Merchant of Record services

When expanding an ecommerce business internationally, understanding the role of a Merchant of Record (MoR) and whether to use an MoR service is crucial. Learn what a Merchant of Record is, the benefits and disadvantages of using an MoR service, and which businesses should or should not consider using one.

What is a Merchant of Record (MoR)? 

The Merchant of Record (MoR) takes legal responsibility for processing payments and handling associated liabilities such as chargebacks and tax collection. The MoR’s name shows up on customers' bank statements. By default, a business acts as its own MoR. However, in cross-border ecommerce, businesses sometimes use a service that will, in simple terms, become the MoR and essentially takes legal responsibility for their cross-border transactions. Depending on certain factors, this may be beneficial, but it can also negatively impact their business, so it’s important to know the difference.

What is a Merchant of Record service? 

A Merchant of Record Service is a third-party service that assumes the role of the MoR for businesses. These services manage international transaction complexities.

MoR service manages:

• Payment processing
• Tax compliance and remittance
• Fraud management
• Currency conversion
• Logistics and shipping coordination

MoR service is responsible for:

• Legal liability: Assumes legal liability for the transaction, including fraud risk and chargebacks.
• Compliance: Ensures compliance with local tax laws and remittance of VAT/GST.
• Customer payment experience: Manages the end-to-end transaction process, including appearing on the customer’s statement and handling refunds.

International selling introduces complexities like varied tax laws, compliance regulations, and currency conversions, which can overwhelm retailers. An MoR service appears to offer significant benefits, such as compliance management and streamlined financial operations, particularly appealing to businesses expanding globally. However, these advantages often come with substantial drawbacks, including higher costs, loss of control over customer interactions, and unnecessary tax collection in regions where it may not be required.

The difference between MoR, IoR, and payment processors 

It’s easy to confuse Merchant of Record (MoR), Importer of Record (IoR), and payment processors because there is some overlap in what they do. The distinctions between them are important to note. Each role has unique responsibilities and implications for your business operations. Here's a breakdown of how they differ:

Merchant of Record (MoR)

• Responsibilities: Manages payment processing, tax remittance, and compliance with local regulations.

• Role: Appears on the customer's credit card statement as the entity responsible for the transaction.

Importer of Record (IoR)

• Responsibilities: Ensures compliance with import regulations, handles duties and taxes upon importation, and manages customs clearance.

• Role: The entity (often the buyer) is responsible for the goods when they enter the destination country, typically not the same entity as the MoR.

Payment Processors

• Responsibilities: Facilitates the transaction between the buyer's and seller's banks, manages authorization, and processes payments.

• Role: Acts as an intermediary to process payments but does not assume legal responsibility for the transaction as the MoR does.

Pros and cons of using an MoR service 

Disadvantages

Using an MoR can have disadvantages, such as higher costs, loss of control, product restrictions, increased support requests, and slower payout cycles. Businesses should weigh the complete list of disadvantages against the benefits to determine if an MoR service is right for them.

• High costs:
  • Additional fees: MoR services often charge a percentage of each transaction for handling payments, tax remittance, and compliance. These fees can add up, significantly reducing profit margins, especially for businesses with tight margins.
  • Non-refundable transaction fees: If a transaction is refunded, the initial processing fee charged by the MoR service is typically not refunded, leading to additional costs.
  • High refund rates: Higher refund rates can occur due to several factors:
    • Customer confusion: Customers might be confused seeing the MoR's name on their bank statements instead of the merchant’s business name, leading them to dispute the charge.
• Loss of control over customer experience:
  • Customers may be confused by seeing the MoR's name on their statements.
  • Increased customer service inquiries due to billing discrepancies.
• Restrictions on product sales:
  • MoR services may restrict certain products to minimize risk.
• Payment delays:
  • Slower payout cycles can affect businesses' access to cash.
• Flexibility and scalability issues:
  • Solution may lack the flexibility needed for custom solutions.

Benefits

While using an MoR service can have disadvantages, it does offer benefits in certain cases. An MoR service can simplify international tax compliance and fraud management, providing an alternative for businesses that lack the resources for international selling and shipping, and facilitating quick market entry. However, these advantages may not apply to all businesses, particularly those with low international sales volume, those needing rapid access to cash from orders, or those that prioritize maintaining control over their transactions, brand, and customer experience.

• Simplifies international tax compliance by:
  • Managing various tax regulations (VAT and GST).
  • Eliminating the need to deal with multiple tax authorities.*

    *Does not include threshold management; all orders get charged duty and tax

• Manages fraud risk by:
  • Assuming risk and responsibility for chargebacks and fraud. ^{*Does not include friendly fraud.}
• Reduces operational complexity by:
  • Offloading complex international transaction management, including payment processing, tax remittance, and compliance.
  • Streamlining logistics coordination.
• Optimizes customer experience by:
  • Presenting prices in local currencies and offering local payment options.
• Quickly enter new markets with:
  • Market expansion: MoR services facilitate quick and efficient entry into new international markets by handling regulatory compliance, tax management, and logistics. This allows businesses to expand their global reach without the need for extensive in-house resources or expertise.
  • Risk mitigation: By managing the risks associated with international transactions, MoR services enable businesses to explore new markets more confidently and reduce financial risk.

Who should use a Merchant of Record service? 

The following business types can benefit from the simplified processes and reduced risk that MoR services offer when these scenarios apply:

• Small to medium-sized businesses (SMBs) with limited resources that:
  • Lack the resources to manage international operations.
  • Aim to expand into new international markets efficiently and without much risk.
• Businesses with high international sales volume that:
  • Exceed all international tax sales thresholds.
• Ecommerce startups that:
  • Want to scale internationally without heavy investment in infrastructure.
• Companies in high-risk fraud markets that:
  • Face high fraud rates in cross-border transactions.

Who should not use a Merchant of Record service? 

Certain businesses may find that using a Merchant of Record (MoR) service does not provide enough benefits to justify the costs and potential drawbacks. These businesses may include:

• Large enterprises with established international operations that:
  • Have resources to manage international transactions internally.
• Businesses with low international sales volume that:
  • May not generate enough international sales to outweigh the costs of the service.
• Highly specialized or regulated product sellers that:
  • Find MoR services too restrictive.
• Businesses prioritizing customer experience control that:
  • Prefer to handle transactions to maintain brand integrity.
• Companies with strong cash flow requirements that:
  • Require rapid cash flow and would be impacted by slower MoR payout schedules.
• Businesses using Zonos for cross-border sales that:
  • Do not need MoR services because Zonos handles everything that MoR services manage while allowing the business to remain the actual Merchant of Record. This approach offers several significant advantages:
    • Comprehensive duty and tax management:
      • Zonos handles duty and tax calculations, collection, and remittance.
    • Fraud risk management:
      • Zonos manages fraud risk, allowing businesses to remain the Merchant of Record.
    • Maintaining control:
      • Your business has control over every aspect of the transaction process.
      • Zonos ensures consistent brand presence in all customer interactions.
    • Cost management:
      • Zonos lets you save on the additional fees charged by MoR services.
      • Zonos allows faster payout cycles.
    • Flexibility and customization:
      • Your product offerings are not restricted.
      • You have the freedom to choose and negotiate with logistics providers (BYOR-Bring Your Own Rates).