Merchant of records can be a great solution for getting your business up and running quickly. A merchant of record (MoR) like Paddle takes over the mundane obligations such as collecting sales tax, dealing with disputes, invoicing customers, and other critical services you'll need when launching a business. By undertaking these tasks, the MoR assumes legal liability for your transactions, effectively becoming a reseller of your product.
While taking the pressure of handling taxes, negotiating disputes, and issuing billing reminders off the table seems a great way for businesses to become productive in short order, keep in mind that the MoR applies a one-size fits all service to their merchants. This means you have less control over the billing process, and you won't have the flexibility to make optimizations in your billing flow.
For example, selling software that only recurs monthly? With Paddle you'd be forced to send out routine billing reminders, whereas if billing directly, under certain circumstances (for example, no "trial") per VISA/Mastercard terms, you are not required to send these emails. Blasting your customers with unnecessary billing reminder emails can be irksome, and worse, may prompt customers to cancel.
Worrying about billing is not the first priority of any founders when they launch a business. Getting up and running fast, however, is a main priority, and at the early stages of a business, there's not much revenue to optimize for. However, as the business scales, selecting the right payment processor is crucial for the bottom-line.
Here are 3 reasons why serious startups should not use a MoR like Paddle:
Higher dispute rates out of the gates
Paddle will take over your billing descriptors and on each of your customers' bank statements they will see "PADDLE.NET *CO_NAME".
This will confuse customers and lead them to dispute purchases - reasonably so, since they will not know what Paddle is and why it's showing up on their billing statement. For businesses selling directly to consumers, this can be quite costly, as the price of a dispute is not only financially painful (Paddle bills $15 per dispute), but can lead to your company being placed on risk monitoring programs and even getting kicked from your processor.
In our experience, if you are selling B2C software on Paddle, you will be starting at a 0.5% dispute rate, just based on the hostile takeover of billing descriptors alone.
Excessive Taxation
One of the largest selling points of a MoR is that you don't need to collect sales tax. While dealing with sales tax can be a major headache, and seem like time wasted for a constrained startup, in the US, SaaS is actually only taxed in [17] states of [taxjar]. Furthermore, each state has a different minimum threshold, and some of them are quite high. We've found for startups processing <$1M/yr, the tax thresholds only get hit in a few states (most of which are small states). The rest of the states that charge a sales tax for SaaS have 100k+ transaction minimums:
- Kentucky
- Louisiana
- Utah
However, given Paddle (and other MoRs) are required to register all their merchants under a single entity, they will be hitting tax thresholds in all 17 states, and thus you'll be paying taxes in states that would otherwise be exempt!
Here’s an example of taxes paid with and without Paddle:
| States with SaaS Tax | % of pop | $ Revenue | Sales Tax | With Paddle | Without Paddle |
|---|---|---|---|---|---|
| KY* | 1.36% | $13,595.17 | 6.00% | $815.71 | $815.71 |
| LA* | 1.42% | $14,199.40 | 4.45% | $631.87 | $631.87 |
| UT* | 1.00% | $9,969.79 | 4.85% | $483.53 | $483.53 |
| WA | 2.33% | $23,262.84 | 6.50% | $1,512.08 | - |
| AZ | 2.21% | $22,054.38 | 5.60% | $1,235.05 | - |
| NM | 0.63% | $6,344.41 | 5.13% | $325.47 | - |
| TX | 8.79% | $87,915.41 | 6.25% | $5,494.71 | - |
| SD | 0.27% | $2,678.75 | 4.50% | $120.54 | - |
| AL | 1.51% | $15,105.74 | 4.00% | $604.23 | - |
| TN | 2.08% | $20,845.92 | 7.00% | $1,459.21 | - |
| WV | 0.51% | $5,135.95 | 6.00% | $308.16 | - |
| SC | 1.57% | $15,709.97 | 6.00% | $942.60 | - |
| PA | 3.87% | $38,670.69 | 6.00% | $2,320.24 | - |
| NY | 6.10% | $61,027.19 | 8.88% | $5,416.16 | - |
| RI | 0.33% | $3,323.26 | 7.00% | $232.63 | - |
| MA | 2.08% | $20,845.92 | 6.25% | $1,302.87 | - |
| OTHER | 70.03% | $700,342.40 | 0.00% | - | - |
| Total | $1,000,000 | $23,205.08 | $1,931.12 |
This shows that with Paddle, this hypothetical business is paying an additional 2.17% of their top-line revenue in taxes. For a low margin business, this could be upwards of 20% of their profits, just in state taxes that otherwise they wouldn't pay if they had their own merchant account. Wow!
TaxJar makes collecting and paying state sales tax easy – no excuse to shave 2% from your top line.
Relentless Billing Receipts
Taking over the payments process requires Paddle to assume responsibility for sending billing reminders, invoices, and other communications to your (really their) customers in order to be compliant with credit card companies.
Losing control over the billing process means you're reliant on Paddle's stock emails, which while convenient (their localization feature is quite nifty) can mean annoying your customers, and in some cases, going above and beyond compliance requirements to notify your customers about transactions. In other words, Paddle stops just short of sending a "do you want to cancel?" email.
If you want the ability to take control of your billing emails you should consider using a payment service provider such as Stripe. They make it easy to turn off default powered emails and slot in your own, keeping your customers tuned into your business and maintaining your flexibility over communications.
