Startup companies have depended on the conventional methods of payment acceptance and transaction management through regular payment processing services for a long time. This method was perfectly fine with customers mostly coming from a single country. But now, as companies go global, they are presented with an array of unfamiliar challenges such as chargeback issues, tax law adherence, fraud prevention, and delayed fundings. It is at this point where the founders who initially devoted great amounts of time thinking about their product development and customer attraction start to get involved with complex financial matters and administrative duties.
Faced by these difficulties many startups have found the idea of the merchant of record (MoR) model as a perfect alternative solution. They no longer have to oversee every detail of international payment themselves but instead can rely on the services of a provider who will be the one to handle the major financial and legal responsibilities. Such a move does not mean only a temporary change; it is indicative rather of rising demand for simpler, more expandable global commerce solutions.
What Exactly Is a Merchant of Record?
Is a merchant of record simply another means of payment technology? That would be an understatement indeed. By being the official seller in such a deal it can serve a variety of purposes.
Usually, when a merchant deals directly with a traditional payment processor, it is the merchant that appears as the party liable under the law for the transactions (called in legal terms the merchant of record). You as the merchant are the person (entity) that should collect the necessary taxes, get compliance, consumer protection (and the like) up to the standards, and be the one managing disputes related to payments and other seller obligations.
A Merchants of Record (Mor) model, the provider becomes the official seller for the covered transactions and generally oversees duties like payment processing, collecting taxes, and conforming to regulations. Of course, the particular arrangement will vary depending on the supplier selected and the agreement.
It is not easy to see the concept at first glance. One has to think of it in analogy – that is like the difference between a car rental and a private chauffeur. You are the one who drives and therefore is responsible in case of driving problems, when you rent a car, you are the one who is in control of the entire experience and, if things go wrong, it is up to you to do the repairs or handle the issues – you get the picture. When you hire a driver, you can simply enjoy the ride and have someone else managing your journey. An MoR works like a private driver. Your company will have a merchant that you rely on as your driver to take care of those payment-related duties allowing you to stay focused on core areas such as development of your product and interacting with your customers.
Why Most Startups Are Switching to the MoR Model
Most of the startups, especially those that are selling online products, software subscriptions or selling internationally, are seeing a few advantages of this new model which are making the model more and more attractive to them.
1. Global Tax Compliance Without Headache
Tax compliance for businesses selling internationally is one of the main sources of the headache among businesses. Different countries and regions have different rules in regards to value-added tax (VAT), sales tax, goods and services tax (GST) etc. Knowing where a business needs to register, collect taxes and file returns is an easy way to get lost quickly.
If a brand owner can find a merchant of record they can use such as a merchant of record to greatly simplify the process of tax compliance, through taking care of:
- Figuring out the tax rate applicable on a sales transaction based on the customer location.
- Making sure the customer pays the right tax during checkout.
- Processing the taxes collected from sales as per the agreed procedure with the merchant of record.
With the help of these capabilities the company can decrease its compliance burden and save the time and costs that come as a result of a noncompliance mistake on a compliance issue. Rather than going to all possible trouble of understanding the rules of international tax laws the startup teams can focus on product development, customer acquisition and other work that contributes to long term growth.
2. Better Cash Flow Management
Cash flow is vital for start-ups – particularly those that are low on funds. Sudden payment stops, late settlements, and rapid increases in transaction volumes are just some of the factors that can leave a start-up unable to pay their staff, keep their services running, and even do a little marketing.
The risk management and payment plans of some merchant or record providers are aimed at simplifying the management of international transactions. Still, payout timings, reserves, and account restrictions differ among providers. Using a Money Origination Report, you don’t get any certainty that funds are available for withdrawal all the time.
Pick up the phone to a provider after your business has already signed up for the service so that you can thoroughly inspect the settlement terms, reserve policies, refund procedures and dispute management processes before your startup decides on the best partner for handling payments to help maintain cash flow predictability while minimizing operational uncertainties.
3. Higher Conversion Rates Through Localized Checkout
Foreign customers will be in a better position to complete a sales transaction when they have the sense of a familiar and straightforward checkout process. In fact, a sudden change in currency and/or a very restricted method of payment together with a very confusing calculation of taxes could easily cause the customer to hesitate and abandon the shopping in their cart.
MoR may resolve these issues by enabling local checkout experiences. Depending on the provider, customers might have the option to pay in their local currency, to use familiar methods of payment, and to see the taxes that apply before completing their purchases.
This can help a business become more international and also reduce friction in the purchase process. For new companies, on the other hand, a better customer experience during the purchasing process can be a crucial competitive edge.
4. Reduced Administrative Work and Compliance Risks
To grow a startup, entrepreneurs must consistently focus on product improvement, customer service, marketing, and developing business strategy. Handling payment disagreement, refund appeals, fraud prevention, and regulatory requirements can take focus away from those priorities.
Merchant of record services generally cover several processes related to the transaction such as payment processing, consumer tax duties, and dispute resolution. In this situation, the smaller team can continue to work efficiently without having to build a major internal finance or compliance department in the initial phase.
Even though the company has to adhere to its own contractual and operational obligations at the same time, off-bonding such responsibilities can help simplify day-to-day operations.
5. Easier International Expansion
A company expanding abroad may have to be equipped with more than a website translation or an advertising campaign. It may require gaining a fundamental understanding of local taxation, payment methods, regulation in consumer protection, and related legal aspects.
Leveraging an MoR solution allows businesses to expand their reach internationally with ease and with the assurance that payment and tax processes will be handled by an external entity. A company, especially one which offers products or services online and globally, can take advantage of this to serve their customers without having to get bogged down in the nitty gritty of handling such operations on their own at all the locations.
Founders benefit from a streamlined, and essentially more efficient international development process as they will be able to carry market research, identify new customer demands, and implement global strategies without having to spend excessive amounts of time and resources solving the related administrative tasks.
Last words
An MoR (the merchant of record) enables startups to sell globally while the MoR assumes responsibility for complex payment, tax, and compliance procedures that would otherwise fall to the founders themselves. By taking on these tasks, an MoR lowers the risk factor, makes the checkout process enjoyable, and allows the founders to be concentrated on creating a sustainable business.
The choice of a proper payment system that meets the startup needs is increasingly the part of its commercial roadmap. Startups that assess the available payment tools and choose the one which matches their needs best will get the benefit of a solid international expansion base without increasing the workload for the startup team excessively.