What is a Merchant of Record?

JR Farr  |  August 16, 2021

If you’re looking to sell products online — it’s important to understand how a merchant of record can help.

If you live in the 21st century, chances are you’ve purchased a product online.

Studies show that the online shopping market size reached a staggering $4 trillion in 2021. In the US alone, experts predict the number of online shoppers will reach 300 million in 2023.

That’s 91% of the country’s population.

The COVID-19 pandemic is fueling the switch to e-commerce, and consumer buying habits are changing accordingly.

With the recent surge in online shopping, many companies are taking their businesses online. With that said, managing online payments is a complex process. It’s important to understand whether or not you want to take on the hassle of collecting payments, taxes, and other liabilities.

Aside from setting up the payment gateway, businesses have to devise strategies to protect themselves and their customers from online fraud. Leading to many businesses opting for merchant of record services that remove the liability of accepting online payments.

The good news is — services like ours, Lemon Squeezy, acts as a merchant of record on your behalf.

In this article, we’ll discuss everything you need to know about a merchant of record.

What is a Merchant of Record?

Two options: You take on the responsibility or pass it off to services like Lemon Squeezy

A merchant of record (MoR) is an entity authorized and held liable by a financial institution to process consumers’ debit and credit card transactions on your behalf.

These entities process all payments and take on all the liability for those transactions, including honoring refunds and chargebacks. Additionally, they are also responsible for collecting taxes and ensuring PCI compliance.

Different options for payment processing integration exist that determine who is the merchant of record. These include:

1. Hosted Gateway

With this option, a hosted gateway acting as a third-party is integrated into your website and charged with the responsibility of collecting payments.

The hosted payment gateway takes on all the risks associated with being a merchant of record. However, the merchant pays a fee for this service. Some examples of third-party merchants of record are Lemon Squeezy, Square, and PayPal.

2. Non-Hosted Method

With the non-hosted method, you can be the payment processor for your business. This means you become the merchant of record.

If you choose to become a merchant of record for your business, you’ll need to stay compliant with the relevant laws. You’ll also be responsible for the liabilities associated with all the transactions you make.

Many large companies don’t outsource merchants of record, preferring to be their own MoR.

On the other hand, many small and medium-sized businesses prefer to hire a third party to take on the merchant of record role.

Responsibilities of a MoR

A merchant of record streamlines the checkout process for customers.

They are responsible for maintaining a merchant’s account, managing the card processing fee, and securely sending customer card data to the merchant’s bank. Other responsibilities of a merchant of record include:

  • Managing transactions, cancellations, refunds, and disputes
  • Maintaining financial liability for the goods sold
  • Ensuring compliance with PCI-DSS standards
  • Managing all tax calculation, collection, and remittance
  • Maintaining a direct relationship with payment service providers
  • Staying up-to-date with the ever-changing card association regulations
  • Providing billing-related customer support

If you chose to work with an MoR, the entity would be responsible for all the administrative and financial tasks associated with payment processing.

How the Merchant of Record Model Works

If you choose to outsource the merchant of record to a reseller, your customers will still conduct transactions through your website.

The MoR will act as an intermediary between you and the customer. And with the MoR taking on the reseller role, two transactions will occur during the sale: One between the MoR and the customer and the other between you and the MoR.

The MoR receives a portion of the transaction to cover the fees and taxes, and the rest goes to your business with no further action required on your part.

When a transaction is complete, it’s the MoR’s name that will appear on the card statement and to whom the cardholder has recourse in the event of a dispute.

Reasons to Choose a Merchant of Record

Aside from taking off the guesswork and payment processing liability out of the equation, using a merchant of record provides a myriad of other benefits.

1. It Simplifies Your Work

Payment processing is an arduous task, filled with small complexities such as calculating taxes and managing multiple payment methods. A merchant of record will take control of these tasks so you can skip the hassle.

2. It Provides Easy Entry into the Global Markets

Entry into the global markets can be challenging, especially for small and medium-sized enterprises, and the ever-changing international laws don’t make it any easier.

But with a merchant of record, you don’t have to worry about international laws, foreign compliance rules, or currency conversion. These entities will handle everything foreign-related, giving you unlimited potential to scale up and reach an international audience.

Not to mention, Lemon Squeezy offers currency support and flexible payout methods.

3. MoRs Ensure Guaranteed Compliance

MoRs make it easy for anyone to stay on top of their game and adhere to the governing compliance rules and regulations. Knowing that your company is complying with the governing laws at all times can give you peace of mind as you run your business.

4. It Streamlines Communication

Instead of working directly with your customers and payment service providers, outsourcing allows you to communicate with a single entity; your MoR.

Differences Between a Merchant of Record (MoR) and a Payment Service Provider (PSP)

The key difference between an MoR and a PSP is in the scope of their roles.

An MoR will take care of the entire payments docket and related liabilities, including collection and remittance of taxes. On the other hand, a PSP only handles the payment processing part of the transaction process.

For example, a payment service provider (PSP) like Stripe doesn’t handle any financial or taxation responsibilities of the transaction you make through their gateway.

In contrast, a merchant of record handles everything related to payment processing, including tax calculations and chargebacks.

Wrapping Up

If your business accepts online payments, you need to have a merchant account and a merchant of record to process debit and credit card payments.

Engaging with the services of a third party can be a viable option for you as they will carry the liability, guarantee compliance, and allow you to conquer the global market.

Moreover, by outsourcing, your company can avoid the costly and time-consuming task of setting up your own merchant accounts.