Evan Minsberg and  Andrew Bigart, Venable LLP

As we have previously discussed in our newsletter, there seems to be a great deal of confusion about card payments aggregation these days. As online re-sellers, independent software vendors (ISVs), marketplaces, payment facilitators, and other formal and informal designations proliferate, it can be difficult to determine what model is being used and how to characterize a given transaction. Adding to the confusion is the spread of the term “Merchant of Record” or “MOR,” which has traditionally been used to refer to the entity selling goods or services to the cardholder. In recent years, however, the term has been used by payment intermediaries to mean the exact opposite – a party other than seller that will “act as the merchant” for other businesses. 

In this article we discuss what it means to be the merchant, the differences between MOR status and providing MOR services to merchants, and the potential consequences of improper use of the MOR concept to describe payment facilitation services. 

Merchant Status

Many companies in the payments industry use the term “merchant of record” to describe their payment services. But what does this term mean? The merchant in a sales transaction is the party from which the cardholder believes it is making a purchase and the party to which the cardholder is liable for payment. According to the card network rules, the “merchant” in a card transaction represents itself as selling the goods or services to the cardholder, uses its name to identify its store or ecommerce site, and provides recourse to the buyer in the event of a dispute. Typically, the merchant is the company whose name appears on transaction statements, owns or takes possession of the goods or services, books the sale as revenue, and provides customer service and returns. 

The term “Merchant of Record,” however, does not appear in the most recently published Visa or MasterCard Rules. To our knowledge, the term MOR is not a formal designation, although it does provide a useful shorthand for platforms, marketplaces, and others whose business model involves meeting the criteria to be a merchant. This might be the case, for example, for a services platform that markets itself as the MOR in connection with processing payments for the services sold through the platform. Under this scenario, the platform markets the services to the user, arranges provision of the services through a network of contractors, processes the payments, manages disputes, books the sale and revenue, is liable for chargebacks, and compensates its independent contractors through separate agreements.

This scenario, however, is different from a payments company advertising “MOR services” for third-party merchants. In this case, the payments company is likely using the term to describe a package of features, including, but not limited to, (1) card payment processing; (2) gateway services; (3) tax calculation and remittance; and (4) chargeback and fraud prevention services. Importantly, companies offering MOR services are typically not offering to bethe MOR as described above, and any card-processing services they provide (including payment facilitation, if applicable) need to comply with the network rules. While these “MOR services” may be useful in streamlining the process and reducing the risk of accepting card payments, a business that enters into an arrangement to receive such services will still be the merchant for the purpose of selling its goods and services.

Moreover, the term MOR should not be used as a substitute for payment facilitation. An entity that does not meet the criteria to be the merchant (such as in the example above) and that submits transactions for processing on behalf of third-party merchants is engaged in payments aggregation and should comply with applicable requirements as a payment facilitator or other approved aggregator type.

For example, consider a software platform (Platform) with a uniform payments experience that allows cardholders to purchase various goods and services provided by third parties. Depending on how it is structured, this business could be offered either through the MOR model or through a payment facilitation model. The chart below describes differences between acting as a merchant and a platform that does not meet the definition of a merchant.

 Merchant (of Record)Non-Merchant Payment Facilitation
Which Party Is the Seller?Platform characterizes itself as the seller. Cardholders understand that Platform is providing the goods or services and not any other third party identified on the website. Cardholders believe their relationship is with Platform.Platform does not identify itself as the seller. Cardholders understand they make purchases through the website, but not fromPlatform.
To Which Party Does the Cardholder Owe Payment?Platform.A third party identified on the Platform.
Which Party Provides the Goods or Services?Platform. The Platform may (1) take title to the goods at or before the sale; and/or (2) provide goods and services through relationships with third parties on the Platform. Third parties on the website provide the goods and services to the cardholder.
Against Which Party Does the Cardholder Have Recourse?Platform. The website’s terms and conditions obligate Platform to provide the goods and services and provide recourse to the Cardholder.A third party identified on the website. The website’s terms and conditions clarify that goods and services are provided by third-parties and Cardholders do not have recourse against Platform.
Funds Flow and CompensationPlatform books the sales proceeds as revenue and has separate contractual obligations to compensate third parties before or after the sale.Platform takes custody of funds and transfers them to third parties net of its fee.

Incorrect Use of MOR Status

For each company appropriately described as the MOR, there are others that may be using that term to describe an aggregation business model that does not meet the criteria described above. Instead of accepting payment as merchant for the goods and services on their platforms, these companies enable other businesses to accept payments electronically by receiving and distributing funds to third-party merchants. As long as these companies are appropriately set up and registered as payment facilitators, digital wallets, or marketplaces, and do not otherwise use the term MOR in a deceptive manner, they are unlikely to be violating network rules or applicable law.

However, companies that do not meet the criteria for being a merchant should not use the MOR concept as a reason to avoid registering as a payment facilitator or other aggregator type. It is a violation of network rules to submit the sales transactions of other companies through your own merchant account without registering as a payment facilitator. And, if not authorized by the card networks, payment aggregation presents a risk of violating federal laws related to card factoring, defined as processing a merchant’s transactions through another merchant’s processing account.

In addition, a company that markets itself as an MOR business model may not appreciate the need to comply with anti-money laundering and money transmission laws. The sale of goods or services by a merchant is a two-party transaction that does not generally implicate such obligations, but the receipt of funds from one party for the purpose of transferring them to another is money transmission, subject to federal and state regulation. Moreover, while there are exemptions from money transmission laws for payment processors, a company cannot claim to be the MOR for one purpose and a payment processor for another.

Given the complexities of these issues, it is important for payments companies to understand the nature of their services and how they fit within the card network rules, and for merchants seeking processing services to understand what they are being offered. Otherwise, payments companies risk entering into arrangements that do not comply with the network rules or applicable law; it is therefore better for all involved for the real merchant (of record) to please stand up.

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For more information, please contact Evan Minsberg (erminsberg@venable.com) or Andrew Bigart (aebigart@venable.com).