Merchant of Record vs Payment Facilitator: Key Differences Explained

When running an online business, choosing the right payment processing model is crucial to ensure a smooth transaction. Two popular models that businesses often consider are the merchant of record (MoR) and payment facilitator (PayFac).

While both handle the important task of processing payments, they differ significantly in how they manage risk, compliance, and customer relationships. Understanding these differences can help you make a better choice between the two.

In this blog, we’ll dive into what makes a merchant of record different from a payment facilitator. We’ll also check on whether you should choose a merchant of record provider or payment facilitator based on your preferences. With that, let’s start!

What is a Merchant of Record?

A merchant of record (MoR) is a legal entity that takes responsibility for selling goods or services to an end customer. They handle all payments and the associated liabilities, such as collecting sales tax, ensuring Payment Card Industry (PCI) standards, and honoring refunds and chargebacks.

An MoR acts as the seller of record on the customer’s credit card statement. This means that the MoR is legally responsible for the transaction, even though the actual seller might be a different business. Key responsibilities of an MoR include:

Payment Processing: The MoR facilitates payments from customers, handling credit card processing and other payment methods.
Compliance with Laws: It ensures that transactions adhere to local and international financial regulations, such as PCI DSS compliance.
Tax Management: It calculates, collects, and remits any necessary taxes, such as VAT, sales tax, or GST, depending on the region.
Chargeback Handling: The MoR is responsible for dealing with chargebacks, disputes, and refunds, ensuring compliance with the rules of card networks and payment platforms.

How Does Merchant of Record Work?

A merchant of record (MoR) works by acting as the intermediary between the business selling products or services and the customer making a purchase. The MoR takes full responsibility for the transaction, handling everything from payment processing to tax compliance. Here’s a breakdown of how the merchant of record model operates:

Sub-merchant Onboarding: The sub-merchant enters into an agreement with the MoR, providing necessary documentation.
Payment Processing: When a customer makes a purchase on the sub-merchant website or app, the payment data is sent to the MoR’s payment gateway.
Payment Authorization: The MoR verifies the payment information with the customer’s bank or card issuer.
Transaction Settlement: If the payment is authorized, the MoR settles the transaction with the sub-merchant minus any fees or charges.
Customer Billing: The MoR issues the customer a receipt or invoice, typically displaying the MoR’s name as the seller of record.
Chargeback Handling: If a customer disputes a charge, the MoR is responsible for handling the chargeback process with the card issuer.

If simply said, the MoR acts as a trusted third party that takes on the financial and compliance risks associated with online payments. This allows merchants to focus on their core business without having to worry about the complexities of payment processing.

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What is a Payment Facilitator?

A payment facilitator (PayFac) is a business that allows multiple merchants to accept payments under their merchant accounts. They act as a single entity that aggregates multiple sub-merchants under their own merchant account.

It provides the technical and operational infrastructure to process payments on behalf of businesses without taking on the legal liabilities of the transaction. Benefits of using a PayFac include:

Simplified onboarding: Sub-merchants can often get started quickly without the need for extensive paperwork or approval processes.
Reduced costs: PayFacs can negotiate better rates with acquiring banks, potentially leading to lower transaction fees for sub-merchants.
Additional services: Many PayFacs offer additional services like fraud prevention, chargeback management, and customer support.
Scalability: PayFacs can handle growing payment volumes and expanding businesses.

How Does Payment Facilitator Work?

A payment facilitator (PayFac) works by allowing businesses to accept payments through its existing payment infrastructure. It eliminates the need for each sub-merchant to obtain its own merchant account. Here’s how the process works, step by step:

Merchant Onboarding: A business (merchant) signs up with the PayFac.
Master Merchant Account: The PayFac maintains a master merchant account with an acquiring bank.
Sub-Merchant Account: When a merchant signs up, they become a sub-merchant under PayFac’s master account.
Payment Processing: When a customer makes a purchase on the merchant’s website or in-store, the payment data is sent to the PayFac.
Authorization Request: The PayFac forwards the transaction details to the acquiring bank for authorization.
Settlement: If the transaction is approved, PayFac settles the funds with the acquiring bank.
Disbursement: The PayFac then disburses the funds to the merchant minus any fees.

This work simplifies payment processing for sub-merchants by providing a faster, more streamlined way to accept payments. Plus, it manages compliance, risk, and handles transactions with scalable solutions.

Merchant of Record vs Payment Facilitator

Feature	Merchant of Record (MoR)	Payment Facilitator (PayFac)
Legal Entity	Acts as the seller of record on the customer’s credit card statement.	Aggregates multiple sub-merchants under their own merchant account.
Responsibility	Assumes full legal and financial responsibility for transactions.	Shares responsibility with merchants, but may have some oversight.
Merchant Account	Requires a separate merchant account for each business.	Provides a single merchant account for multiple businesses.
Compliance	Handles all compliance matters, including PCI DSS.	May assist with compliance but may require merchants to handle some aspects.
Customization	Offers more customization options for payment processing.	May have limited customization options.
Fees	Generally has higher fees due to increased responsibilities.	May have lower fees due to shared responsibilities.
Risk	MoR assumes all financial and compliance risks.	PayFac shares some risk with sub-merchants, especially for fraud and chargebacks.
Control	Offers less control to merchants over payment processing.	Offers more control to merchants over payment processing.
Onboarding	Can be more complex and time-consuming.	Often offers faster and easier onboarding.
Ideal for	Businesses with complex compliance needs, high-risk industries, or those seeking a hands-off approach.	Startups, small businesses, or those seeking a simpler and more cost-effective solution.

Merchant of Record vs Payment Facilitator: Detailed Comparison

Merchant of record (MoR) and payment facilitator (PayFac) are both entities involved in payment processing, but they operate in distinct ways. Here’s a detailed comparison based on key aspects:

Liability

The merchant of record assumes full liability for the transaction, including chargebacks, fraud, and compliance with laws and regulations. The business is protected from these risks as the MoR takes responsibility.

The payment facilitator shares some liability, but the sub-merchant is ultimately responsible for issues like chargebacks and fraud. The sub-merchant is more exposed to risk than it would be with an MoR.

Onboarding Process

Onboarding with an MoR is typically more complex. It involves thorough checking because the MoR is responsible for managing the risk. It takes longer but offers complete risk protection.

Payment facilitator offers faster, simplified onboarding for sub-merchants. The process is often automated and allows businesses to start accepting payments quickly, making it more attractive for small businesses and startups.

Compliance and Regulatory Responsibility

The merchant of record handles all compliance matters, including PCI DSS, tax, and regional regulatory requirements (e.g., VAT). The business doesn’t need to worry about meeting compliance, as the MoR ensures full adherence to regulations.

Payment facilitators only take care of basic regulatory compliance, such as PCI DSS, but the sub-merchant is responsible for things like local tax compliance. That can add complexity for businesses that operate in multiple regions.

Tax Handling

Merchant of record takes on the responsibility of calculating, collecting, and remitting taxes (e.g., VAT, sales tax) on behalf of the business. This is particularly useful for businesses operating globally, as it reduces the tax burden.

When using a payment facilitator, the sub-merchants are responsible for managing their own taxes. The PayFac does not handle the full tax burden, leaving more responsibility on the business.

Payment Processing and Settlement

The MoR controls the entire payment process, from collecting customer funds to disbursing them to the business after deducting any fees. Settlements can take longer due to the comprehensive checks involved.

Payment facilitator payments are processed through PayFac’s infrastructure, but funds are dispersed faster to the sub-merchant. This makes PayFac’s process more streamlined and focused on quick settlements.

Fees

Merchant of record charges are higher due to the full range of services they provide, including compliance and fraud management. The fees are usually a percentage of the transaction and can include additional service charges.

Payment facilitators generally charge lower fees, often structured as a flat fee plus a percentage per transaction (e.g., 2.9% + $0.30). Additional fees may apply for services like chargeback management, but overall costs are lower compared to MoRs.

Risk Management

The MoR assumes full responsibility for managing transaction risk, including fraud prevention and compliance. This minimizes the business’s exposure to financial and legal risks.

The PayFac monitors for fraud and risk, but the sub-merchant also bears responsibility for managing risk. If issues like fraud or high chargeback rates arise, the sub-merchant could face consequences, such as higher fees or penalties.

Which One Should You Choose, MoR or PayFac?

The decision between a MoR and a PayFac depends on your business’s needs and the complexity of your operations. Here’s a breakdown of when you might choose one over the other:

Choose a Merchant of Record (MoR) When:

You have complex compliance needs: MoRs are well-equipped to handle complex compliance regulations, especially for businesses operating in high-risk industries or across international borders.
You prioritize a hands-off approach: If you want to focus on your core business operations and avoid the complexities of payment processing, an MoR can take care of most of the heavy lifting.
You require a high level of customization: MoRs generally offer more flexibility in terms of customizing the payment experience to your specific needs.

Choose a Payment Facilitator (PayFac) When:

You want a simpler onboarding process: PayFacs often have a faster and easier onboarding process than to MoRs.
You need a scalable solution: PayFacs can accommodate businesses of different sizes and growth rates.
You want more control over the payment experience: PayFacs typically offers merchants more control over the payment process, such as branding and customization.

By comparing your preference with what these services provide, you can choose between the two. If you want more compliance and low risk, it’s better to rely on a merchant of record services.

FAQs About Merchant of Record vs Payment Facilitator

Q1. What is the difference between MoR and PayFacs?

The key differences are in legal responsibility, merchant accounts, and customization. A MoR handles full responsibility, with separate merchant accounts and more control. Conversely, PayFacs share responsibilities, use a single merchant account, and have limited customization.

Q2. What should I consider when choosing between MoR and PayFac?

Your choice depends on company size and type, industry, compliance requirements, budget, and the level of control you want to enjoy.

Q3. What is a merchant of record?

A merchant of record would be Amazon or some other big eCommerce vendor. It fulfils all aspects of the sales transaction: payment processing, customer service, and shipping.

Final Verdict

The choice between a merchant of record (MoR) and a Payment Facilitator (PayFac) depends on your business’s unique needs. The best solution will vary based on factors such as your industry, business size, compliance needs, and budget.

Choosing an end-to-end MoR service is ideal for businesses with complex compliance needs and a high risk of payment processing. Conversely, PayFacs are well-suited for startups, small businesses, or those looking for a simpler and more cost-effective solution.

If you want the best eCommerce MoR, you can trust and rely on our expert team. To streamline your business payment processing, contact us today!