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What is a Merchant of Record and do you need one?

What is a Merchant of Record and do you need one?

If your business is thriving, international expansion might be on the horizon. Along with exciting opportunities come challenges, of course. Based on our experience, one significant hurdle is ensuring compliance with local legislation, managing transactions smoothly, and preventing fraud attempts.

This is where working with a Merchant of Record (MoR) comes into question. MoRs act as third-party entities responsible for online transactions and manage invoicing, taxes, data compliance, and more.

Some advice out there says a Merchant of Record is absolutely necessary – but is it? There are benefits and drawbacks to using an MoR as an e-commerce or other online business. And there are also alternatives that might fit your operations and budget much better!

As experts in cross-border tax compliance, we’ve put together this guide to help you decide how best to grow your business abroad.

What is a merchant of record (MoR)?

Merchants of Record are third-party companies acting as legal entities responsible for all the online transactions between a company and its customers. But there’s more to an MoR than financial capabilities and legal expertise.

These providers can manage areas such as invoicing, taxes, data compliance, billing, chargebacks, refunds, and more. Working with an MoR can be an appealing choice for businesses looking to grow internationally, but especially for:

  • E-commerce companies, as they often sell to customers across the globe and may find it challenging to set up local legal entities.
  • Digital goods providers, such as SaaS companies, because the goods sold by these companies are intangible and, by default, available to a global consumer base.
  • Digital service providers, such as an online business coach or consultant, as the services can be conducted virtually from anywhere in the world.
  • Providers of downloadable items such as video games, eBooks, and more because streamlining their legal and financial operations with an MoR can speed up their global appeal and reach.

Similarly, if you’re expanding internationally and hiring employees, you might consider working with an external provider who can handle tasks such as processing payroll and benefits for your global workforce.

The pros of using an MoR to grow your business

Here are 4 pros of using a Merchant of Record to grow your business, especially internationally.

1. Helps you comply with international laws and regulations

One of the most complex, time-consuming, and often frustrating aspects of growing a business internationally involves having to get familiar with international taxes. These may differ greatly from your local ones, or there may be overlaps with only very subtle changes. Not to mention that keeping up with the constant changes can become like another full-time job.

In addition to taxes, when selling globally, you also need to make sure you comply with the following:

  • PCI compliance: Each country follows its own regulations regarding payments via AMEX, Mastercard, and Visa.
  • Data privacy regulations: GDPR and other local rules need to be taken into account at all times.

An expert MoR is equipped with the tools, resources, and knowledge needed to comply with local laws, handle data privacy adequately, and generally adhere to any other regulations. But this is also true for other compliance softwares that don’t function as an MoR, but that take care of taxes, payments, invoices, and data security. Of course we’re thinking of Quaderno!

2. Minimizes fraud and chargebacks by handling payments and disputes

If you sell your goods online, you could be at a higher risk of coming across fraud. Some MoRs use fraud detection technologies to identify potentially fraudulent behavior. These tools can monitor transactions in real-time to detect irregularities or unusual purchasing patterns, high-risk geographies, and discrepancies in billing information.

In parallel, selling online means increased likelihood of having to deal with chargebacks — when a payment made by a customer is returned by the retailer. Instead of having to deal with potentially stressful and lengthy disputes yourself, the MoR takes all those matters into its own hands.

3. Expands market reach and increases sales

Expanding internationally is no easy feat, especially if you set off on this journey without any external support. How will you manage a sudden increase in customer orders and the requirement to localize payments, while still delivering top-notch customer support?

By automating and streamlining areas such as multi-currency support and customized checkouts, an MoR can keep your growing business thriving without the need for you to lose sleep over things such as scalability, unfamiliar currencies, and personalization.

4. Improves CX with local language support and handling refunds

Speaking of customer experience (CX), this is another important area to consider when expanding internationally. With global growth comes a variety of new customers who likely speak different languages and have specific expectations from you as a retailer or service provider.

You may have already thought about incorporating a chatbot to help you provide a smooth, fast, and pleasant CX. But when it comes to potentially thorny situations such as returns and refunds in local currencies, you might need human agents to step in and save the day.

Once again, the key to success lies in working with a Merchant of Record, who can sort out all this on your behalf thanks to its legal expertise and ability to operate on a local level.

The cons of using an MoR to grow your business

Here are just 4 cons to using a Merchant of Record to grow your business:

  1. Costs
  2. Difficulty of integration
  3. Less control of the customer experience
  4. Data privacy and compliance issues

1. Costs

A Merchant of Record will provide you with their services for a fee, which can include transaction fees, setup fees, monthly or annual subscription fees, and sometimes additional fees for currency conversion or handling international transactions. This can quickly accumulate over time, and you could rack up quite a hefty bill for using these services. In our experience, this can be an issue for independent online businesses, especially if you mainly handle small transactions.

2. Difficulty of integration

Integrating a MoR into your eCommerce platform can be quite complex. Many MoRs offer an API (Application Programming Interface) with documentation, but this will require a certain level of technical expertise and knowledge. They usually offer a one-size-fits-all approach, which can make integrating their service into any customized platform can be challenging and resource-intensive. Not all businesses are the same or have the same needs!

If any technical issues arise, you’ll need to contact your MoR and wait for them to resolve the issue. Depending on the level (and quality) of support they offer, your customers could become frustrated with delays or unresolved issues.

3. Less control over the customer experience

When using an MoR, you have little control over both the payment process and the payment options you provide. The MoR handles the transactions on your behalf, which gives you less flexibility in terms of payment options, accepted currencies, and dealing with any customer issues. You also own less direct customer data to pull from, which means you have less insight into your own buyers. Overall, this can have a negative effect on the customer experience, and you may not be able to craft a seamless customer journey.

4. Data privacy and compliance issues

While an MoR usually takes care of many of the legal and compliance considerations, there may be additional requirements depending on the industry you operate in. You may also have to verify that they have followed the correct tax and legal requirements.

Your MoR will also be handling your customers’ data. You’ll need to ensure they follow any data privacy regulations like GDPR in Europe or CCPA in California. If your MoR experiences a data breach, your customers’ data may be at risk, leading to a loss of customer trust and a negative effect on your brand reputation.

5 steps on how to use an MoR for international business growth

If you choose to try a Merchant of Record, there are 5 steps to getting started:

  1. Choose the MoR that is right for your business
  2. Onboard with the MoR
  3. Set up your store in the countries where you want to sell
  4. Start selling to customers in the new markets
  5. Track your results with the MoR

1. Choose the MoR that is right for your business

Do you remember how long it took you to find the best small business payroll service for you? Well, to reap the most benefits from your Merchant of Record, you need to take the time to select the best one for your needs.

Consider things such as the ability to process international payments, experience and expertise, client portfolio, and, of course, ratings and reviews. If you need any help with additional areas, such as compliance and data security in the specific geographies that you’re targeting, then make sure the MoR you choose can deliver that.

2. Onboard with the MoR

Once you have identified the right MoR for you, it’s vital to get them to familiarize themselves with your business before you begin working together. Hopefully they have a proper onboarding process for you!

Clarify what your business is, what it does, what your company values are, how many customers you have, where in the world you currently sell, and where you’re planning to expand.

3. Set up your store in the countries where you want to sell

Now that the partnership with your MoR is official, you can get your online store up and running. Make sure you select the right local domain for each new country that you’re targeting, you create custom mailer boxes that take local cultures and preferences into account, and that everything else — including the currency — is localized.

4. Start selling to customers in the new markets

Thanks to your MoR, you can start selling immediately once you have launched your online store. From this moment on, you’ll have the peace of mind that all payments and transactions are in the safe and expert hands of your MoR, while you can go back to focusing on more strategic parts of your business growth, such as marketing to international customers.

5. Track your results with the MoR

After some time, you need to determine if the MoR is right for you and worth the cost for your business. Gather and analyze data regularly to measure its performance and judge whether it’s delivering the results you expect. Track financial metrics such as sales and returns, as well as data on web traffic. If anything concerns you, make sure you flag it with your MoR and work together toward a solution.

Quaderno: An alternative to using an MoR for international expansion

Many companies prefer not to use an MoR so that they can control all aspects of the customer journey from marketing to sales to payment to customer support. If you’re looking for a simple way to deal with your taxes while retaining control over your entire payment process and customer experience, international tax compliance software can help.

In fact, we created Quaderno to provide a flexible, affordable option to online businesses that are selling at home and abroad. We cover many of the most important functions of a Merchant of Record.

What exactly does Quaderno do?

In every subscription plan, Quaderno provides the following:

  • Easy integrations with any payment system and sales channel
  • Automatic tax calculations on every sale
  • Automatic invoicing that’s localized to language and currency
  • Tax reporting & easy filing
  • Alerts about new tax obligations
  • Storing your business’ tax registrations
  • Easy-to-read business insights

Let’s explain in a bit more detail!

Easy integrations with any payment system and sales channel

It’s all about flexibility. With Quaderno, your business is not locked in with a single payment method or processor. You can switch payment gateways tomorrow and your invoices and taxes won't be affected. We offer 15+ one-click integrations as well as API tools.

Automatic tax calculations on every sale

The app performs automatic tax calculation on every sale you make, according to the product category of what you’re selling. Calculations are automatic and added at the point of sale, no matter which channels and payment processors you’re using. If you sell on your own website, Quaderno will add automatic tax calculation to your checkout process seamlessly.

Quaderno’s database covers over 12,000 tax jurisdictions worldwide. And we stay up-to-date with tax rates and policies as they change around the world, so the rate is always accurate.

Automatic invoicing that’s localized to language and currency

Quaderno provides automatic invoicing for every transaction. The app will send tax-compliant receipts, invoices, and credit notes automatically, on the spot. You can also set up recurring invoices if you bill by subscription. Plus, Quaderno’s automatic invoicing offers:

  • Customizable and localized invoices. Quaderno allows you to customize invoices and receipts to match your brand. Not only that, the app creates documents in your customer’s local language and currency! Perfect for international sales.
  • Self-service invoice and billing help for customers. Quaderno offers a billing dashboard for each of your customers. This self-service customer support option saves you time, money, and stress. Plus, it creates a much better user experience.

Tax reporting & easy filing

No more number crunching or guess work during tax season. With Quaderno’s instant tax reports, you can understand your tax liability in any jurisdiction at a glance and file a return in mere minutes. The app tracks how much tax you’ve actually collected in each jurisdiction, and displays all the necessary information in one place. This makes filing tax returns a matter of data entry.

Or, if you'd rather leave tax returns to the professionals, we'll connect you with a verified tax filing service!

Alerts about new tax obligations

Let’s say you’re based in California but selling to a lot of customers in Florida. You are wondering if you need to charge sales tax. Well, Quaderno monitors your tax liabilities and where your business might need to register next. The app tracks your sales in real time, no matter where you’re selling, and measures those totals against each jurisdiction’s threshold rules. Thanks to Quaderno’s threshold reports and real-time data tracking, the system will alert you when:

  • Your sales have hit 100% of the registration threshold (letting you know it might be go-time for tax compliance!)
  • Your business is liable for a new tax because you’ve made a sale in a new place, where there’s no registration threshold.

You’ll receive these notifications both in the app and via email. Who doesn’t love a heads up about important info? Especially when it can save you time, money, and stress.

Storing your business’ tax registrations

It can be annoying to keep track of your business IDs and tax registration numbers. In Quaderno, all of your business tax registrations are visible in one place, set up and recorded digitally. You can easily update, edit, add or remove these registrations at any time. Quaderno also stores your registration numbers and tax IDs digitally, then automatically stamps them on any receipts, invoices, reports, or other necessary documents. More on that later!

Easy-to-read business insights

Our e-commerce customers say they love that Quaderno provides an overview of their business’ performance. It’s true! Quaderno consolidates all of your sales data into one dashboard, so you have a centralized place to analyze your business – whether by location, by product, or many other factors. So you don’t just get the tax compliance, you also have the information you need to make smarter business decisions.

If all that wasn’t enough, here’s what else you get:

  • 5-star rated customer support team
  • VAT ID verification for B2B transactions
  • Secure storage of customer data, according to local tax laws around the world
  • Currency exchange based on official rates, always up-to-date
  • Automatic, customizable invoices in 10+ languages
  • Seamless payment options for your website or store, Quaderno Checkout
  • Collective data reports from all sales channels, platforms, and payment gateways in one easy-to-use dashboard
  • Helpful accounting reports, such recurring expenses and balance sheets

You can try all of the above for free with the Quaderno free trial. Our best-in-class customer support team is happy to help you with any questions.

Note: At Quaderno we love providing helpful information and best practices about taxes, but we are not certified tax advisors. For further help, or if you are ever in doubt, please consult a professional tax advisor or the tax authorities.