Merchant of Record Services Are Costing You More Than You Think (And What Smart Businesses Do Instead)

Have you ever looked at your bank statement after making a few purchases, and noticed a name you don’t recognize? You might panic, and wonder whether you’ve been a victim of fraud. Yet, in most cases, these names are simply merchant of record companies instead. 

You might wonder why companies choose to use merchant of record services in the first place, but there’s no denying that they do simplify things. This is particularly the case if you want to expand your business internationally as part of your growth strategy. 

There are many merchant of record providers out there, and maybe your business uses one already. You might fully understand the process and be happy with it, you might not be too sure of your decision, or maybe you don’t know what one is. Either way, let’s dig deeper and learn about the pros and cons of choosing a service such as this, helping you make an informed decision.  

TL;DR

• Merchant of record services transfer legal liability and compliance responsibilities but come with hidden costs and reduced business control.
• Revenue recognition changes dramatically under MoR arrangements, potentially inflating gross revenue figures while reducing actual margins.
• The choice between seller of record and merchant of record impacts customer relationships, brand visibility, and operational autonomy. 
• Technical integration complexity is often far beyond what most business owners expect, requiring sophisticated API management and data flow orchestration.
• Hidden fee structures including compliance surcharges and regulatory costs can significantly impact total processing expenses. 
• Exit strategies from MoR providers present unique challenges around data portability and customer migration.
• Alternative solutions like enhanced merchant accounts can provide similar risk management benefits while maintaining business flexibility. PayCompass provides a high-quality option here. 

Understanding What Merchant of Record Really Means for Your Business

The first thing we need to talk about covers the basics – What is merchant of record exactly? 

Let’s break it down. 

Some companies work with merchant of record services, while some don’t. Those that do have a simpler time of things because the MoR company handles all payments when a customer makes an online payment. They make sure the transaction is processed properly, taxes are paid, and all legal and regulatory rules are followed. 

It sounds ideal, but there are downsides to these services too, mostly in the form of reduced control and hidden costs. The merchant of record also becomes the legal entity that actually owns the whole payment relationship with your customers. Before you decide to go down this route, it’s important to ask yourself whether you’re happy with sharing this amount of control. If not, it may not be the best option for you. However, it’s also important to see these services as a risk management tool, and a way to ensure you comply with complex regulations.  

The Legal Reality Behind MoR Arrangements

Let’s explore the legal side of this a bit more as it’s quite complex. We’ve mentioned that the merchant of service becomes the legal entity that has full responsibility for all payment processing. This includes the less desirable parts, including refunds, regulatory compliance, and chargebacks. 

For high-risk businesses, this might sound like a good idea – if you fall into this category you’ll understand the stress of losing a chargeback, and if someone else can handle it, all the better! Yet, it doesn’t mean you won’t lose out on money when these things happen either. It’s likely that the fees will be passed down to you further down the line. 

Ultimately, using merchant of record services simply means that you have a layer of legal protection. Any payment-related risks aren’t attached to you; they belong to your MoR provider. That sounds good, right? Well, yes and no. Essentially, you’re handing over control of a significant business function to a third party. 

How Risk Transfer Actually Works

What is MoR in business? It’s a common question, and once you learn the simple definition, it sounds like a dream. No need to handle payment processing challenges? Wonderful! Yet, all that glitters certainly isn’t gold. 

The transfer of risk from the company to the provider is extremely complex. If you dig into the contract, you might find that many merchant of record providers don’t simply take on all payment processing risks. Instead, they assume liability for certain things, such as tax and regulatory compliance, as well as data protection violations. There may still be some things left in a gray area, and this will be outlined in a very complicated contract. It’s vital to understand this and be happy with what you are and aren’t responsible for before signing.  

The table below gives some useful insights into who is responsible for what in a regular MoR agreement. 

Risk Category	MoR Responsibility	Merchant Responsibility
Payment Processing	✓ Full liability	✗ None
PCI Compliance	✓ Full responsibility	✗ None
Chargebacks	✓ Handle disputes	✗ Limited involvement
Tax Compliance	✓ Calculate & remit	✗ Provide transaction data
Product Quality	✗ None	✓ Full responsibility
Customer Service	◐ Payment-related only	✓ All other issues
Data Breaches (Payment)	✓ Full liability	✗ None
Fraud Prevention	✓ Detection & prevention	✓ Cooperation required

Why Revenue Recognition Changes Everything

At the very start, we asked if you’d ever noticed a different entry on a bank statement and questioned whether you actually made that purchase or not. After all, there are many different types of fraud around, and we’re all doing our best to protect ourselves. However, this is a regular occurrence when a company uses a merchant of record provider. Rather than the actual business name appearing on credit card or bank statements, the MoR will appear instead. It can be very confusing for customers. 

Yet, there’s another side to this that we’ll talk about next.  

Principal vs. Agent Revenue Models

If you work with a payment processor rather than a MoR, they act as your agent and process payments for you. However, when you go down the MoR route, they become the principal in the transaction from an accounting point of view. 

This means that your revenue category might go from net to gross reporting instead. It inflates your top-line numbers but, in reality, your cash flow remains the same. It’s a small shift but it can make your financial metrics look extremely different and can create big complications in terms of tax, financial planning, and relations with your investors. 

Tax Optimization Opportunities and Pitfalls

Dealing with tax is never fun, and if you don’t fully understand the process, it can lead to overlooking something important. That’s one of the main reasons why some businesses choose to go down the merchant of record route. 

MoR providers can optimize tax structures across several countries and find cost-saving areas. However, it’s not all positive – this strategy can also lead to dependencies and complications that could give you a bigger headache. For that reason, carefully assess the pros and cons before making a decision, and don’t simply assume that not dealing with tax makes merchant of record the best option. 

Seller vs. Merchant of Record: The Control Trade-Off

You’ve built your business from the ground up, you’re watching it grow, and you’re proud. In that situation, do you really want to hand over a big chunk of control to someone else? 

This is where we need to talk about seller of record and merchant of record compared. The major difference isn’t just about payment processing, but the transfer of commercial responsibility and creating strategies for your business operations. Deciding which route to go down affects everything from your brand visibility to your customer relationships. It also has a big say in dispute management and how your business grows over the long-term. 

If you choose seller of record, also known as SoR, you’ll have direct relationships with payment networks and your customers. Effectively, it means you’re the one in control, but the flipside is that you’re also responsible for anything that might go wrong too. 

On the other hand, we know that merchant of record means that you’re making a trade that gives you convenience and transfer of risk but means you miss out on control. While your MoR will deal with all the complex problems, they might also end up involved in customer relationships and your overall business relationships without you even realizing it. 

The Liability Transfer Matrix

A little earlier we talked about the fact that with MoR arrangements, it’s still possible that you’ll be responsible for certain parts of your business. We know that with merchant of record arrangements, they deal with all parts of the payment processing journey. Yet, it gets complicated when we talk about customer relationship dynamics. 

Remember, it’s likely that the merchant of record will appear on statements and handle any parts of customer service related to payments. Yet, in the middle of that, you deal with the main customer relationship issues. It’s a form of split responsibility and it can be confusing for both you and your customers. 

Brand Visibility Considerations

Another thing to consider when choosing between seller of record vs merchant of record is brand visibility. Each model affects this slightly differently. While seller of record arrangements tend to preserve customer relationships more directly, MoR uses a different entity in customer documentation. 

We’ve already mentioned that it can be confusing to customers but it also affects trust and long-term relationship management. After all, where brand visibility is concerned, it’s vital to be consistent across the board.  

Advanced Implementation Strategies That Actually Work

If you’re considering the merchant of record model, it’s also key to think about how to implement it properly. This is often where many businesses make a mistake because they don’t realize how complex it can actually be. In most cases, it goes beyond initial expectations and the rush to choose a merchant of record provider can cause problems. 

It’s crucial to look beyond attractive pricing. It could be that you’ll see a low price, have your head turned, only to realize that the technical integration requirements are complex, or require a costly upgrade first. There might also be geographic limitations to think about, or maybe industry-specific capabilities that don’t fit your needs. If you make the wrong decision, you’ll need to switch and that is both costly and time-consuming. 

Before making a decision, consider the points on the following checklist.  

MoR Integration Checklist:

• Implement webhook retry logic with exponential backoff
• Set up deduplication for duplicate event handling
• Create fallback API polling for webhook failures
• Establish monitoring for webhook delivery success rates
• Document event ordering and dependencies
• Test webhook security and authentication
• Plan for webhook endpoint scaling under high load
• Set up alerting for webhook processing failures

The Hidden Economics Nobody Talks About

The first price you see isn’t the full picture. It’s the same story with most things, but when it’s something as critical as choosing the right merchant of record provider, it’s important to dig deeper. Hidden costs can hit your pocket hard, including compliance surcharges, cross-border transaction handling costs, VAT handling, and regulatory fees. These can be substantial over time and are often never mentioned during the initial discussion about pricing. 

We’ve already mentioned the fact that MoR arrangements may move your reporting from net to gross, which affects your revenue significantly. But what else often hides beneath the surface?

Business Autonomy vs. Operational Simplicity

We know that you give up a certain amount of control when you opt for the merchant of record model. Of course, instead, you’re rewarded with a large dose of convenience, but it means that you don’t have much say in many aspects of your business. This could include pricing flexibility and strategic decision-making. It can also affect customer data ownership, and how flexible your business is over the long-term. Of course, the longer you stick with the MoR model, the more you’ll notice these challenges. 

In fact, some merchant of record providers place restrictions on promotional pricing, revenue model innovations, and limit refund policies. All of this could help to build and grow your business over time, but you’ll find yourself stuck. 

Information Asset Control Dynamics

Payment analytics are extremely useful. They give you insights into where you can make changes to improve your business, as well as giving you a head’s up on any problems you need to manage quickly. Yet, when you use a merchant of record service, you may find you face limitations when it comes to detailed customer payment data and behavioral analytics. Over time, this places a huge barrier between you and your business intelligence capabilities, affecting strategies to optimize customer lifetime value. 

The reason is because your MoR owns the direct payment relationship with your customers. That also means they control transaction-level data access, and that is extremely useful when making business decisions. Effectively, you’re missing out on key information about payment method preferences, reasons for failed payments, and transaction timing patterns, to name just a few. 

For your business to grow over time, you’ll need access to this information because it helps you maintain a competitive advantage, and boost your customer lifetime value. Without it, you’ll struggle. 

MoR Transition and Migration Challenges

If you choose MoR services but later decide to switch, you could face significant migration challenges. You’ll face problems with customer migration, continuity of regulatory compliance, and accessing historical transaction data. In this case, you need to plan very carefully indeed.  

Historical Transaction Archive Management

If you’ve been with a merchant of record provider for a while, you’ll need to extract many years of data from them. This is complex, to say the least. Even if you’ve only been with them for a few months, there’s still challenges in front of you, and it’s important to do all of this without disrupting your operations and affecting the customer experience. 

The most important thing here is historical transaction archive management. It’s vital when you need to move away from a MoR provider, but this data isn’t just about transaction records. It’s also about documentation to prove regulatory compliance, dispute history, and customer payment preferences. 

To extract this information, you’ll first need to create systems and software that suit your needs, and this can take months to do correctly. While this process is going on, your business needs to continue ticking along, ensuring that no important data is lost in the process. 

The checklist below will help you during this tricky time. 

MoR Exit Planning Checklist:

• Review contract termination clauses and notice periods
• Identify all data types requiring extraction
• Assess data export capabilities and limitations
• Plan customer communication strategy
• Establish parallel payment processing capabilities
• Test data migration processes in staging environment
• Prepare compliance documentation continuity
• Calculate total switching costs and timeline
• Develop rollback plan for migration issues

Why PayCompass is a Better Option

PayCompass can help you streamline your payment processing, without handing over control to a merchant of record provider.

How do you feel about the idea of using a merchant of record provider now? There’s no denying that it has its benefits. The idea of someone else dealing with all the hassle that can often arise with the payment process? That’s certainly appealing. Yet, nothing in this world comes for free, and it’s important to look at the bigger picture when it comes to your business. 

Giving up a huge chunk of control for a little convenience isn’t acceptable for many business owners. And why would it be? You’ve worked hard to get your business to where it is now – why would you let someone else handle some of the most important parts of it? There are also many hidden fees associated with MoR arrangements, and these often work out much more expensive than simply doing it all yourself and working with a payment processor. 

And that’s where we come in. 

At PayCompass, we don’t believe you should have to hand over the reins to someone else. You’ve worked hard; you deserve the credit! Of course, the main reason why some businesses choose a merchant of record is because they don’t want to deal with the payment processing side of things. Yet, we make all of that easier without you having to give up control. We don’t want any credit; we just want to help you! 

We offer a range of tools and services to address the main problems many businesses face in payment processing. If you’re a high-risk business, you’ll certainly find our high-risk merchant accounts tick many boxes. We offer real-time transaction monitoring, fraud protection, and chargeback prevention as standard. Our dashboard makes it easy for you to see everything in one place, and we have excellent customer service on hand to help you. 

Ultimately, you get all the support you need to make payments easier to handle, without the extra fees and lack of control. 

What could be better?

Final Thoughts

We’ve talked a lot about merchant of record and the ins and outs of what it means. Some businesses use this service, others don’t. It’s really a personal choice that you have to make for your business, and one that you should spend plenty of time and effort on. 

It’s true that using a merchant of record can help you sell internationally without having to build your own indepth systems for handling taxes, payments, and regulations. It appears simpler, and in some ways, it is. Yet, there is a big drawback and that’s the lack of control you’ll also experience. 

It might be helpful for you, it might not. The point here is that it’s not for everyone, and it’s often the case that choosing a payment processor like PayCompass is a far easier option. If that’s the case, contact us today and let’s discuss what we can do for you. While regulatory compliance, taxes, and the ins and outs of payment processing may seem overwhelming, they don’t have to be. We make everything easier to manage. In fact, we’ll become your strategic partner throughout it all. 

Reach out to us, and let’s work together to find the best solution for your needs!