Joshua D'Costa
Growth & Marketing
Mar 16, 2025
|
5
min
PayPal is one of the most widely used online payment solutions, trusted by businesses and individuals worldwide. Its ease of use, security features, and global reach make it a go-to choice for handling online transactions.
Many businesses use PayPal to accept payments, but there’s a lot of confusion about what PayPal actually does. Some assume it’s a Merchant of Record (MoR), while others see it as just a Payment Service Provider (PSP) that processes transactions. This misunderstanding can lead to unexpected issues, especially when scaling globally.
Managing payments isn’t just about accepting money but it involves handling taxes, refunds, chargebacks, fraud prevention, and regulatory compliance. Businesses looking to offload these responsibilities typically turn to either an MoR, like Dodo Payments, or a PSP, like PayPal.
But what’s the real difference between these two? And where does PayPal actually fit? Let’s break it down.
What is a Merchant of Record (MoR)?
A Merchant of Record (MoR) is the legal entity responsible for processing transactions on behalf of a business. The MoR takes on multiple responsibilities, including:
Managing subscriptions, billing, and invoicing – The MoR ensures smooth recurring payments; ARR and MRR, automates invoicing, and provides a seamless checkout experience.
Handling global tax compliance – This includes calculating, collecting, and remitting Value Added Tax (VAT), Goods and Services Tax (GST), and sales tax based on the customer’s location.
Overseeing chargebacks and dispute resolution – If a customer disputes a transaction, a Merchant of Record manages the chargeback process, reducing financial risk for businesses.
Establishing Local Entities – An MoR creates local business entities to streamline operations, including setting up merchant accounts, registering for taxes, and building relationships with payment processors in various regions.
Seamless Currency Conversion – To enhance the customer experience and prevent payment hurdles, an MoR automatically adjusts prices to the buyer’s local currency, ensuring a smooth and hassle-free transaction process.
Examples of SaaS Business-focused MoR:
Paddle
What is a Payment Service Provider (PSP)?
A Payment Service Provider (PSP) is a company that facilitates online transactions by providing businesses with payment processing services. Unlike an MoR, a PSP does not handle compliance, taxes, or chargebacks. A PSP primarily:
Payment Processing – A PSP provides businesses with the necessary tools and technology to accept and process payments from customers, connecting them to banking networks and payment methods.
Multi-Payment Method Support – PSPs allow businesses to accept various forms of payments, including credit and debit cards, mobile wallets, and bank transfers.
Fraud and Chargeback Handling (with additional cost) – Some PSPs offer additional fraud prevention tools, but merchants often need to handle chargeback disputes themselves or pay extra for dispute management services.
Examples of PSP:
PayPal
Stripe
Where Does PayPal Fit?
PayPal primarily operates as a PSP rather than a Merchant of Record. It facilitates payments, allowing businesses to accept money from customers globally. However, PayPal does not handle tax compliance, chargebacks, or merchant liability, which are key functions of an MoR.
Different PayPal services include:
PayPal Standard – A basic payment solution for businesses that enables businesses to accept credit cards, debit cards, and PayPal payments. It redirects customers to PayPal’s site for checkout, which may affect conversion rates.
PayPal Business – Offers features like invoicing and multi-user access. While it enhances payment processing for businesses of all sizes it does not handle tax compliance or chargebacks.
PayPal Commerce – Handles end-to-end payment processing, similar to Stripe. While it supports advanced integrations and caters to businesses of all sizes, it still functions as a Payment Service Provider (PSP) rather than a Merchant of Record.
Does PayPal Act as an MoR in Any Case?
In certain situations, PayPal may operate as a Merchant of Record, particularly with its PayPal Digital Goods service designed for microtransactions. However, this functionality is quite limited and lacks the comprehensive MoR features that businesses need for managing large-scale global payments.
For companies seeking a more robust solution that covers tax compliance, chargeback management, and legal responsibilities, exploring an alternative to PayPal is often the better choice.
Key Differences: PayPal vs. a True MoR
Conclusion
While PayPal is a payment service provider (PSP), it does not offer the full functionality of a Merchant of Record (MoR). Businesses selling digital products and subscriptions worldwide often face the challenge of managing payments, taxes, and compliance on their own.
The right solution depends on your needs. If you only need payment processing, PayPal as a PSP might be enough. But if you want to offload tax compliance, chargebacks, and legal liability, a Merchant of Record is the smarter choice.
Dodo Payments offers a seamless MoR solution designed for digital businesses looking to scale globally without financial and legal headaches. Want to learn more? Get in touch today!
