Merchant of Record: The New Way of Doing Business that is Revolutionising D2C E-Commerce

Por Go Global Ecommerce

21 Jul 2022

An increasing number of e-commerce businesses are making the leap into internationalisation. Clearly, a broader potential customer base of cross-border commerce equals numerous growth opportunities, but it also amounts to a series of complexities which can drastically increase the level of difficulty when navigating the transition. As markets multiply, so do the currencies, languages, and cultures one has to contend with, as well as regulatory and tax regimes if one does not want to incur penalties; all at the same time as trying to concentrate on the business itself. As off-putting as this may sound – the transition to cross-border commerce requires substantial economic and, crucially, organisational involvement in its various phases – there is a way to manage being a part of the international markets. In fact, joining forces with a third party such as a Merchant of Record, particularly where Europe and its complexities are concerned, has become the reference model for internationalisation.

What is a Merchant of Record (MoR) and what does it do?

A MoR is a legal entity that acts as an intermediary in transactions between an e-commerce seller and its customers. The MoR is responsible for merchant-client relations on many counts. Above all, it is fiscally and legally accountable for cross-border sales to end consumers worldwide. In this respect, the MoR looks after aspects such as payment options, opening and management of the brand’s VAT position, country-specific bureaucratic requirements, customs-related costs and their corresponding variables, tax compliance and legal advice. Additionally, it localises solutions and integrates all processes.

Merchant of Record, Seller of Record and Payment Service Provider

There are three distinct models, with progressively narrower scopes of competence. In reality, the Merchant of Record, Seller of Record and Payment Service Provider do not cross over with one another. The MoR is a retailer that takes full legal and fiscal responsibility for sales and is authorised to process payments: a real intermediary. Whereas the SoR helps process payments and taxes, but still acts on behalf of the brand. Lastly, the PSP is a third party that lets merchants collect payments, but does not intervene in any tax or legal transactions.

Why is a Merchant of Record necessary when expanding an e-commerce business internationally?

Usually, when expanding internationally, companies face various complexities which are made all the more complex the greater the scope of the expansion. Basically, the complexity is multiplied by the number of countries in question. As a result, many companies are hesitant about making the leap, and even more so if the business is an American one. A market as singular as the US is obviously an enormous market, but with only one currency, a somewhat cohesive culture, one or two main languages and a single legal and fiscal framework to take into account. In lots of other cases, the move to sell cross-border is rewarded with much smaller markets and figures than in the US. Europe is a key example of the challenges internationalisation brings with it. Although there are plenty of fantastic opportunities in some of the most prestigious markets in the world, it is also very complex management-wise because, in spite of a high degree of homogeneity, every country has its unique components. For this reason, the Merchant of Record is largely chosen by American companies looking to internationalise, as it assists them in all the important aspects.

A winning model: how it works

“The Merchant of Record is the preferred working model for American companies keen to sell in Europe. The MoR handles thousands of B2C sales to end customers and then the company issues a monthly B2B invoice to the MoR. In the meantime, all risks and complex procedures are in the hands of the MoR,” explains Simone De Ruosi, CEO of Go Global Ecommerce. Essentially, the Merchant of Record acts as a reseller, mediating the relationship between seller and customer. No commission is charged to the MoR for individual transactions, rather it is a fixed monthly payment. This means that companies, as De Ruosi adds, “can focus on the business itself – designing, developing and marketing their products – with a ‘borderless strategy’ mindset. The MoR is simply a business accelerator.” The business grows, delegates hard-to-manage responsibilities and streamlines processes, as it does not have to put time and expertise into managing, updating and localising legal and tax elements.

Is a MoR suitable for your company?

Undeniably, a MoR is beneficial to any e-commerce business wanting to position itself in the cross-border market. “It is beneficial for any kind of business to be free of complications and to avoid risks or allocating resources to activities that are not key to their business.” However, De Ruosi points out, “Highly regulated companies, such as those dealing with alcohol and electronics, can benefit even more.” These sectors encounter the more difficult aspects of internationalisation and are subject to more rigorous regulations; the very ones that hold nasty surprises for companies that have not taken action to prepare for such risks.

From the US to the rest of the world

These days a Merchant of Record is essential for American companies. Europe can seem a hostile environment from a US perspective, in a number of ways. For instance, there are far stricter consumer protection and privacy regulations, differing tax and legal frameworks, on top of numerous payment methods, taxes and customs fees. But managing international sales is not all outgoing items and obstacles. In fact, it can end up being an opportunity. “Ensuring fiscal and legal transparency, complying with the regulations in each country and localising check-outs has a positive impact on the shopping experience and on trust. All of this has been proved to increase conversion and return rates.” Similarly, “Legal risks are reduced to zero. The sales responsibility is on the MoR and the seller is only responsible for the products going to the MoR.”