If you are a digital product seller, you might be asking yourself:
"What is a Merchant of Record exactly, and should I be using one to support my business?"
The nature of the digital product industry (and what makes it so exciting) is that it removes barriers to selling your products internationally.
This expansion brings its own challenges.
Managing local tax requirements, navigating VAT, and protecting against fraud can complicate matters. Using a MoR service can help ease the headache of these financial and legal complexities.
But there’s a trade-off.
Because an MoR is a middleman between you and your customers, it is crucial to consider whether you truly need this service, especially if you value autonomy in your customer relationships.
In this article, we’ll explore what a Merchant of Record is, how it operates within digital products, and why maintaining more control over your business with the support of Checkout Page might be the better option.
What is a Merchant of Record?
A Merchant of Record (MoR) is a third-party entity authorized to process sales transactions for your business. The MoR assumes responsibilities related to payment processing, tax compliance, Payment Card Industry (PCI) compliance, billing, customer service, and handling chargebacks.
Businesses that use an MoR essentially delegate transaction-related complexities to it, thus offloading the hassle of transaction management. The arrangement means that the MoR legally owns the relationship with your customer rather than you.
A consequence of this is that you lose access to valuable data and direct communication with your customers.
How does a Merchant of Record work?
When a marketplace like Etsy serves as the Merchant of Record, it essentially communicates to the sellers on their platform:
"I will be responsible for purchasing and selling your digital products to customers."
From the customer's perspective, buying your products remains straightforward; however, two transactions are occurring simultaneously behind the scenes. One is between the end customer and the marketplace, while the other involves the marketplace and the individual seller.
Since the marketplace acts as the MoR, their name will appear on the customer's bank statement instead of the seller's. If payment disputes arise, the marketplace is responsible for being the liable party.
🔑 What’s key here, though, is the customers buying the products are not your customers—they are the MoR’s customers.
Functionality of a Merchant of Record
In their responsibilities as the legal entity selling your products, the MoR has several functions, which include:
- Compliance & tax: The MoR ensures that all transactions comply with local, state, and international regulations, including tax laws, data protection laws (like GDPR), and payment industry standards. This includes managing sales tax collection and remittance.
- Legal liabilities: As the legal entity recognized in transactions, the MoR assumes all legal liabilities. This includes liability for payment failures, fraud, and compliance breaches.
- Dispute resolution: The MoR handles chargebacks and disputes with customers. They provide support in investigations and interface with banks and payment networks to resolve issues, protecting the seller from loss due to fraudulent claims.
- International reach: MoRs enable businesses to expand into international markets by managing local compliance and currency processing. They allow sellers to navigate various tax regulations worldwide.
- Marketplace functionality: MoRs like Amazon facilitate marketplace operations, enabling multiple sellers to list and sell products under a common platform while managing payments, compliance, and customer interactions for all transactions.
- Payment capabilities: MoRs offer reliable payment solutions, integrating multiple payment gateways and supporting various payment methods.
- Payment infrastructure: They provide the infrastructure for secure payment processing, including encryption, fraud detection mechanisms, and secure data handling.
Examples of Merchant of Record platforms for selling digital products
The MoR model can take various forms. Here are some common types of merchant of record platforms popular with digital product sellers, with examples:
1. Marketplace Merchant of Record
Marketplace MoRs operate platforms that connect multiple vendors to customers, managing the payment processing and customer experience for all transactions within their ecosystem.
The MoR marketplace:
- Maintains oversight over transactions between consumers and various sellers.
- Manages compliance and risk across all participating vendors.
- Collects and remits sales tax on behalf of sellers, ensuring sales tax compliance.
Example: Gumroad
Gumroad is a popular marketplace that serves as a merchant of record, allowing creators to sell digital products such as e-books, music, and software.
Gumroad simplifies the selling process by assuming the associated financial responsibilities but takes a 10% fee on anything you sell.
2. SaaS Merchant of Record platforms
For SaaS (Software as a Service) or digital products, certain MoRs specialize in managing subscriptions, user accounts, and recurring payments.
The role of such a platform includes:
- Providing a payments stack that integrates subscription management with payment gateways.
- Handles customer billing, invoicing, and payment updates seamlessly.
- Manages compliance related to software licensing and digital sales.
Example: Lemon Squeezy
Lemon Squeezy operates as a Merchant of Record, specifically designed to support digital product sellers by taking care of payment processing, tax compliance, and customer support.
Lemon Squeezy charges a flat 5% + 0.50¢ on each sale made through the platform, with extra fees for subscription and international payments.
What are the benefits of using a Merchant of Record?
The benefits of using a Merchant of Record partner lie in the responsibilities they take on for you, which can free up time and provide peace of mind. These include:
- Simplified compliance: MoRs can help businesses navigate tax regulations and compliance in various jurisdictions, reducing the burden of managing these complexities.
- Streamlined payments: Handling multiple payment gateways and currencies can be cumbersome. MoRs simplify this process by integrating these services.
- Chargeback management: They typically offer support in managing chargebacks and disputes, providing expertise in navigating these challenges.
- Efficiency: Businesses can focus on core operations, like product development and marketing, while the MoR manages transaction processes.
- Peace of mind: As an entrepreneur or creator, one of the last things you want to worry about or spend a lot of time on is managing tax complexities. Peace of mind and being able to focus on your product are tremendously valuable.
What are the downsides of using an MoR?
- Loss of control: Businesses may lose direct control over customer interactions and the sales process, which can affect branding and customer experience.
- Fees and costs: MoRs charge fees for their services, as we saw in the Gumroad example above, impacting profit margins and overall revenue.
- Limited access to customer data: Relying on a MoR often means that businesses have restricted access to customer data, limiting insights that drive marketing and sales strategies.
- Dependency risks: Relying on a third-party intermediary for critical aspects of business operations introduces risks, such as service interruptions or changes in terms that may adversely affect the seller.
The impact an MoR on your customer relationships
We’ve dedicated a section to this topic because, in our experience, it's one of the main reasons sellers reconsider using an MoR. We've spoken with numerous customers who moved away from MoR platforms once their businesses gained traction because of the strain it placed on their customer relationships.
When an MoR serves as an intermediary, your customers are not actually your customers.
This situation can significantly affect your ability to connect with those who purchase your products—which we think is a pretty big deal.
Customers might feel disconnected from your brand, and without ownership of their data, opportunities for personalized engagement are drastically reduced.
Do I need a Merchant of Record?
No, you don’t need a Merchant of Record. The real question is, do the positives of using one outweigh the negatives in the context of your business and needs?
There are some key factors to consider that might make using an MoR a preferred choice for you, and these are:
- Scale and complexity: If you operate in multiple regions with diverse tax regulations and payment processing needs, an MoR might simplify operations.
- Resource allocation: Evaluate your team's capacity to manage transactions, compliance, and customer service. If resources are limited, an MoR may provide necessary support.
- Customer relationships: If direct engagement with customers is not a core value for your brand, the cons of using an MoR might not weigh heavily on you.
- New sellers: For those just starting out, an MoR can keep things simple while you test your product ideas. It allows you to focus on market validation without being overwhelmed by financial management and compliance complexities.
These factors will feed into whether an MoR is right for you, at least for now.
Merchant of Record alternative
It’s clear we’re not advocates for using MoRs for anyone who values independence in their customer relationships. Still, we are also well aware of the headaches that compliance and tax responsibilities can induce and why an MoR is appealing.
So what’s a good alternative?
Payment processing platforms like Stripe enable businesses to accept online payments, manage subscriptions, and handle transactions easily. Stripe is a popular alternative to traditional Merchant of Record platforms, especially for digital product sellers looking to maintain control over their customer relationships.
Stripe offers tools that help streamline compliance and manage tax obligations effectively with Stripe Tax.
This feature lets you quickly calculate, collect, and report taxes on global transactions through a single integration. There’s a little more work for you here than with an MoR, but we think it’s worth it.
Stripe provides detailed reporting and analytics, giving sellers insights into transactions and customer behavior. This data can be invaluable for tailoring marketing efforts and improving customer engagement.
So, while an MoR simplifies certain aspects of selling internationally, Stripe enables sellers to manage their processes directly, helping them remain compliant while maintaining a strong relationship with their customers.
Checkout Page helps you sell digital products without an MoR
Checkout Page is a no-code checkout page builder built on top of Stripe. We help our customers sell digital products, event tickets, and subscriptions on their websites with pages that blend seamlessly with their branding and make things refreshingly simple for them and their customers.
We are all about removing obstacles between you and your customers, not creating them.
We don’t act as an intermediary at any stage. Your money and data stay in your Stripe account, and we add to Stripe’s power by enabling you to sell digital products and event tickets within minutes of setting up an account.
Because our checkout pages are quick and easy to create, you and your team can get creative with sales funnels and page layouts, setting up unlimited pages to sell your products wherever you interact with your customers.
You can easily integrate Checkout Page with 3rd party tools via Webhooks or Zapier, ensuring you get to use your data your way. Our monthly subscription fee starts at $24, and we don’t charge any transaction fees, so you always know where you stand.
Checkout Page requires minimal setup, and if you ever decide we are not a great match, parting ways is equally simple. As we said, we believe in independence.
If you’d like to see for yourself how user-friendly Checkout Page is, you can sign up for a free 7 day trial - no card required.
Simply connect your Stripe account, and away you go!
