Sick of negotiating transaction fees or filing complicated tax returns? How about dealing with chargebacks? These are the financial and administrative aspects of running a growing eCommerce company that no one told you about. However, managing payments is so essential that large eCommerce brands typically outsource these financial, regulatory and chargeback concerns to a Merchant of Record partnership.
A Merchant of Record (MoR) is an authorized entity that handles eCommerce transactions—and everything they involve—on your behalf. Most importantly, they are held financially liable by the consumer’s financial institution, not retailers.
There’s no difference from the consumer’s viewpoint, but this type of partnership makes a world of difference for eCommerce companies. With less risk, lower costs, and a more streamlined process overall—here are five reasons to consider outsourcing transaction management to an MoR partnership.
1. Control and Reduce Total Cost of Payment
Taking online payments is becoming increasingly complicated. Not only do you have to deal with standard payment service providers to process credit and debit card payments, but consumers now demand even more payment methods.
Research by Javelin has found merchants typically partner with an average of four parties to handle eCommerce transactions. That’s a lot to manage when you handle payments yourself, which is precisely what you’ll have to do if you only work with payment service providers. Plus, the more payment providers you work with, the more fees you have to account for and the more complicated your financial reporting becomes.
Retailers can avoid multiple fees on transactions by partnering with a Merchant of Record. Your MoR partner will also help to negotiate those fees and lower the total cost of payment—ultimately leaving retailers with less to keep track of.
While fees from Visa and Mastercard aren’t negotiable, as Matt Ellis at Zapier notes, fees by payment processors and other payment technology types can be reduced or even eliminated. In fact, most costs determined by processors are up for discussion.
2. Eliminate the Risk of Fraud and Chargebacks
The rapidly growing eCommerce sector is ripe with opportunities for malicious actors looking to defraud businesses and consumers, writes Louis Columbus, Principal at design and manufacturing software provider Dassault Systems.
“The most common type of e-commerce fraud is Chargebacks, one of the most expensive types of fraud an online retailer will experience,” he says. “It’s a technique that often leads to additional fees, loss of inventory, services, and can even lead to them not being able to accept a specific type of credit card.”
And it’s not just chargebacks eCommerce brands need to worry about. Credit card fraud and identity theft also pose issues. It’s important to work with a payment solution that offers suitable protection against these kinds of threats. Your solution must be PCI-DSS compliant, says Brian Nunes, former Magento Channel Manager at American Payment Solutions Inc. It also needs to have fraud filters that verify the legitimacy of transactions and catch blatant fraudulent attempts in their tracks.
However, there are times when even these measures often aren’t enough to protect brands. That’s why many businesses go one step further and partner with a Merchant of Record who can offer security features like the ones discussed above and who can take financial responsibility for all transactions, including chargebacks.
“The merchant of record is summed up as the liable organization for every single customer to seller transaction, including all credit card fees associated with company transactions and monitoring systems that deal with the risks and frauds that come along with e-commerce business,” explains Jia Wertz, a documentary filmmaker and Founder and CEO of women’s dress boutique Studio 15. “Basically, a MoR assumes a lot of your risk.”
3. Capture Orders That Would Otherwise be Left on the Table
While it’s important to stop as many fraudulent transactions as possible, you don’t want your payment processor to be too strict and create false declines either.
“Your good customers shouldn’t be punished because of fraudsters,” says Visiture’s Ron Dod. “You have to find a good balance—set your filters too low, and you expose yourself to a higher risk of fraud; but set them too high, and you could lose real sales from actual customers.”
The latter point should be a serious concern for eCommerce companies. A survey by Sapio Research found one-third of U.S. consumers would never shop with an online store again after a false decline. A similar survey by fraud prevention platform Sift found a quarter of shoppers who were false declined would shop with a competitor instead. It’s even worse if you target younger consumers, 36% of whom would abandon your store for a competitor.
Unlike some payment processors, a Merchant of Record can work at scale, leveraging superior data and more advanced fraud detection technology to limit the number of false positives and stop valid transactions from being rejected.
4. Handle Tax Calculation and Reporting
If one thing isn’t straightforward about running an online store in the U.S., it’s taxes.
As a result of the Supreme Court’s 2018 decision in South Dakota v. Wayfair Inc., calculating sales tax in the U.S. has become increasingly complicated. Not only do different states charge different tax rates from each other, but they also charge different rates depending on what is being sold, writes Wayne Rash at PCMag UK. Each state has equally complex and differing tax exemptions, too.
“That’s not even the worst of it,” Rash says. “According to one estimate I’ve read, there are actually over 10,000 unique taxing jurisdictions in the U.S., each one of which can impact both sales tax rates and collection operations from eCommerce activity.”
Fail to compute tax correctly and it won’t just be the IRS on your case.“When tax calculations for online transactions are inaccurate – or so noticeable as to be disruptive – they can give rise to CX problems and potentially costly compliance risks,” writes Brian Wilchusky, Global SAP Partnership Director at Vertex Inc.
Filing tax returns adds another layer of complexity. It’s common for eCommerce brands of any size to outsource this function to an accountant or CPA, but a Merchant of Record can offer a more comprehensive and streamlined solution. An MoR is held liable by banks and is responsible for calculating and declaring taxes wherever you sell. With an MoR partnership, there’s no need to complicate things further by involving more third-parties or worrying about regulatory problems. Instead, it’s the MoR who assumes all liability and manages complex administrative tasks if and when issues arise.
5. Sell Across Borders with Ease
Smaller eCommerce companies may be able to justify acting as their own Merchant of Record when selling in domestic markets. However, it’s virtually impossible for brands that want to sell across borders to do so.
Some of the biggest concerns companies have when it comes to expanding abroad are financial in nature. A 2018 survey by Pitney Bowes found fraud to be the biggest concern. In a 2019 survey by Internet Retailer for BlueSnap and Kount, the biggest challenges to expanding abroad were fraud and payment processing.
An MoR partnership can significantly ease both issues by applying the same rigorous fraud protection strategies as it would at home. Moreover, using a single MoR to handle all payments, whether international or domestic, makes it much easier for brands to manage multiple currencies across disparate markets.
Tax and other regulatory issues can also be overcome by using an MoR. This is a good thing, because if you thought calculating sales tax was complicated in the U.S., wait until you try to do so for sales across the globe, says Richard Gilbert, Head of Systems Integrator Partnerships at PayPal. Not to mention customs, duties and other taxes that may need to be collected during the sale.
It’s highly likely a Merchant of Record already has experience handling transactions in the countries you want to expand into. Not only will they be able to handle currency conversion, but they can also handle local tax and regulatory issues, too, as well as financial reporting.