What does it take to be a successful Merchant of Record?

Many enterprise merchants in recent years, in particular Quick Service Restaurant (QSR) chains and Convenience & Energy Retailing (CER) companies, have become the Merchant of Record (MoR) for their franchisees. In an earlier article, we explained what it means to be a Merchant of Record. Here, we’ll explain the profile of companies that might benefit from the MoR path and how to set yourself up for success.

What sets you up for success as the Merchant of Record (MoR)?

1. A larger organization with a defined tech stack. Standardization and alignment of vendors in your tech stack is key. Jim DuBoyce, Managing Director of Payments at W. Capra, elaborates, “You don’t need to be a Fortune 500, but you do need to be large enough that you’ve achieved some level of standardization with your tech stack.”
2. A distributed base of single or small multi-site franchisees or licensees. Larger operators, particularly those that are multi-franchise, may not be interested in disrupting their operations to become the MoR. Smaller operators, such as those with 1-5 locations, will view it as a benefit. Erika Curtis, Lead at W. Capra, says, “You’re taking a lot of finance and operations work off of their hands, which is significant to smaller operators.” Companies with smaller operators stand a better chance of making this transition, such as a 500-1,000 store chain with 250 franchisees.
3. An existing payments group at the company. Payments touches nearly every aspect of a business, and it needs the cross-functional capabilities to effectively work across the organization to be an effective MoR. Per DuBoyce, “it doesn’t matter where in the organization payments sits, whether it’s Finance, Operations, IT, or the Project Management Organization (PMO)” as long as it exists at the company. Your company should regard payments as a separate function with resources dedicated to payments and payment innovation.

What should I consider as I evaluate becoming Merchant of Record?

Assuming you meet the criteria above, there are several additional considerations you should factor in as you evaluate what it takes to become a MoR.

In many cases, becoming the Merchant of Record requires changes to your franchise or license agreement. This needs to be carefully considered from the joint perspectives of the legal implications, your franchise relationships, and your business model. DuBoyce says, “Because this requires a change in your relationship with your franchisees, it can have impacts that reverberate further than you anticipate.”

One of these impacts is a possible change in business model. Curtis adds, “If you’ve been a hands-off franchisor, you’ll run into more friction, both in your relationships with franchisees and with the operational impact of taking on payments support for franchisee operations.” If you’ve already provided operational support to the payments operations of your franchisees, becoming the Merchant of Record will have less of an operational impact. But if you don’t, it may be a tougher sell to convince your franchisees that managing payments for them is in the best interest of both the franchisor and franchisee.

Finally, the decision to become a MoR may present a fork in the road to your business. Curtis says, “If you want a unified experience for your customers, or even a mobile app that’s consistent across all of your franchise and corporate locations, becoming the Merchant of Record can help you do this.” From accepting the same payment methods across your locations to building a mobile app with a consistent experience across stores, many soon-to-be table stakes business initiatives become a contracting nightmare. As the MoR, these problems disappear. DuBoyce adds, “You can roll out a robust app that does everything you want and is accepted at all of your locations, something many merchants struggle to imagine given the complexity of their tech stack and their contracts with their franchisees.”

What should I do to get started?

1. Mandate your tech stack and build in consistency. Technological consistency can be a boon to cross-functional initiatives in payments, but it will achieve additional benefits for other cross-functional sales, information security, and data initiatives.
2. Sell into your brands. You will need to convince your franchisees of the benefits of your organization becoming the Merchant of Record. This will be a relatively easy sell with smaller franchisees, but with larger franchisees who may own stores of other franchises who have their own means of consolidating data and infrastructure, this may be a tougher conversation. Regardless, it’s better to have these conversations sooner rather than later.
3. Underwrite the Know Your Customer (KYC) requirements of your franchisees. You need to ensure that your franchisees are a good fit for the business by performing a detailed assessment, particularly given you’re taking on some risk as the Merchant of Record. Curtis states, “If you’re settling payment funds to your franchisees, there is the addition of a 1099-K responsibility. If a franchisee were to go into IRS withholding, you pick up those operational components as well. I’ve seen this happen at several clients, and it’s important to be prepared for the operational impact.”
4. Decide whether to become a Payment Facilitator (PayFac). The decision to become a PayFac is a big decision, similar in impact to becoming the MoR. We’ll share more on PayFacs in the next article in this series.

Closing Thoughts

Becoming a Merchant of Record can have broad operational impacts, particularly on your payments team. DuBoyce says, “If you’re already burdened with a number of other large initiatives, taking on the responsibilities of a Merchant of Record may leave your team treading water.” It requires a great deal of payments and operations expertise to manage the transition to Merchant of Record effectively and efficiently.

Jim DuBoyce and Erika Curtis are passionate about supporting merchants on their payments journeys and have helped a number of merchants make the transition to Merchant of Record. If you have any questions about becoming a Merchant of Record or other payments-related topics, feel free to reach out to Jim at [email protected] or Erika at [email protected].