What is a merchant of record?

Let’s start with a basic definition. A merchant of record is the legal entity selling goods or services to an end customer.

The MoR is responsible for handling all payments and legal liabilities of each transaction. This includes:

• Arranging payment reconciliation, refunds, and chargebacks
• Calculating, filing, and remitting sales tax 
• Opening bank accounts in countries where customers live, to accept payments in local currencies
• Ensuring compliance with payment card security (PCI-DSS) standards and data requirements (e.g., GDPR)
• Establishing local business entities to facilitate merchant accounts, tax registration, payment relationships, and so on
• Converting payments made in foreign currencies
• Integrating & maintaining B2B payment processors or payment service providers
• Managing all credit and debit card fees
• Creating fraud risk controls and reviewing suspicious orders

So, what is a merchant of record marketplace?

When a marketplace chooses to become the merchant of record, they are essentially saying to the sellers on their platform:

“I am going to purchase your goods and services and take responsibility for selling them on to the end customer.”

Customers visit the marketplace and shop as normal, but in the background, there are actually two transactions happening simultaneously during the sale. The first transaction is between the end customer and the merchant of record, and the second is between the merchant of record and the seller.

Because they are the MoR, it will be the name of the marketplace that appears on the customer’s bank statement and the marketplace that is held responsible if any payment disputes arise. They become the liable party.

Marketplaces may have greater international capabilities than the sellers using the platform, so by acting as the merchant of record, they are able to help connect sellers with a greater number of buyers.

And what about marketplaces that choose not to be the merchant of record?

In this scenario, the marketplace is essentially saying to the sellers on their platform:

“I will provide the platform upon which for you to connect and do business with end customers, but all payments responsibilities and related legal liabilities remain with you.”

Customers visit the marketplace and shop as normal. When they make a purchase, just one transaction happens. The customer sends payment to a Stripe connect wallet that is owned by the marketplace. Automated rules applied to the account will result in funds being distributed to the relevant sellers and the marketplace itself. 

The seller’s name appears on the customer’s bank statement, and the seller remains liable. 

How does this impact trade credit?

The good news is that all marketplaces can partner with a digital trade credit provider in order to offer payment terms on their platform. There are variations in how this works depending on whether the marketplace is the merchant of record or not.

With MoR marketplaces, the digital trade credit provider buys the right to collect the money owed to the marketplace by customers. This is not possible for marketplaces which are not merchants of record, because the goods belong to the seller and the customers don’t owe the marketplace any money.

However, such marketplaces are still able to offer credit. One option is for the trade credit provider to offer buyer loans. In this scenario, the provider is essentially saying to customers:

“I will lend you money to buy those goods. I will pay the merchant for your purchase, and you will pay me later.”

The other option is for the trade credit provider to finance individual sellers, in the same way that they would have financed the marketplace if it was the merchant of record.

Usually, the marketplace and trade credit provider will work together to understand the best approach.

Interested to find out how Hokodo can help marketplaces to avoid platform bypass and grow their revenue? Check out our dedicated marketplace hub.