When Should a Merchant Be Merchant of Record?

In recent years, many enterprise Convenience & Retail Fuel (CRF) and Quick Service Restaurant (QSR) merchants have taken efforts to become the Merchant of Record (MoR) for their dealers or franchisees. Being the MoR means the franchisor or corporate office will negotiate an umbrella acceptance agreement with Payment Service Providers (PSPs) on behalf of their brand-wide store footprint. Under this model, the franchisee would sign a contract with the franchisor*, and the franchisor would receive funds directly from the PSP to pay its franchisees. While increasingly popular in the CRF and QSR verticals, any organization that licenses its brand to dealers or franchisees can employ this model.

Why Would I Consider Becoming the MoR?

“The biggest benefit to becoming the Merchant of Record is the opportunity to optimize payment operations and standardize the customer experience,” offers Jim DuBoyce, Managing Director of Payments at W. Capra. “As technology has evolved, so has the need to optimize transaction flows across channels of commerce, control costs, and improve resiliency. At the same time, merchants want to easily introduce new methods of payment across their entire brand and streamline the consumer experience. This becomes exponentially more difficult to manage with a varied stack of payment vendors across your site network.”

Those with a desire for a common, standardized payment process across all franchisee stores can use the MoR model as an opportunity to unify consumer and back-end experiences. This model streamlines operations for franchisees, ridding them of the need to negotiate and/or execute individual acceptance agreements and card offers with multiple providers while providing the franchisor with richer, more consistent payment data insights.

What are the Risks of Becoming the MoR?

“To adopt this model is to essentially stand up a new line of business,” says Erika Curtis, Delivery Lead at W. Capra. “Becoming the Merchant of Record means that the franchisor takes on responsibilities typically assigned to the Acquirer, including responsibility for settlement and PCI compliance.”

Under the traditional model, franchisors can provide franchisees with the benefit of purchasing power, standardization, and a common customer experience, while focusing on their own core competencies. This traditional model precludes the need to interfere with the business operations of the franchisee. 

However, under the MoR model, the franchisor effectively becomes a PCI Level 1 service provider to the franchisee, increasing the franchisor’s regulatory burden and complicating PCI Report on Compliance (RoC) certifications for the franchisor.

What Else Should I Be Considering?

Whether your business should pursue the MoR model depends primarily on your business’s structure and strategy. This model makes the most sense for large organizations who support many small site operators with consistent, well-defined technical stacks. An organization whose policy and market positioning supports a large degree of technology and process standardization will have the easiest time implementing this model in a streamlined fashion.

For those interested in pursuing this model, several key questions remain: How will you introduce it to your franchisees? Will you charge a per transaction fee as many Payment Facilitators (PayFacs) do? How will you recover your costs? How will you structure your team to increase both revenue and savings while working the financial logistics and technical solutioning for franchisees?

While PayFacs like Toast and Clover have made it easier to standardize across small-to-medium franchisee portfolios, doing so across thousands of sites and supporting those relationships will always be a challenge. Becoming the MoR can be highly beneficial for franchisors, but without attentive execution, this decision can burden operations and damage franchisee relationships.

W. Capra has extensive experience in helping our enterprise clients to navigate the complexities of crafting and delivering enhanced business models to market. For those interested in enhancing their franchisee support operations while positively impacting the P&L, stay tuned for Part II of this article. In the meantime, for further discussion, please contact Jim DuBoyce at [email protected] or Erika Curtis at [email protected].

*All relationships between franchisees and vendors will depend on the terms of the franchise agreement that governs the relationship between the franchisee and franchisor. Converting to a MoR model may require modifications to the franchise agreement. 

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