Navigating the Labyrinth: Deciphering the Merchant of Record Model for Payment Facilitators
In the dynamic world of payment processing, Third Party Agents (TPAs) face a constant barrage of decisions, each carrying significant weight. One of the most impactful, yet often obfuscated, is the choice of a MID model for their payments program. This article delves into the intricacies of the Merchant of Record (MOR) model, shedding light on its implications for Payment Facilitators (Payfacs) and helping you determine if it's the right path for your business.
Understanding the Foundation: Merchant Identification in the Payments Ecosystem
Before diving into the MOR model, it's key to grasp how merchants are identified within the payments ecosystem. Every merchant is assigned a unique Merchant Identifier (MID) by their acquirer, coupled with a Merchant Category Code (MCC) that classifies their business type. This powerful combination dictates everything from merchant funding and 1099k issuance to risk monitoring and interchange rates. The traditional approach, where each merchant has their own unique MID, is known as the multi-MID model.
Operating multiple merchants under a single MID without the necessary infrastructure is strictly prohibited. This practice, a form of transaction laundering, misrepresents the actual merchant behind the transaction and exposes the entire ecosystem to significant risks:
Underwriting: Aggregating transactions under one MID hinders acquirers' ability to verify the identity of individual merchants. This lack of transparency creates a breeding ground for fraudulent activity.
Transaction Monitoring: Chargebacks and illicit transactions become obscured when mixed with the transactions of multiple merchants. This blending makes it extremely difficult to detect bad actors and maintain a secure payment environment.
Interchange: Presenting transactions from multiple merchants under a single MCC can lead to incorrect interchange calculations. This discrepancy can result in financial losses for both the acquirer and the issuer.
Merchant Payouts: Without acquirer visibility into transaction ownership, merchants become entirely reliant on the solution provider for accurate fund remittance. This reliance introduces potential vulnerabilities and increases the risk of errors.
The Rise of the Single-MID: The Merchant of Record Model
Despite the inherent risks of commingling transactions, the business need for a single-MID model, or MOR model, is undeniable. Marketplaces, for instance, operate under a single MID associated with the marketplace itself. Sellers are underwritten, managed, and monitored by the marketplace, which also handles all payouts and 1099k obligations. This structure requires marketplaces to implement robust systems for seller identification, underwriting, risk management, and merchant monitoring, as well as the capability to manage complex payments and issue tax statements.
At its core, the MOR model hinges on who controls the merchant ID table – the marketplace or the acquirer. However, the true complexity lies in the associated obligations that come with this control.
Payment Facilitators: A Unique Position
Payment Facilitators occupy a unique space within the TPA landscape. They are the only entities that can choose between a multi-MID and an MOR model. While they maintain a list of merchants (known as sub-merchants), they also transmit the unique merchant ID alongside their Payfac ID with every transaction, providing greater transparency to acquirers. For Payfacs, the decision to adopt an MOR model is driven by a complex interplay of factors.
Merchant of Record: Advantages for Payfacs
Cost Savings: Acquirers often charge fees per MID. The MOR model can translate into significant cost savings for Payfacs, especially as they scale their operations.
Enhanced Control: The MOR model grants Payfacs greater control over fund disbursement to sub-merchants, enabling the implementation of more sophisticated and flexible funding models.
Streamlined Onboarding: With complete control over merchant onboarding, Payfacs can curate the sub-merchant experience, meeting compliance obligations while optimizing both the process and the timing.
Merchant of Record: Disadvantages for Payfacs
Acquirer Support: Not all acquirers are equipped to handle the additional data fields necessary for uniquely identifying sub-merchants. This lack of universal support can limit a Payfac's options.
Card Present Hardware: Since the Payfac owns the merchant ID table, they may need to own or directly integrate with card-present hardware, adding complexity and cost.
MCC Code Compliance: The MCC code must remain accurate for each sub-merchant. This requirement means that a horizontally focused Payfac, dealing with merchants across various business types, will still need a diverse range of MIDs.
Infrastructure Complexity: Managing a large number of sub-merchants demands a complex infrastructure capable of handling onboarding, risk monitoring, funding, and 1099k issuance. This infrastructure investment can be substantial.
Making the Right Choice: A Strategic Imperative
While the merchant of record model boils down to a question of ledgering, its implications for TPAs, particularly Payfacs, demand careful consideration when designing a payments program. The decision is not one-size-fits-all. It requires a thorough assessment of your business model, target market, and long-term goals.
Are you a Payment Facilitator grappling with the complexities of the MOR model? RPY Innovations can help. Our team of experts can guide you through the intricacies of this decision, analyzing your specific needs and helping you determine if the MOR model is the right fit for your business. Contact RPY today to discuss your payment strategy and take the next step towards optimizing your payments program.
