Succeeding in the SaaS world is challenging, especially when you have to grapple with endless compliance issues, tax concerns, and payment gateways. Incorporating a merchant of record (MoR) into your SaaS model can make all the difference.
Nevertheless, it is important to understand the downsides of a MoR so that you can determine if it is the right option for you.
A MoR is a legal entity that takes care of payment-related tasks for SaaS businesses. Their specialties include processing, compliance, and taxes.
This company acts as an intermediary, shouldering numerous aspects involved in selling products to clients, i.e., chargebacks, refunds, and tax remittance.
There are several features of the merchant of record for the SaaS model that make it appealing to businesses looking for options for recurring payments. For one thing, because a MoR handles those ongoing legal, taxation, and SaaS compliance issues with aplomb, companies that want to sell internationally can do so with ease.
What’s more, the MoR takes care of record-keeping and paperwork. With the MoR in the driver’s seat and accepting the liability for financial-related jobs, owners are left with more time to focus on growing their operations.
Although MoRs clearly have their advantages, there are also drawbacks to the merchant of record model.
Perhaps most significantly, you relinquish full payment processing control to the MoR provider. Consumers actually buy products not from you but from the MoR, with you only receiving the funds after the MoR releases them.
Moreover, sellers connected to the MoR fully bear the risk of a platform shutdown. Additionally, the platform is home to numerous merchants. If any one of them engages in practices that break security protocols or other rules, all SaaS companies in the community suffer the consequences.
With the MoR SaaS billing model, you don’t get paid until after the third-party billing platform collects money from customers and deducts their fees. This can lead to cash flow issues and make financial reconciliation problematic.
When you incorporate a MoR into your business model, the MoR owns every transaction. Customers don’t get a personalized checkout experience from you, and post-purchase communications are generated by a third party.
In the end, you are deprived of that invaluable back-and-forth and customer insights that can be so helpful in boosting retention and in creating long-term brand ambassadors.
By handing over the burden of payments and tax, and security compliance to a MoR, you lighten your load significantly in many ways. However, you lose access to a treasure trove of vital data about the people who are purchasing your products through this third-party entity.
For instance, you are locked out of receiving details on shopping behaviors that you could otherwise have used to craft your next marketing campaign and boost your SaaS revenue. This can lower your revenue retention and lessen your subscription revenue impact.
Scaling your business can present significant obstacles when you partner with a MoR. Due to the MOR’s control, you are limited in how flexible your business can be and may not be able to customize as much as you would like.
For international SaaS transactions, your MoR might not provide sufficient localization options when it comes to currencies, payment methods, and regional preferences. This rigidity can make cross-border payments unnecessarily cumbersome and confusing to your customers.
If you ultimately decide to terminate your relationship with a MoR, you can encounter significant difficulties. Since the MoR is the legal seller, its name is usually seen on the statements sent to customers. That makes transferring the relationship confusing and frustrating for shoppers.
Furthermore, migrating subscription billing to a new platform is complex. It can lead to digital product sales errors, service disruptions, declined payments, and customer churn.
Finally, platform lock-in involves using proprietary technologies and service integrations that make switching to another provider costly and complicated.
The MoR model is not the only answer if you own a Software-as-a-Service business. There are other options for recurring payments worth exploring. In the direct merchant model, you act as your own merchant of record, integrating on your own behalf with the payment gateway.
In this, utilizing a subscription management platform for billing, invoicing, dunning, upgrades, downgrades, etc. You are responsible for handling your own tax compliance, fraud detection, and chargeback liability and management.
Another model lets payment facilitators help to simplify the purchasing process while leaving control in your hands. Although you remain in charge of your own tax liability, the facilitator provides payment processing, subscription billing, and tax calculation tools.
Additionally, they can equip you with fraud detection mechanisms and help with managing chargebacks. For international sellers, these companies offer localized payment methods in the customers’ currency of choice.
You might also leave the selling of your SaaS products to a third-party reseller, who acts as the merchant of record for the customer. Typically, you would sell your product to the reseller, who then handles all aspects of the customer relationship, including recurring payment solutions.
This model enables businesses to rapidly expand into new markets without the need to make a huge investment.
For a SaaS company interested in B2B SaaS monetization as well as in selling to consumers, partnering with a MoR can serve as a highly effective part of your payment infrastructure.
When you no longer need to carry the added onus of tax and security compliance, you and your staff have more time to concentrate on refining your product offerings and expansion.
While a MoR is just one of many payment gateway alternatives, it can serve as a robust and reliable partner throughout the evolution of your SaaS shop.