The Difficulty of Being a Merchant of Record

Billing your global online customers is a very complex activity. To effectively collect payments in a secure manner, you must, among many other things, open up merchant accounts, put payment gateways in place, manage contracts with global payment service providers, comply with PCI DSS, and abide by global taxation requirements. When you handle all these things on your own, you are acting as your own merchant of record (MoR).

There are cases where it’s to your advantage to act as your own merchant of record. But there are also cases where accepting the responsibility of being the merchant of record has many disadvantages.

Going It Alone

If you are only selling domestically with basic payment capabilities, then it’s relatively easy to open a merchant account with an acquiring bank and install a payment gateway. By relatively easy, I mean that the process for acquiring the ability to process even simple credit card transactions in just your local currency involves a lot of time and effort and maintenance. There are financial audits, risk analyses, and investigations into what products you sell and what your chargeback rate will likely be. All these aspects influence the price and rate you receive on your gateway fee.

On top of the time, money and effort of getting up and running with simple credit cards in your domestic currency, there is also maintenance work to worry about. You need to make sure your customer and payment data is secure, that you’re collecting and remitting sales tax where it’s necessary to do so, that you’re handling customer questions about billing, managing refund requests and dealing with chargebacks. All of these things involve huge costs to your business.

The Difficulty of Going Global as Your Own Merchant of Record

However, if your business is growing beyond your domestic borders, being your own MoR in those crossborder regions gets even more difficult. Yes, it’s terrific that you are growing sales. But it also presents a number of challenges. To build a truly global payment infrastructure you have to deal with acquirers, not just once, but all over the globe with different rates for different currencies. And you need backups in place in case one goes down. I mean, how would you feel if you lost even just a few hours of orders?

From a MoR perspective, you’d have to set up all your international merchant accounts if you want to grow your global customer base. You need to handle payment contracts, not just for payment methods, but for currencies too. In fact, you need to sign contracts for each currency you want to offer your international customers. And because the typical software vendor does not process even close to the transaction volume that ecommerce providers do, the payment rates and fees for software companies will be much greater than if they found a reseller to act as MoR on their behalf.

Taxes

Your work doesn’t end once you sign all the contracts for offering payment methods and currencies to your global customers. So even if you are the MoR, you still have a lot of work to do before you can succeed globally. This is the part that many businesses don’t think about. The sales tax laws have been changing very rapidly around the world, and this is one the biggest challenges for digital goods companies. In the U.S., each state makes its own tax laws. Then each county. Then each city. Knowing what sales tax to apply to each transaction is very challenging.

That’s just the challenge of collection. Once you calculate and collect, how do you remit? You need to file for each jurisdiction and there are lots of opportunities to make mistakes. Now multiply that for different states where you have a tax nexus, economic or otherwise. And what do you do when you’re selling to German and Japanese customers? Or Aussies? Now what about Brexit? Gotta keep up!

Reconciliation

Acting as your own merchant of record also places a huge burden on your Finance department. For example, if you’re a software company and you get your gateway and merchant account for U.S. dollar transactions with VISA and MasterCard with one acquirer, you’ll need to reconcile your receivables at one rate with that acquirer and at a different rate with the acquirer you use to process Discover transactions.

What happens is that along with receiving your money into your merchant account, you get a long list of transactions. Then you have to reconcile the payments with the transactions. This presents an opportunity to really mess up your ledger, because you have to reconcile your payment from the acquirer according to every rate based on the type of credit card your customers use.

Ecommerce providers who act as resellers on your behalf will do all the reconciling for you as a MoR. All you have to do is wait for the cash in your accounts. Without that expertise, you have to spend lots of time and resources trying to see what you pay per transaction.

MoR is Key to Customer Experience

So why does any of this matter? Well, if you want to expand your business globally, and you want to provide those global customers with superior customer experiences (these are both excellent goals, btw), executing on MoR is key. The challenge is that most businesses simply don’t have the expertise to do that. And even if they had that expertise, they don’t necessarily have the development, business operations or financial resources to bring that expertise to life.

That’s where ecommerce providers and resellers come in. Resellers assume the entire burden of opening up merchant accounts, installing payment gateways, signing contracts for all the payment methods and currencies you need to accommodate global customers. They also assume responsibility for managing tax collection and remittance, maintaining data security, and reconciling your financials, leaving you to develop better products and a better business.

Without this infrastructure in place (and it takes a long time to get it in place when you’re on your own), your chances of growing global revenues are slim. More likely, you’ll be offering the wrong customer experience, many valid transactions will be declined by the card issuers, your conversion rates will go down, and your transaction fees will go up.

Keystone

What’s important to you? Is it to have cost certainty? To expand globally quickly in a compliant way? Or is it important for you to devote resources to doing it yourself?

If your goal is to expand into other markets, doing it as your own merchant of record means diverting resources from your product innovation and customer acquisition efforts.

Elan Sherbill is a Corporate Blogger at Cleverbridge

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