For e-commerce businesses, handling payments and managing financial obligations isn’t as simple as it seems.
Every purchase involves a mix of financial processes and regulatory requirements. And how your business handles these can impact customer experience, brand credibility, and overall profits.
As the e-commerce industry is growing rapidly, many businesses rely on merchant of record (MoR) services and payment gateways to handle digital payments. But you might think what sets them apart, right? MoR services take full responsibility for processing transactions, including taxes and compliance, while payment gateways focus on securely transferring payment data.
In this blog, we will discuss the basics of both merchant of record and payment gateways, how they work, their key differences, and which option is better for your business. So, let’s dive in:
What is a Merchant of Record?
A Merchant of Record is a legal entity authorized to sell products or services to customers and process their credit and debit card transactions on behalf of another merchant. This is useful when sellers face legal limitations or geographical barriers to processing payments directly. There are multiple responsibilities of an MoR like processing payments, meeting regulatory needs, providing customer service, etc.
Suppose an online retail store is aiming to tap into the global market. While there is a huge potential for growth, accepting payments from customers around the world comes with significant challenges. Each country has its own set of financial regulations, tax laws, and currency requirements. Setting up local merchant accounts to comply with these diverse regulations can be expensive and time-consuming for many businesses.
Merchant of Record offers a straightforward solution in this scenario. By partnering with an MoR, you can leverage a ready-made payment processing system that adheres to local legislation and handles currency conversions seamlessly. People often confuse it with the seller of records, but MoR and the seller of records are different.
How Does it Work?
As MoR service provider is an intermediary reseller; they receive payments from customers, pay the original merchant for the products, and manage the shipping process for the buyer.
This entire transaction happens within seconds, providing a smooth experience for both the merchant and the customer.
When a customer makes a purchase on your website, they input their payment details at checkout. Behind the scenes, the payment is processed in the name of the Merchant of Record, who owns the merchant account. As a result, the customer’s credit card statement will display the name of the MoR rather than the original seller.
MoRs offer several advantages for businesses looking to expand globally. It simplifies the complexities of international sales, reduces the administrative burden on merchants, and provides a layer of legal protection.
What is a Payment Gateway?
A payment gateway plays an important role in facilitating online transactions by linking your customers’ bank accounts to your merchant account. It acts as a bridge, collecting transaction details securely and transmitting them to your merchant account. This setup ensures your customers seamlessly make payments online without directly engaging with your merchant account.
The payment gateway securely stores and verifies payment information to ensure sufficient funds are available before processing the transaction.
Once verified, it initiates the transfer of funds to your merchant account. Throughout this process, payment gateway maintains stringent security measures to safeguard sensitive financial data, ensuring a safe and reliable payment experience for both you and your customers.
How Does it Work?
Payment gateways are bridges that pass data from the merchant to the issuer bank and the bank to the merchant.
First, the consumer fills up the card details on your e-commerce website. Then, your payment gateway will encrypt and tokenize these details.
Now, the gateway will forward this information to the issuer bank through the payment processor. The issuer bank will pass this data to the card network (such as Mastercard, Visa, American Express, etc) to conduct a fraud check and forward the response back to the bank.
The issuer bank will check the fund availability and approve/decline the payment request. In the end, the payment gateway forwards the payment status to the merchant account and customer.
As soon as the payment is approved, the acquiring bank will request the funds from the issuer bank.
Merchant of Record Vs. Payment Gateway: Key Differences
While MoR and payment gateways have some similarities in functions, they both serve different purposes. Here are the major differences that will help you better understand their difference:
Role:
- Merchant of Record: The MoR takes on the responsibility of processing and settling transactions on behalf of the merchant. They handle all financial aspects, including taxation, invoicing, and compliance.
- Payment Gateway: A PG acts as a conduit between the merchant’s website and the financial networks, securely transmitting transaction data to the acquiring bank.
Responsibilities:
- Merchant of Record: Beyond transaction processing, MoRs manage international sales tax compliance, currency conversion, and fraud prevention. They provide a seamless checkout experience.
- Payment Gateway: PGs focus primarily on securely transmitting payment data. They facilitate authorization between the merchant, customer, and financial institution.
Compliance and Risk Management:
- Merchant of Record: MoRs shoulder compliance burdens, ensuring adherence to regional tax laws and financial regulations globally.
- Payment Gateway: PGs maintain PCI DSS (Payment Card Industry Data Security Standard) compliance, safeguarding payment data during transmission.
Customer Interaction:
- Merchant of Record: MoRs handle customer inquiries related to billing, refunds, and order discrepancies, ensuring a streamlined customer service experience.
- Payment Gateway: PGs have minimal direct customer interaction, primarily dealing with technical aspects of payment processing.
Integration and Management:
- Merchant of Record: Integrating an MoR involves deeper collaboration, as they manage end-to-end transaction processes and financial reporting.
- Payment Gateway: Integrating a PG is simpler and focuses on technical integration with the merchant’s website or app for seamless payment processing.
Which One Should You Choose?
Choosing between a merchant of record and a payment gateway is a crucial decision for any business engaged in e-commerce. Both options have their merits, and the right choice depends on your specific needs, resources, and growth plans.
A payment gateway is an excellent choice if you want to maintain full control over your transactions and customer relationships. It is a rail bridge for payments, securely transmitting data between your website and the payment processor. This option is ideal for businesses with the infrastructure to handle tax compliance, fraud prevention, and customer support in-house. It’s also typically more cost-effective for high-volume sellers, as fees are usually lower per transaction.
On the other hand, a merchant of record solution can be a game-changer for businesses looking to expand globally or those wanting to offload the complexities of e-commerce. An MoR takes on the legal responsibility for the entire transaction, handling everything from payment processing to tax calculation and remittance. This comprehensive service can significantly reduce your administrative burden and legal exposure, especially when selling internationally.
You should choose merchant of record (MoR) when:
- You’re expanding into international markets
- You lack in-house expertise in global tax compliance
- You want to minimize legal liability in transactions
- You need help with currency conversions and localization
- You have limited resources for customer support and fraud prevention
- You’re a startup or small business without a dedicated finance team
You should choose payment gateway when:
- You want full control over the customer relationship and data
- You have a high transaction volume and seek lower per-transaction fees
- You have established in-house systems for tax management and compliance
- You require deep integration with your existing infrastructure
- You want to customize the checkout experience extensively
- You have the resources to handle fraud prevention and chargebacks
- You prefer to manage your own merchant account
Ultimately, the choice between MoR and payment gateway comes down to control, convenience, and cost. Assess your business’s current capabilities, growth potential, and risk tolerance.
Remember, what works best for your business today may change as you grow, so it’s wise to periodically reassess your choice to ensure it continues to meet your evolving needs.
FAQs on Merchant of Record Vs Payment Gateway
Q1. Can I use both an MoR and a payment gateway together?
Yes, you can use both a MoR and a payment gateway together. The MoR handles comprehensive e-commerce responsibilities, including compliance, taxes, and fraud protection, while the payment gateway focuses on processing payments securely. Combining both provides a robust solution where the MoR oversees the entire transaction lifecycle, and the payment gateway ensures smooth, secure payment processing.
Q2. How can I ensure my chosen solution scales with my growing business?
To ensure your chosen solution scales with your growing business, opt for providers that offer flexible, customizable plans. Look for features like multi-currency support, global tax management, and advanced analytics. Assess their track record with other businesses of similar size and growth. Ensure they provide robust customer support and regular updates to adapt to evolving market demands and technological advancements.
Q3. How does the MoR model affect my checkout process?
The merchant of record model simplifies checkout by managing compliance, taxes, and payment processing under one umbrella. Customers experience a seamless transaction as the MoR takes on the legal responsibilities and risks associated with the sale. This model can enhance trust and streamline the purchasing experience, potentially increasing conversion rates and customer satisfaction.
Conclusion
Choosing an ideal payment processing model for your business can be confusing, especially when you are just starting out in the e-commerce space. The right model can greatly impact your business success, so make your choice wisely.
If you want to simplify the transaction process and handle the compliance part yourself, there are payment gateways you can partner with. And if you are dreaming of an internationally recognized store and want to scale without much hassle, a merchant of record provider can help.
For an effective e-commerce MoR, you can trust our team. With years of industry experience, we strive to provide the best solutions to streamline payments. Contact us for more info!