A Merchant of Record (MOR) is a third-party entity that takes on the financial responsibility for processing credit card payments and other online transactions on behalf of a business. This includes handling payment processing, fraud prevention, chargebacks, sales tax management, and compliance with data privacy regulations. By using an external company as your MOR, you essentially outsource the financial liabilities and legal complexities associated with online sales.

The MOR appears on the end customer's credit card statement, bank statement, or debit card transactions, providing customer support when it comes to the payment related customer experience. The MOR is actually taking on the role of reselling the SaaS startup’s product. MORs are especially worth considering for SaaS companies that deal with international markets, as it simplifies the management of different currencies, tax jurisdictions, and regulatory compliance.

Payment Processing in Different Currencies
Payment processing involves more than just accepting credit card payments. If you care about offering your product in different currencies in different currencies, and you want accurate currency conversion whenever you sell, MOR service providers can be helpful. These providers handle payment processing on your behalf. Be aware though that unless you have sophisticated requirements when it comes to handling different currencies, most payment gateways will meet your requirements too.

Global Compliance
Expanding into new markets often means dealing with various payment methods and tax regulations in different countries. MOR services allow for global reach without the added complexity of managing these elements yourself. They ensure that you are compliant with international laws, including PCI DSS for payment security, tax calculation and remittance, and local data privacy regulations. This is where MOR service providers can make a real difference for you.

MOR services come with a massive price tag: Processing fees and additional fees easily reach more than 5%. This can be a major cost factor, so it's essential to weigh them against the benefits MOR services provide. The main question you have to ask yourself is whether or not you actually need the payment and compliance benefits that MOR services give you or not. MOR service providers are incredibly good at selling you that you need their services, but in reality, these services are really just a nice to have for many early-stage SaaS companies.

We can simplify the routes to global expansion for SaaS startups into two common patterns:

1. Go global first, then get big
SaaS startups that leverage Merchant of Record (MOR) services are typically early stage, with an immediate need to serve a global audience. A prime example is companies creating plugins for international e-commerce platforms like Shopify and Wix or those offering prepackaged web development frameworks. Their products are often discovered on global marketplaces or within global open-source communities, necessitating a service model that can cater to a worldwide audience from the outset.

Upon achieving product-market fit, these startups are quick to tap into this global demand, long before they have the in-house financial infrastructure to manage multicurrency transactions, establish banking relationships internationally, or navigate the complexities of tax and regulatory compliance across multiple jurisdictions. Many of the founders of such companies are indiehackers, either with a business that is not venture scale or actively choosing to avoid venture funding, so they don’t have the resources early on to hire finance experts to take care of all this.

Partnering with an MOR provider enables these companies to expedite their market penetration while avoiding the operational bottlenecks associated with global compliance.

However as they scale and their operations mature, there's a strategic pivot—shifting these compliance responsibilities in-house. This transition aligns with their growth trajectory, allowing for tighter control over treasury and compliance, and often results in significant cost savings, as the relative expense of MOR services can weigh on the profit margins of a scaling enterprise.

So for such companies MOR is therefore a handy accelerator to use at the early phase of the company’s growth.

2. Get big first, then go global
This second route is the most common one for SaaS companies.

SaaS companies that concentrate initially on their local market would not have much benefit from Merchant of Record services since it is relatively easy to handle compliance, taxation etc., from the company’s own local legal entity. And billing and accounting packages that the startup uses would make compliance straightforward.

This also applies when the startup decides to sell cross-border to adjacent markets. For example, many EU companies sell to the US and vice versa. So many companies expand in this way that most startup finance teams know how to handle this and their billing and accounting software does too.

As such a startup would gain greater success and expand their products and go-to-market they will then start staffing up commensurately large finance teams who can handle their growing needs, sometimes relying on the advice of external experts in tax and compliance to ensure that they are optimizing their financial health as they grow.

When these companies then decide to go into more global markets they already have the wherewithal to staff up their tax, compliance and treasury operations on a global basis and would not need MOR services.

Evaluating Financial and Legal Responsibilities
One of the primary benefits of MOR services is the transfer of financial liability and legal responsibilities from your startup to the MOR provider. This includes the handling of chargebacks, sales tax collection and remittance, as well as compliance with global payment regulations. Weigh the potential risks and costs associated with managing these responsibilities in-house against the fees charged by MOR service providers. Also consider that many of the payment related challenges are actually covered by your subscription management solution and/or your payment gateways, which means that MOR services might be less needed than you think.

For instance, for companies selling in the US, there are a host of solutions for calculating and remitting sales tax, often these have tight integration with subscription billing and accounting solutions.

For companies selling into the European Union and the UK the tax authorities there have made it relatively easy to register for tax IDs and to pay taxes. For example the EU has harmonized rules for Value Added Tax (VAT) for goods and services sold in the EU and a non-EU seller just needs to register through a simplified One-Stop Shop in any EU country and that opens up all countries in the union for compliant sales, and there is only place where tax needs to be reported and remitted.

Check your tax-exempt thresholds
In many tax jurisdictions governments seek to encourage the growth of small businesses by removing the regulatory burdens on them when they are early in their growth. This often means that a company is not liable for taxes before they cross a revenue threshold. And to encourage technology companies, online businesses like SaaS often have extra incentives with even higher thresholds.

For example, many US states have thresholds of US$100,000 or US$500,000 in annual sales that must be crossed before they require companies to pay their local sales tax.

Companies operating in Singapore only need to register for paying Goods and Services Tax (GST) once their annual revenue exceeds S$1M (about US$740,000).

In the EU and the UK the thresholds vary per country but are mostly in the range of tens of thousands of Euro/Pounds.

So if you are a small startup, be sure to do a quick check of the relevant tax threshold for your type of business and the places where you expect to be selling. You might be tax exempt for some time and can focus on building your product and growing your business before having to worry about tax compliance at all.

Assessing Your Business Model
The need for MOR services largely depends on the nature of your SaaS product and how you plan to scale your business. If your startup operates on a subscription model with recurring payments and aims to rapidly expand into international markets, the complexities of handling different tax regulations, currency conversions, and compliance issues can quickly become overwhelming. In such cases, MOR services can be worth it to manage these aspects.

Understanding Your Customer Base
Knowing your customer base is crucial when considering MOR services. If your customers are spread across various regions, dealing with multiple currencies and payment methods can complicate the transaction process. MOR services can simplify this by managing currency conversions and providing a variety of payment options, and making sure that you are compliant wherever you sell.

Considering Your Current Billing, Payment Processing and Accounting Capabilities
The ease of payment processing and the security of financial transactions play a significant role in customer acquisition and retention. If your current payment service provider is unable to offer a secure, reliable, and user-friendly payment experience for the geographies you want to expand into, it may be worth considering an MOR service. However, you might not even use some of the global payment and compliance features of your current billing, payment processor and accounting solution  yet, so make sure to check out their features first before deciding for a costly switch to an MOR service provider.

Can MOR Providers Handle Your Desired Pricing Model?
If you decide that you need to outsource to a MOR provider, be careful to check that they can support the kind of pricing model that you need. One of the issues with using a MOR is that you have to use their infrastructure for setting your price model, price points and discounting strategy. Many MOR providers only support relatively simple recurring subscription models with flat recurring fees per month. Many SaaS businesses need to use more sophisticated hybrid pricing models that are simply not supported by the MOR providers.

Projecting Future Growth
Consider your startup's growth trajectory and how it might affect your need for MOR services. As you scale, the demands on your payment processing and tax compliance systems will grow. An MOR provider can help manage this growth, but it's also important to ensure that their services can scale with you and won't limit your flexibility in the future.

Paddle
Paddle is a comprehensive MOR service provider that caters specifically to the needs of SaaS companies. They offer a suite of tools designed to handle everything from payment processing and subscription management to sales tax compliance and fraud prevention.  Paddle acts as the merchant of record, taking on the responsibility for all aspects of the checkout and payment process, including compliance with local tax laws and data privacy regulations.

Lemon Squeezy
Lemon Squeezy is an up-and-coming MOR service provider that offers an easy-to-use platform for selling digital products, including SaaS products. They provide a range of services, such as handling payments, managing subscriptions, delivering digital products, and taking care of VAT and sales tax.

When it comes to multi currency payments, pricing localization, and invoicing, Wingback offers a compelling solution without the cost that MOR services bring with them.

Handling Internationalization Complexities with Ease
Wingback is adept at handling the complexities that come with serving a global customer base. With features that manage multi currency transactions, pricing localization, and sophisticated invoicing, Wingback simplifies what traditionally has been a convoluted part of running a SaaS business. MOR services can be expensive, and companies offering these services are skilled at selling them as essential. However, Wingback's approach demonstrates that there's often a more cost-effective way to handle internationalization.

The Merchant of Record model is helpful for SaaS startups who have an immediate need to quickly go to a global customer base while they are still very small. It allows them to ensure regulatory compliance while maintaining a focus on building their product. However, MOR services are not without their costs. Startups must assess their current and future needs, figure out if they really need MOR services for providing their product to their customers. As with any significant business decision, it's about finding the balance between financial responsibility, customer satisfaction, and the ability to reach and serve new customers effectively.