Paylosophy articles often discuss payment facilitation, split funding, branding of payment solutions, online marketplaces, and credit card transaction descriptors. These concepts are all related to the term “merchant of record,” which surprisingly has not been mentioned yet. Therefore, let’s begin by defining the merchant of record and then explore some explanations and examples.
Definition of a merchant of records
The merchant of record (MOR) is responsible for receiving and processing payments on behalf of the merchant, assuming liability for the transaction. The name of the MOR appears on the receipt that the customer (cardholder) receives, which may differ from the name of the product seller. The transaction descriptor specifies the name of the MOR. Typically, the MOR temporarily holds the transaction amount paid by the customer at the point of sale.
The benefits of MOR models
As a merchant of record, the merchant must handle many aspects of accepting electronic payments. Among them are the following:
- PCI DSS compliance
- management of chargebacks and refunds
- taxation
- deduction of credit card processing fees
- Funding
- payment security
It is common for small and medium-sized merchants to be unable to afford to spend significant time and effort managing all the problems listed above. For this reason, at least initially, they prefer to work through larger organizations. They will then grow their business, and their needs will become more sophisticated as they expand. This may cause them to find merchants of record to be too intrusive and restrictive, thereby causing them to reject it. The merchant may consider turning into its MOR or switching to a different service provider. It could serve as a PayFac, offering an API that can be highly customized to meet customers’ needs.
Companies may also choose to operate through the merchant of record model because they desire a trusted and reputable entity to represent them to their clients. Uber and Amazon are excellent examples of such reputable companies.
Example
When passengers take an Uber ride, they are charged by Uber, but most of the payment goes to the driver of the specific vehicle. Similarly, when someone buys a product on Amazon, they pay the marketplace owner and see the name “Amazon” on the invoice. However, the products are sold by certain vendors that operate using Amazon, and the payment amounts are distributed accordingly.
A MOR is often responsible for managing subscriptions and payment plans for recurring billing companies that are part of their business model.
When there is a split or chained payment, the MOR often provides the necessary logic and distributes the funds to the different affiliates based on the split funding logic.
In addition, when it comes to international and multi-currency payments, the MOR is responsible for converting the currency and managing these payments on behalf of the retailer.
Some major companies use the services of merchants of record to sell non-priority products and services they have yet to make plans to focus on in the immediate future.
Payment facilitators are different from merchants of record
The functions of a merchant of record are akin to those of a payment facilitator (refer to our PayFac article series). Furthermore, the process of becoming a merchant of record is just as arduous and time-consuming as the process of becoming a payment facilitator. This leads to the question: what distinguishes the two?
It’s worth noting that not all merchants of record are payment facilitators, and the reverse is also true. Payment facilitators are sometimes known as “master merchants,” whereas a MOR may or may not be a master merchant. A MOR can be a sub-merchant of a particular payment facilitator.
Examples
PayPal serves as a merchant of record for numerous customers, providing them with a greater sense of security, knowing that cardholder data is being handled by a trustworthy platform such as PayPal instead of unknown vendors. On the other hand, larger corporations like American Airlines employ PayPal solely for payment facilitation services. Given its size, American Airlines can function as its merchant of record.
Stripe and WePay are exclusively payment facilitators and not merchants of record for their sub-merchants. As a result, when a cardholder purchases goods or services from these sub-merchants, they see the retailer’s name (sub-merchant) on the invoice rather than the name of the underlying payment facilitator (Stripe or WePay).
Despite increasing expenses and obligations, the payment facilitator model offers more flexibility and profitability than the merchant of record model. As a result, the first step towards being a full or white-label payment facilitator by becoming a merchant of record.
Conclusion
The merchant of record concept is fundamental to the merchant services industry. Operating as your own merchant of record may be challenging to handle if you’re a small-to-medium-sized company. However, if you’re a larger-scale enterprise, serving as a MOR or payment facilitator for other merchants could be advantageous, enabling you to generate additional revenue through merchant services.
Feel free to seek advice from our professionals at UniPay Gateway to acquire further knowledge about how the merchant of record and payment facilitator models can benefit your business.
