer on behalf of a merchant. This means handling all the legal, financial, and administrative obligations that come with processing transactions—such as compliance with regulations, taxes, currency exchanges, payment processing, refunds, and chargebacks.

In simpler terms, when a customer purchases a product or service, they are technically purchasing it from the MoR, even though the transaction is conducted on the merchant’s website. The MoR then takes care of the administrative aspects, such as collecting payments, deducting fees and taxes, and remitting the balance to the merchant.

How Does the MoR Model Work?

The MoR serves as an intermediary between the merchant and the customer. The process looks something like this:

1. Customer purchases from the merchant’s website.
2. The MoR receives the payment on behalf of the merchant, deducts necessary taxes and fees, and remits the remaining amount to the merchant.
3. The MoR’s name appears on the customer’s bank statement, which can help resolve any payment disputes or chargebacks.

MoRs typically handle everything from payment processing and tax filing to compliance with local regulations. By doing so, they reduce the operational burden for businesses, enabling them to concentrate on their core operations like product development and marketing.

Key Responsibilities of a Merchant of Record

• Payment Processing: MoRs manage the payment gateway, ensuring secure transactions. They work with Payment Service Providers (PSPs) to integrate payment methods and manage payment processing fees.
• Compliance: MoRs ensure that all transactions comply with local laws and regulations, such as the General Data Protection Regulation (GDPR) in the EU and other global standards.
• Fraud and Risk Management: With online fraud on the rise, MoRs work closely with PSPs to implement robust fraud detection and prevention measures, reducing the risk of chargebacks and unauthorised transactions.
• Tax and Currency Management: MoRs calculate, file, and remit sales tax, VAT, and other regional taxes. They also manage currency conversion and fluctuations for international transactions.
• Customer Service and Disputes: MoRs handle customer disputes, refunds, and chargebacks, ensuring smooth transaction resolution on behalf of the merchant.

Key Benefits of Using a Merchant of Record

1. Cost-Effectiveness: Instead of hiring in-house experts for taxes, legal compliance, and payment processing, businesses can outsource these tasks to an MoR for a fee, making it a cost-effective solution. MoRs also benefit from economies of scale, which further reduces costs.
2. Fraud and Risk Mitigation: MoRs take on the liability for chargebacks, fraud, and disputes, shielding merchants from the financial risks associated with online transactions. This includes employing cutting-edge fraud detection systems and collaborating with payment providers to minimise risks.
3. Focus on Core Business: By outsourcing payment, compliance, and administrative tasks to an MoR, businesses can focus on what they do best—building innovative products, growing their customer base, and delivering superior customer experiences.
4. Access to Local Payment Methods: MoRs offer a seamless way to integrate local payment methods, currencies, and tax handling, ensuring a better experience for international customers and improving conversion rates.
5. Simplified Global Expansion: Expanding into international markets can be daunting due to varying legal and financial requirements. An MoR simplifies this process by handling compliance with local tax laws, regulations, and currency exchanges, giving businesses easy access to global markets.

PCI DSS Compliance and Security

One of the most crucial aspects of payment processing is compliance with the Payment Card Industry Data Security Standard (PCI DSS). PCI DSS ensures that businesses securely handle credit card information, protecting customers from data breaches and fraud. Compliance with PCI DSS can be challenging for businesses, as it involves rigorous security measures such as encryption, firewalls, and monitoring systems.

An MoR simplifies this process by taking responsibility for PCI DSS compliance on behalf of the merchant. This includes ensuring that payment data is handled securely, reducing the risk of data breaches and fines for non-compliance. For businesses, this is a major advantage, as they no longer need to invest in maintaining their own complex security infrastructure.

Types of Merchant of Record Models

1. Payment Facilitator (PayFac) MoR: Acts as a payment processing service provider, offering sub-merchants the ability to set up merchant accounts and start accepting payments. The PayFac MoR handles both legal risks and payment processing responsibilities, streamlining the onboarding process for businesses.
2. Marketplace MoR: In this model, the MoR represents itself as the seller of goods or services on a marketplace platform (e.g., Amazon). The MoR handles everything from payment processing to customer service, allowing businesses to focus on product supply and marketing.
3. Seller of Record (SoR) vs. MoR: While the MoR focuses on the financial and regulatory side of the transaction, an SoR is responsible for the customer-facing aspects, such as fulfilment, support, and brand reputation. Often, SoRs own the product or service being sold, whereas MoRs are third-party facilitators.

Cons of Using a Merchant of Record

While the MoR model offers significant advantages, there are a few potential drawbacks that businesses should consider:

1. Loss of Control: By using an MoR, businesses hand over control of critical customer interactions, such as refunds, disputes, and chargebacks. This can limit flexibility and responsiveness in customer service.
2. Customer Confusion: Since the MoR’s name appears on customer bank statements, rather than the merchant’s, customers may get confused about the transaction. This could result in higher dispute rates or diminished customer trust.
3. Transaction Fees: While outsourcing compliance and payments can be cost-effective, MoRs charge fees per transaction. For businesses with high transaction volumes, these fees could add up, impacting profitability over time.
4. Brand Dilution: By allowing the MoR to handle significant parts of the transaction process, merchants may lose some brand visibility, as the MoR’s name is what appears in customer communications and on financial records.
5. Dependency on Third-Party: The merchant becomes dependent on the MoR for critical operations. Any disruptions, regulatory issues, or service lapses on the part of the MoR can negatively affect the merchant’s business.

Conclusion: Is a Merchant of Record Right for Your Business?

The Merchant of Record model offers a streamlined, cost-effective way for businesses to handle the complexities of global transactions, compliance, and payment processing. It allows businesses to focus on their core strengths—product development, customer experience, and growth—while offloading the administrative and legal burdens to a trusted third-party partner.

The model is particularly beneficial for businesses looking to expand internationally, as it handles regional differences in tax, compliance, and payment methods seamlessly. Additionally, the MoR’s responsibility for PCI DSS compliance ensures a secure transaction environment, reducing the risk of data breaches and financial penalties.

However, businesses need to weigh the pros and cons. Loss of control over customer interactions, potential brand dilution, and transaction fees are all factors to consider. For businesses that prioritise global expansion and reducing operational burdens, the MoR model is a game-changer. But for those that prioritise brand visibility and a direct customer relationship, the decision may require more careful thought.

Ultimately, the Merchant of Record solution is an attractive option for businesses looking to scale rapidly and securely without getting bogged down in the complexities of compliance and payment logistics. The key is to evaluate whether the benefits—particularly in terms of cost savings, reduced risk, and PCI DSS compliance—align with the specific needs and goals of your business.

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Disclaimer:

The views and opinions expressed in this LinkedIn article are solely my own and do not necessarily reflect the views, opinions, or policies of my current or any previous employer, organisation, or any other entity I may be associated with.