A merchant of record (MoR) is a company that legally sells your product to your customers, on your behalf. It takes the customer's payment, charges the right tax for the customer's country, and pays you what is left after its fee.
The merchant of record is the name on the customer's invoice and on their card statement. In law, it is the seller. So it is responsible for tax, refunds and disputes.
Here is why this matters. Say a two-person software company in Bengaluru sells a $20 monthly subscription to customers in 40 countries. Each country has its own tax on digital services. A customer in Germany must be charged German VAT, which is 19%. A customer in Australia must be charged Australian GST. The company would have to register for tax in each country, file returns there and keep records. That is too much work for two people.
A merchant of record does this work. The customer in Germany pays $23.80: the $20 price plus 19% VAT. The merchant of record pays the VAT to the German tax office. It keeps its fee, and pays the rest to the Bengaluru company. The money arrives in the company's multi-currency account, or in its bank account in India.
How is this different from a payment gateway? A gateway only collects the payment. With a gateway, the business itself is the seller, so it must handle every country's tax. With a merchant of record, the merchant of record is the seller. It still uses a gateway behind the scenes to take the card payment.
A merchant of record usually also runs subscription billing, because most software is sold by monthly plans. It is also used by a game top-up website that sells to players in many countries. The tax work it takes over is the same work that indirect tax software does for larger companies, which prefer to stay the seller themselves.
The cost is a higher fee than a gateway charges. A merchant of record takes a percentage of each sale, because it carries the legal risk.