There are two types of payment processors.
1. “Merchant of Record” payment processors
Examples include FastSpring and Paddle.
These handle all the messy details of payments. They make sure the payment system meets regulations in your country and in other countries. They validate tax numbers, and calculate, collect, and remit national and state sales taxes and VAT. They typically allow payment via a number of methods, including credit card, PayPal, and ACH (US bank transfers).
They are called “Merchant of Record” because they act as a reseller of your product, which puts them on record as the merchant who made the sale.
Merchant of Record payment processors:
- typically send you a monthly payment, net of all fees. You can account for this in your bookkeeping as a single line.
- charge relatively higher fees
- offer minimal customisation
- are easy to get started with
2. Stripe-style payment processors
Examples include Stripe and PayPal.
Fundamentally, these payment processors just allow you just to charge a customer’s credit card. It is up to you to work out how to meet laws regarding calculating, collecting, and remitting sales tax and VAT.
Transactional payment processors:
- might require you and your accountant to account for each transaction in your bookkeeping
- charge relatively lower fees
- allow high flexibility in your payment workflow
- put the onus on you for collecting and remitting sales tax and VAT
If you’d like to use multiple transactional payment processors, you need to code the integration manually for each processor.
Choose between a “merchant of record” or a “transactional” payment processor
Either choice is good, and many successful companies use each choice.
First time bootstrapper?
If you are selling your first online product, consider starting with a merchant of record. This lets you use your precious time on product development instead of the payment system.
Is your product a consumer (B2C) product?
Bootstrappers selling B2C products find that many customers want to be able to pay using PayPal and many want to use credit card. A merchant of record offers both of these, and hides you from the troubles of creating a payment system that can cope with both.
Want full control over the payment workflow?
If you want fine control over the payment workflow, you’ll need to use a transactional payment processor.