The Differences between Becoming a Payment Aggregator vs Being a Merchant of Record
Written by Shannon LeDuff, in Category Payment Processing
Payment aggregators vs. merchants of record: six of one and half a dozen of the other, or not? Terminology in the payments processing industry has reached a level of complexity matching that of a giant jigsaw puzzle, and it's difficult to determine precisely where each piece fits into the picture. To process online payments, you need a payment gateway and a merchant account. Or do you?
What a Payment Aggregator or Payfac Is
A payment aggregator provides processing services for sellers under its own merchant ID. This enables sellers to accept electronic payments without needing to set up their own merchant account with a bank or card association.
Payment facilitators (Payfacs) offer an identical service, except they provide sellers with individual merchant IDs. Aggregators are responsible for processing card and online payments and transferring revenue to merchants, and have control over when the merchant gets the funds for their sales.
Amazon and PayPal are both payment aggregators and Payfacs receive money from buyers on behalf of sellers using their processing services.
What a Merchant of Record Is
A merchant of record (MoR) is a company or individual operating a website that sells products or services, which accepts electronic and card payments. The MoR is the official seller and is, therefore, the organization responsible for processing customer payments. It’s also sometimes referred to as the master merchant and can service smaller sub-merchants by processing their payments for them.
Blurring the Lines: Amazon and PayPal
Here’s where it gets interesting: the difference between Payfacs and MoRs becomes difficult to monitor once companies start blurring the lines.
As a master merchant or merchant of record, Amazon is responsible for processing payment for all items supplied by Amazon itself. It is not only the merchant of record for everything it sells, but also acts as a Payfac for multiple smaller suppliers who sell through its site.
Instead of stating “fulfilled by Amazon” on the invoice, items purchased from other sellers state that they come from third party suppliers. The payment still goes through Amazon’s payments system though, which means Amazon is acting as the aggregator for the transaction, and receipts are issued by Amazon regardless of whoever gets the money. This means Amazon is both the Payfac and the MoR for these transactions.
With PayPal, it’s slightly different. PayPal is also a payments facilitator as well as a merchant of record. Customers don't buy anything from PayPal itself but buy from other sellers using PayPal’s system, which processed $451.27 billion in 2017, according to Statista.
In the case of suppliers big enough to stand alone as merchants of record with their own processing facilities, a buyer’s card statement shows the name of the company from whom the item was bought. Purchases from smaller companies are shown as purchased from PayPal, which then forwards the funds to the seller.
It’s All About Trust
Basically, it’s all about trust and brand reputation. Larger companies have enough of a reputation to stand alone as merchants of record, and buyers trust them to take care of their payment information.
Smaller companies don’t enjoy quite the same level of trust, so they use a payments aggregator their buyers can trust with information. Some payment aggregators never act as merchants of record, but purely facilitate payments between buyer and seller.
In other instances, MoRs accept payments on behalf of sub-merchants, without acting as Payfacs or aggregators for a broader marketplace. This is the case with companies like Lyft and Uber, which collect payments from customers and pass it on to drivers.
Why It Matters
Customers might not even wonder about the issue, given that when they purchase through Amazon, they pay through Amazon, regardless of where the product comes from.
It’s important, however, for companies in the global marketplace, to understand the differences between being a MoR and a payment aggregator.
As a MoR, companies are only liable for fulfillment of their own sales, but as a Payfac, they are also liable for sales made by members, including any chargebacks and fraud.
In addition, MoRs have to “exist” legally in a particular country, so for companies that receive international funds in other currencies, it would be necessary to set themselves up as a merchant of record in every country they deal with, because of card networks’ rules that require local domestic sponsorship. In that case, using a payment aggregator would make life much simpler for them.