How Can Vertical Software Companies Avoid Merchant of Record Liability as a Payment Facilitator?

Vertical software companies have been gaining a lot of speed. Business software is becoming more and more vertical.

 Many of these technologies are hiding in plain sight. Hiding behind the magic curtain, so to speak.

Merchant of Record

 A merchant of record is one of these such wonders that hides in plain sight. Many people do not realize it is there when they make a purchase.

They might be simply swiping their credit card, but they have no idea what is going on behind the scenes. And usually do not care. As long as the transaction is seamless, there is nothing else to consider, right?

A merchant of record is the term used to describe a legal entity which sells goods and services. These services are sold to a cardholder who then makes a purchase.

Many times, small and medium sized merchants are not able to afford the cost, liability and time of managing the task. Being a merchant of record or MOR comes with a lot of responsibilities, such as merchant funding, calculation of processing fees, taxes, payment security, etc.

Traditional Payment Facilitation

Payment facilitation, or PayFac is able to offer a SaaS platform the ability to accept payments on behalf of its customers.

A PayFac serves the needs of the retailer, but a retailer can serve as a Merchant of Record.

The need to grow and develop traditional payment methods has caused vertical SaaS companies to also become merchants of record.

And the need to further develop these software systems to keep up with the ever-competitive market.

PayFac Growth 

PayPal is a great example of a PayFac. People are familiar with PayPal and trust them with their credit card information. A smaller more unknown merchant utilizes PayPal for these reasons.

A person will see PayPal listed on their bank statement as they are the payment facilitator for a sub- merchant. Therefore, PayPal is both the payment facilitator and the merchant of record.

PayPal also serves larger well-known merchants like but will not show up on a customer’s bank statement.

Larger companies can better afford to be a merchant of record as they have brand recognition.

Better brand recognition means the ability to expand into these roles.

Building a company’s brand recognition is key to functioning as both a PayFac and MOC.

PayFac Can Be A Little Blurry

Then we have Amazon. Amazon is a PayFac giant as well as a merchant of record. However, the difference is that Amazon always acts as the merchant of record, regardless of the how large its sub-merchant is.

Consumers choose to make purchases from these merchants via the Amazon platform, so that is what shows up on their statements.

There are PayFacs who don’t act as a merchant of record. WePay and Stripe are examples. These companies provide infrastructure yet remain unseen to consumers.

Stripe serves a payment gateway as well as a third-party processor and is everywhere these days.

Vertical SaaS Companies Are Different

These existing businesses that have been around for a while and have been accepting payments long before vertical SaaS.

Early vertical SaaS companies, such as Toast or Shopify, initially began by reselling financial services.

These financial services were intertwined with other financial products.

Like credit cards, loans, or insurance directly into their vertical software. This expansion is what defines their difference. This expansion allows companies to better absorb the MOC liabilities.

Solution for Vertical Software Companies?

Fintech companies. Offer both. The expansion from within is key. Further development of fintech companies within vertical software companies is the wave of the future.

And why not?

Fintech companies have made it possible for SaaS businesses to also provide financial services along with their usual products.

With fintech, SaaS businesses can increase their revenue substantially. At some point in the near future, this will become the new normal.