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If you run an online business that sells products or services, you will need to have a merchant of record to process credit and debit card payments. This article will explore:

  • what a merchant of record is;
  • what role they have; and 
  • the obligations they hold when processing online payment transactions. 

What Is a Merchant of Record?

A merchant of record is a payment transaction processor that processes debit and credit card payments on behalf of a business. There are a couple of options for payment processing integration which will determine who is the merchant of record. These include using a:

  1. hosted gateway: the hosted gateway acts as a third party to take payment, which will be integrated into your website or on an external site. The hosted payment gateway takes on the risk of being the merchant of record. However, you will need to pay a fee for this service. Some examples of a third party merchant of record are PayPal and Stripe; or
  2. non-hosted method: you can be the payment processor for your website. However, this means that you will be the merchant of record. This requires compliance with the relevant laws. 

Larger businesses will act as their own merchant of record. On the other hand, many small or medium businesses will use an external third party as merchant of record on their behalf. 

What Does the Merchant of Record Do? 

When someone purchases a good or service from your website, they will proceed to the checkout and pay for delivery and GST. After they enter the credit card information, the payment gateway securely sends the customer card information to the merchant bank for processing. This payment gateway is the merchant of record for your business. The merchant of record:

  • maintains a merchant account;
  • negotiates credit card processing fees; and
  • administers refunds and chargebacks.

What Obligations Does the Merchant of Record Have?

The merchant of record has a number of important obligations to facilitate customers’ transaction. These include complying with legislation which is designed to protect your customers’ data. The merchant of record typically holds the risk of any fraudulent transactions, and so should ensure that they process payments correctly.

PCI Compliance

As a merchant of record, you must comply with the Payment Card Industry Data Security Standard (PCI DSS), developed by the PCI Security Standards Council. These global standards ensure that any card payment is always secure. The merchant of record must comply with the PCI DSS regardless of business size. The key requirements of the standards include obligations to:

  • use a firewall; 
  • protect stored cardholder data; 
  • develop and maintain secure systems; 
  • meet audit requirements on a regular basis; and 
  • implement an information security policy. 

Maintaining the Payment Gateway 

As a merchant of record, you must maintain the payment gateway from the customer to the merchant’s bank account. This includes authorising, capturing, refunding and voiding payments. Transaction data is encrypted and passed through to the merchant bank, so this must be facilitated properly. 

Compliance with Laws and Regulations

Aside from complying with the PCI DSS, a merchant of record must comply with various legislation in Australia. 

For example, the law prevents businesses from passing on excess credit card surcharges. 

There are also AUSTRAC, APRA and ASIC regulations that a merchant of record may need to comply with. 

Should I Be the Merchant of Record?

As you can see, there are a number of obligations when taking on the role as a merchant of record for your business. These include: 

  • ensuring PCI DSS compliance;
  • building and maintaining the payment gateway; and 
  • complying with Australian laws. 

However, as your business grows, becoming your own merchant of record can lower the fees you need to pay to third parties and allow you to implement a custom payment feature solution for your business. 

If you decide to choose a third party merchant of record, you should consider the pricing structure they offer and ensure that they support multiple currencies if you are selling overseas. You will also want to check that they offer multiple payment methods, such as credit or debit card and e-wallet transactions, which consumers increasingly expect when online shopping. Third party merchants of record can also have quite specific refund policies, and the ability to handle disputes with customers. You should familiarise yourself with these rules and make sure that you are comfortable with handing off the ability to make those decisions yourself.

Key Takeaways

If you offer online payment for customers on your e-commerce website, you will need to ensure that payment is processed by a merchant of record. The merchant of record facilitates the online payment processing by sending the data to the merchant bank. You can choose to pay a fee for an external merchant of record to take on these obligations for you, such as Stripe or PayPal, or you may decide that it is more economical for you to become a merchant of record yourself. If you are an e-commerce business owner and have any further questions about merchants of record, get in touch with LegalVision’s e-commerce lawyers on 1300 544 755 or fill out the form on this page.


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