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When SaaS and ecommerce companies expand globally, they quickly face compliance headaches - from payment processing to VAT. Everyday tasks like issuing refunds, handling chargebacks, staying compliant with AML rules, and collecting taxes all get far more complicated across borders.
One way to simplify this is by working with a Merchant of Record (MoR). But while an MoR can take the burden off your plate, it also comes with important tradeoffs. Here’s what you need to know before choosing an MoR for international growth.
What Is a Merchant of Record (MoR)?
A merchant of record (MOR) is a company that becomes the legal seller on record for your transactions. In this case, when customers buy from you, they are technically buying from the MoR instead.
The MoR handles things like sales tax, GST, or VAT, and other financial and legal compliance processes required by local government, so that your business doesn’t have to. This entity is responsible for handling payments, taxes like sales tax, GST, or VAT, and other financial and legal compliance processes required by the local government. Merchants of record sometimes even handle order fulfillment.
In other words, you create the product, and merchants of record handle all the complex business requirements. The merchant of record will also appear as the “seller” on things like a buyer’s credit card statement. This is even though the product or service is actually provided by the original business and not the MoR.
Core responsibilities of MoRs
MoRs generally handle:
- Processing payments - Accepting payments, including from credit and debit cards, wallets, payment services providers, or common local payment processors and methods. They also handle currency conversion.
- Tax management - Calculating, filing, and remitting sales tax, VAT, GST, and any other required taxes
- Other compliance and security requirements - handling local compliance requirements such as know your customer (KYC) and anti-money laundering (AML) regulations, Payment Card Industry Data Security Standard (PCI-DSS) regulations, General Data Protection Regulation (GDPR) in the EU
- Customer support - Secondary tasks associated with taking payments and being the party of record listed on the transaction, like issuing refunds or handling chargebacks
Who uses MoRs?
Growing SaaS companies, ecommerce businesses, and other subscription services often use MoRs. Think of MoRs as a shortcut to quickly launching in new international markets without having to build compliance systems in-house.
How the MoR Model Works
Instead of customers paying you directly, with an MoR:
- Customers buy your product
- They pay the MoR
- The MoR takes their fee (typically 5-8%)
- The MoR sends you the rest
Contracts and flow of funds
When working with an MoR, it’s important to understand that the money from your customers does not flow directly to you. Instead, you’re in what is known as a “tri-party agreement structure.”
In the traditional direct sales model, the customer contracts directly with your business. You process their payment, handle tax, and take care of any other regulatory requirements in-house.
But with an MoR relationship, there are now three parties involved. The MoR takes payment, deducts their fees, handles taxes and compliance, and then sends you what’s left. This can take weeks instead of the 1-2 days it takes for your business to receive direct payments from customers.
Payment and compliance mechanics
One of the main advantages of using an MoR is that they have built-in structures to handle the complicated stuff like payment infrastructure, tax, and regulatory compliance. Crucially, these are services that growing SaaS or ecommerce companies need but may be too new or lean to implement themselves.
For one, MoRs generally integrate with multiple global payment service providers (PSPs) and payment gateways to offer customers the online payment options they are accustomed to. This might include credit cards through Stripe or Ayden, bank transfers via GoCardless, digital wallets like PayPal or Apple Pay, and country or region-specific options like SEPA in Europe or UPI in India. When it would be difficult for a small or new SaaS company to integrate with this many service providers, the MoR does the heavy lifting instead.
Another big benefit of using MoRs is tax compliance. Expanding into a new country means following local tax rules, like registering for VAT, GST or sales tax, charging the right rates, and filing and remitting the tax on-time. It may also mean setting up a local bank account or hiring an on-the-ground representative to act on your behalf with tax authorities. For a small company, this can be overwhelming. An MoR handles it for you.
Tax compliance is also a major benefit of using an MoR. When expanding into a new country, businesses are required to comply with that country’s indirect taxation requirements. This includes registering for the country’s sales tax, VAT, or GST, which sometimes requires hiring an in-country representative or having a local bank account. It also means collecting the tax and filing and remitting the collected tax periodically. A small ecommerce company may not have the bandwidth to handle tax compliance, and can rely on an MoR to take care of this complexity for them.
Beyond taxes, MoRs can help growing businesses with a complex web of other regulatory compliance requirements, like:
- Anti-money laundering (AML) and know your customer (KYC) compliance – verify customer identity to combat money laundering
- General Data Protection Regulation (GDPR) compliance - ensuring customer data is collected, stored and processed according to regulations.
- PCI-DSS compliance – ensures customer payment data is handled securely throughout the entire payment process
MoRs can also assist with fraud prevention, a serious threat to smaller companies who may have less robust security measures.
Customer experience
This is where using an MoR can get tricky. While MoRs can help a newer or smaller company get up to speed in a fresh new market, this can also impact your customers’ experience with your brand.
The MoRs name, not yours, will appear on your customer’s bank statement or credit card statement. This can lead to confusion over who the real seller is, and even leave customers feeling tricked or baited and switched. Customers, thinking they’d made a purchase from your company but seeing a generic MoR name on their bill, might dispute the charge or reach out to customer support with questions. This leaves your team to deal with the financial implications of chargebacks or increased customer support volume.
Should customer concerns escalate, you may not be able to provide the type of service you want–such as an immediate refund–because you’ll be required to go through the MoRs internal processes. All of this can lead to customer confusion and dissatisfaction with your brand.
Because of this, it’s vital to monitor a few key metrics in order to determine if using an MoR is right for your business.
- Chargeback rate – A high chargeback rate might indicate that the name on bank and credit card rates is causing confusion.
- Refund rate – A large amount of customers asking for refunds might reflect friction in the delivery or customer service offered by the MoR.
- Conversion rate – Can show that unfamiliar payment processes or checkout steps are deterring customers from completing a purchase.
- Payout delays – When your business directly processes payments, the funds are generally available in 1-2 business days. MoRs may retain funds longer in order to ensure regulatory compliance or for their own cashflow. This may trickle to customers as well, delaying refunds and causing a negative experience.
Not all businesses will experience these challenges with MoRs, but it’s important to know what to look out for if you enter into an MoR relationship.
Benefits of Using a Merchant of Record
MoRs can offer compelling advantages that are attractive to many growing businesses, especially those looking to expand across international borders.
Fast global expansion
The biggest benefit is speed. If you identify an opportunity in a new market, you want to jump on it fast–before a competitor beats you to it. Instead of spending months learning tax laws and setting up compliance in new countries, you can start selling immediately. The MoR already has everything set up.
Another handy thing about using an MoR in a new country is that they are already set up to accept payments in a wide variety of methods, including those that may only be popular locally. If a SaaS company chose to expand into a new market under their own steam, it might be difficult or even impossible for them to take payments in the way local customers prefer to pay.
Reduced compliance burden
To put it lightly, tax and regulatory compliance is complicated.
Getting tax compliant in a new country means registering with the country’s tax authority (and sometimes local jurisdictions), collecting the right amount of tax on all transactions, and filing and remitting the tax. It also means staying up to date on changing tax rates, rules, and regulations.
MoRs handle all this for you.
Beyond taxes, MoRs also handle a country or jurisdiction’s specific regulatory compliance requirements such as customer identification to prevent money laundering, payment security standards, or customer privacy and security. These are all compliance burdens that a small, fast-moving company simply may not have time or money to implement yet.
Improved conversion
An MoR might also deliver a better checkout experience through optimized, localized checkout processes, including having local bank accounts which reduce failed payments and increase conversion.
They might A/B test for flows, optimize for the types of devices buyers in the country use most, and present checkout pages in local languages and currencies that are more trustworthy to buyers. These seemingly small details can make a significant impact on your bottom line.
MoRs are also well-placed for fraud prevention. Because they deal with a large volume of customers over multiple businesses they can spot and optimize for the most common scams. But they can also invest in more sophisticated fraud-prevention mechanisms, resulting in fewer false declines from legitimate customers.
Downsides of the MoR Model
While the benefits of using a merchant of record model can be compelling, the model also comes with significant downsides, especially as your business scales.
High Cost
The most obvious downside is cost. MoRs charge between 5-8% of every transaction, and that adds up fast.
While this might sound like a small price to pay for the convenience of an MoR at first, as your company grows this can become unsustainable. For example, a SaaS company with revenues of $10 million annually would end up paying $500,000 per year to their MoR even at a modest 5% rate.
Further, unlike many business expenses that decrease as a percentage of revenue due to economies of scale, MoR fees remain constant. A company paying 5% on $5 million in revenue will still pay 5% on $100 million in revenue. Ouch.
Because MoR’s charge based on percentage, businesses operating on thin margins or prioritizing rapid growth can quickly become constrained by the increasing expense.
Control and flexibility
When you use an MoR, you’re giving up control of vital parts of your business.
- Billing system – You have to use their billing setup, which limits customization at the crucial “buy now” stage of a transaction.
- Customer data - MoRs generally only provide you with limited data about your customers, making it more difficult to run granular analytics and make smart data-driven decisions about crucial strategies like pricing, marketing, and advertising
- Customer experience – The MoR’s name appears on credit card statements, and that can create real confusion about which business your customer is actually doing business with.
- Refunds and support - Because you don’t handle things like customer service and refunds, you can’t be sure your customers are receiving the experience you desire. For example, an MoR may delay refunds, causing negative customer reviews.
To top it off, migrating off an MoR later can also be a pain point. Your customer payment data, subscription relationships, and billing history are all tied to the MoR's systems. Moving to a direct billing model requires migrating customers to new payment methods, potentially triggering churn, and rebuilding integrations with other business systems in order to replace the MoR’s functionality.
Many businesses who have outgrown their MoR relationship find themselves locked in for longer than anticipated due to the complexity migration.
Contract and cash flow issues
MoRs don't pay you immediately. While direct payment processing gives you money in 1-2 days, MoRs might hold funds for weeks or even a month. This can hurt fast-growing businesses that need predictable cash flow.
The three-way contract structure also complicates enterprise sales, fundraising, and acquisitions. Investors and buyers may see the MoR relationship as a complicating risk factor.
Merchant of Record vs Other Models
While MoRs offer significant advantages to early stage businesses, they have pros and cons when it comes to other models.
MoR vs Payment Services Provider (PSP)
PSPs like Stripe handle the technical aspects of payment processing but, unlike MoRs, don’t become the legal seller.
The key difference here is legal liabilities and control. With a PSP you maintain the direct relationship with the customer and have full control over your billing processes, but you’re responsible for handling tax compliance, regulatory requirements, and dispute resolution.
PSP’s also generally charge a percentage of the transaction plus a small fee, such as 2.9% + .30, which is significantly less than an MoR.
This model works well for businesses equipped to handle payments, taxes, and compliance and who want to maintain control of their business activities and the customer experience.
MoR vs Seller of Record (SoR)
A seller of record (SoR) is the entity responsible for tax obligations on a transaction but who doesn’t necessarily handle payment processing or customer relationships. This is a less common business model than a merchant of record, but might be pursued by a business who wants to maintain customer relationships while only outsourcing the hassle of tax compliance.
SoRs typically charge lower fees than MoRs (typically 1-3% of revenue), because they’re not providing payment processing, security and fraud prevention, or customer support.
This model offers a middle ground between the more full-service MoR model and DIY approaches where your business handles all compliance issues.
MoR vs DIY (Sphere + PSP)
The modern alternative to using an MoR is combining a payment service provider with specialized tax compliance software like Sphere for handling global tax obligations.
This approach allows businesses to maintain complete control over their billing infrastructure and customer relationships while automating the complex aspects of international tax compliance.
One of the most attractive aspects of this approach is price. Rather than pay an MoR 5-8%, this approach allows your business to pay the typically 2.9% + .30 per transaction payment processing fee and Sphere’s $100 per jurisdiction per month flat fee.
The cost savings can be substantial. A business processing $5 million annually would pay approximately $250,000 in MoR fees versus roughly $145,000 in Stripe fees plus $2,400 monthly (or $28,800 annually) for Sphere coverage, an annual savings of more than $75,000.
This model also provides faster access to funds, greater flexibility in billing and checkout customization, and freedom to integrate with other business systems. It’s a win/win for lean fast-growing businesses who value control over their destiny from day one.
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When to Use an MoR (and When Not To)
Whether or not to use an MoR depends on factors like your business stage and long term goals.
Good fit
MoRs work best for small businesses or startups that prioritize speed to market over cost optimization and control, like new SaaS companies or companies that sell a simple one-time product.
For example, say your company tests three markets and finds one especially viable. You might then choose to build out your own direct payment and compliance processes rather than continue to use an MoR in that viable market, while ending your relationship with the MoR in the other two markets.
Lean teams that require operational simplicity may also opt for MoRs at first. If your current profit margins can comfortably absorb 3-8% fees on every transaction, then you may prioritize a small, agile team over profits, particularly in the finding-your-footing stage of your startup.
Poor fit
Mid-market Saas companies with existing payment stacks rarely benefit from MoRs. The cost of migration, loss of control, and hefty ongoing fees typically outweigh any benefits an MoR can provide. This is especially true when modern alternatives like Sphere can handle international tax compliance for your business without the steep per-transaction MoR price tag.
Cash flow sensitive businesses, especially ones that are seasonal or rapidly expanding, will also want to think twice before entering into an MoR agreement. Payment delays of weeks or up to a month can curtail your ability to make swift business decisions.
Businesses with complex or customized billing requirements likely won’t benefit from an MoR either. MoRs are often one-size-fits-all, and can’t account for usage-based pricing, multi-tier pricing, or customized enterprise contracts. This limits the types of customers your business can easily serve.
And then there’s the big problem of small margins. Many businesses operate on tight margins, and the MoR fee of 5-8% can represent a significant chunk of profits. This can impact not only day-to-day operations but big-picture factors like fundraising and future acquisition.
Examples of MoR Providers
Seeking merchant of record services? Here are several established service providers that cater to different markets and business needs.
Paddle
Paddle focuses specifically on SaaS businesses and offers comprehensive subscription billing, tax compliance, and fraud prevention services. They also provide localized checkout experiences, and are one MoR that can handle complex subscription scenarios like upgrades, downgrades, and dunning management. While Paddle’s strength is SaaS-specific features, their pricing and contract terms can be constraining for mid-market or larger businesses.
LemonSqueezy
As their whimsical name hints, this MoR focuses on helping indie content creators sell their digital products. They offer easy storefront creation, basic payments (including subscription management), and global tax compliance. LemonSqueezy is best for solo entrepreneurs or small teams who may not have a wealth of technical know-how but need to get online and selling. However, it may not be robust enough for SaaS businesses or larger teams.
FastSpring
FastSpring is one of the longest-standing MoRs in the software industry, with a history of providing extensive international payment support, compliance, and localized customer service. Because of their history, they have built a reputation for providing comprehensive analytics to customers, and they provide flexible contract terms that also appeal to mid-sized and larger businesses. On the downside, because they are a legacy solution, their technology stack can feel dated compared to modern solutions.
Polar
Polar is the MoR created with developers in mind. This MoR provides modern APIs and extensive customization options, which are attractive to modern businesses that don’t want to be locked into an MoR's stock billing or checkout system. Polar is useful for tech-savvy teams that want the benefits of an MoR but with strong customization for the user experience.
Sphere vs Merchant of Record
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Positioning
Sphere provides all the global tax compliance benefits of a traditional MoR, without the downsides.
Rather than acting as a third-party in your business relationships, Sphere integrates with your existing billing infrastructure to provide AI-powered tax compliance globally.
This distinction is crucial. Sphere doesn’t become the legal seller of your products or appear as the seller on your customers’ credit card bills. Instead, it does all the heavy lifting, determining where you need to register and pay taxes, collecting the right tax rates, and filing and remitting taxes to each jurisdiction.
And because Sphere bills at a flat rate of $100 per jurisdiction per month, you never have to worry about paying a per-transaction fee. You can instead uniformly predict how much you’ll pay for international tax compliance annually.
Sphere integrates with PSPs like Stripe and Chargebee as well as many billing solutions like Orb, Netsuite, Rillet (see full list here) to seamlessly automate your tax compliance without coming between you and your customer.
Comparison table
True Compliance Doesn’t Require a Middleman
MoRs solve real problems for businesses expanding globally: they offer a shortcut to international expansion. But at a price of 5-8% per transaction, they’re an expensive long-term solution.
Beyond cost, MoRs stand between you and your customer. They control refunds, chargebacks, customer support, and customer data. They can hold your revenue for weeks, hampering cash flow when you need to move fast.
Modern tax compliance solutions like Sphere offer an alternative, business-first approach. You get the same tax compliance benefits of MoRs without controlling so many other critical aspects of your business, and minus the high per-transaction fees.
The right choice for your business depends on your goals and ultimate vision. If you’re optimizing for speedy market entry and are willing to accept higher costs and lower control, then an MoR may be for you. But if you’re building a sustainable, software-led approach, using Sphere typically lays a better foundation for long-term success.
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