Why The UK Startup Scene Is Doomed
Background
A year ago I was talking a lot about my startup, the processes and the issues I encountered so others may learn. However, you may have noticed that my talk then went dead. I was entangled in the web of bureaucracies with the bank.
The process for receiving payments on a website (other than services like Paypal, which we all know is not a good idea) goes as so:
- Register a business (Ltd, LLC, etc)
- Open a Business Bank Account
- Open a Business Merchant Account
- Sign Up For A Payment Gateway
- Sign Up For A Billing System (if 4 doesn’t include)
- Implement the billing system into your application.
- Profit!
I was stuck on step number 3. I had a Ltd company that I was giving license to use my idea. (I kept this separate from my other businesses if I wanted to ever invest more in it.) I had a business account (in fact I had one set up in less than a week.) But the Merchant Account is where I was having trouble.
My 2 bank options were Barclays or Lloyds TSB.
I first chose Barclays. They somehow lost my paperwork and so I decided that Lloyds would hopefully be less problematic.
I already had a business account with Lloyds so next I needed to apply for a Merchant Account (3) with them. Not as simple as you would think so I decided to enlist the services of my father (a Chartered Accountant and long time business account holder with Lloyds.) After jumping through some hoops they came to me with an offer that I could use their service if I give a deposit. This is a commonplace technique and I was aware this would be the case. However, they asked me to put a deposit of £50,000 ($81,000.) I kid you not. I had already put decent money into building the business but I had no where near that to put as a deposit. With some further negotiation, they said they would halve it. I grumbled but it was the only way I knew how to further the business and not see my initial money go to waste so I accepted.
After months more of email tennis, unprofessional letters (Most of my letters from them contain my name and business name spelt in random variations) they told me that they had some ‘suggestions’ for my website. At first these were to update the Terms of Service and Privacy Policy. Most were reasonable although some just didn’t make any sense or fit into my business model at all but I figured this was acceptable until they then started telling me I had to change the content on the front page. Items that were of no concern to the banking. (Even though, I was paying them a large deposit to protect them). I was getting web design advice (read: do it our way or forgo our help) from bankers. It was time to look into other options.
Resolution
Since it was my idea licensed to a company I have the ability to license globally without issues. So I decided that the best place I know for launching a product quickly is America.
I Tweeted out that I was trying to sign up for Citibank but I had no social security number. Within a few days I was phoned up by an Assistant Vice President Business Banker who was going through me with the steps to launch my business with them.
She was (and continues to be) absolutely amazing help. I am currently waiting to hear back about the Merchant account and it looks to be completing any day now. (Then I sign up for a Payment Gateway.)
I’ve almost launched a business in America without a Social Security Number, without an American address or phone number and without once stepping foot on American soil. And with only a £3100 ($5000) deposit.
No wonder you have places like San Francisco, filling over the brim with innovatives when banks do everything they can to put up road blocks. Making the experience frustrating is a sure fire way to make people repeat it less. You just simply don’t see the level of entrepreneurs in the UK as you do the US in my experience and I feel that is not helped with the bureaucracies.
Update: The reason we did not go for Paypal first was handling the transition from Paypal subscriptions to a different payment gateway would be a pain. We didn’t want two sets of funds. Knowing possibly we would probably not get our hands on the Paypal funds for a good 5 months.
Couldn’t agree with you more. We had similar issues with Lloyds (our bank for over 3 years). How are we meant to get anything off the ground when they make it this hard. But then a lot of the business set up for the UK is stacked against us:
* HM Customs took 3 weeks to clear a box of knife racks that too 3 days to came from the far side of the USA
* There is no way clear or easy way to pay import duty in advance so I have to sit here and wait for a letter to come through asking me to pay it before it can be released. Speedy.
* Finance is tricky to get hold of
* Companies House, HMCR and all the rest don’t talk to each other are too quick to fine you and too slow to pay back money they owe you.
Enough to make you want to sticks…now there is an idea.
Yikes! And I thought we had a Tom of beauocracy over here. Glad it seems you’re making progress now.
Ignoring the completely unnecessary headline, I still think that this highlights the naivety prevalent among geeks in business.
Despite how your bank may appears in their own adverts (and this applies to all banks in the UK, as far as I can tell), they’re still not run as service providers. They’re not friendly by default, nor do they take a neutral point of view on you as a customer. Your relationship with your bank is just that, a relationship. You need to build it and work on it, on at least a monthly basis. You need to know your bank manager by name, the football team he supports, and the names of his children (side note: if your bank says they don’t have bank managers, bullshit. Ask to speak to someone in their local business team. They still exist, under a different name).
You need to take him out for dinner, send him a card at Christmas, and above all make him believe in you as a business person and entrepreneur. I’m lucky to have a very trusting relationship, and mutual respect for the head of the business team at my local branch, and he’s opened countless doors for me, expedited paperwork, and, yes, setup merchant accounts for me.
If you want to make money, you’re not only a programmer, you’re a business person. And successful business people network.
This is exactly what I did too – create a company in Delaware, use Bank of America for the bank account, and Braintree for the merchant account. Less tax, less bureaucracy, better system.
Getting a merchant account a lot of the time is down to credit. Your new business has no established credit history. Still, a 50k deposit is rediculous.
I faced a similar problem back in 2004 in the UK. My solution? Screw the banks: PayPal. Easy to set up, existing API solutions. PayPal was a bit of a bad name back then but it still worked and people paid by the droves. When I achieved high volume they assigned me an account manager and offered better, negotiated, pricing.
With established sales you can then go to a regular bank and get a merchant account, then a processor etc. But considering PayPal now offer merchant services much like a bank, I wouldn’t bother.
I’m in exactly the same situation!
We are at a stage where we can charge for our service, but can’t create a Merchant Account as it is a new business.
Can you shed some light on who to talk to at citi bank?
@Josh: Message @AskCiti and if that doesn’t work. Message me again and I’ll see what I can do.
As an American who started a company in Britain, I agree with you 100%. In the US, I can start a business by opening a bank account. It took too much effort to do the same thing here in the UK and the tax regime on a pre-revenue business is as clear as mud.
The UK must simply and open its business environment. The Government is going to put £70m into hiring a bunch of coaches (business coaching for growth) and what will happen? Hiring a bunch of unsuccessful talking heads to coach start ups and businesses who might have potential will make the business environment better? No way! Remove all the bureaucracy and make it easy for anyone to come to Britain to start businesses.
Good luck dealing with the Americans. Do remember that even the bank teller has a big title in US banking so never be impressed by what people are called. in the end, they all want to take your money no matter how good the service. The service is much better than the UK and far better than Europe but in the end, they want to hold your money and take their percentage.
Just had exactly the same issue with HSBC over here in the UK. But worse. They didn’t even want to know (no question of a deposit or fiddling with web design), despite the fact that our company has been in existence and profitable for 6 years. Bankers? Useless!!
Ah, we did micropayments not subscriptions with paypal. Still, unless your processor is going to handle the recurring billing paypal might be simpler due to PCI requirements for storing and securing card data. Plus if your processor handles it, won’t you still be locked in with possible migration costs? Paypal supports multiple currencies as well.
I am not familiar with paypal’s subscription model but why would there be any delay in accessing funds?
Zach,
Great article and story, but the melodramatic title lets it down!
Oh, it was more in jest than anything else
I couldn’t think of what to name it, so that was it. More so I wanted people to pay attention and perhaps make a tiny dent in the way things work so they improve.
I’ve just registered a Ltd company for me to do work as a freelance web developer. The whole tax, HMRC and paper work is a nightmare. I should probably just hire an overpaid accountant to do it all…
Keep good accounts of what you pay (shoeboxed helps me with this) and then organise it all and hand it to an accountant. You can be in and out in a few hours.
In Estonia you register a company and bank account online in 5 minutes and are running. Takes less time whan reading or writing your blog post
@Jon Atkinson:
It is not naivety to expect professionalism from a bank. Also, what on earth are you talking about saying “banking is not run as a service provider”? High street/retail banking is a SERVICE INDUSTRY, and the UK’s economy is built on the service industry.
That means it would be reasonable for a customer to expect service.
I hadn’t really thought about this (just pencilled in paypal) – what sort of rates/transaction fees are citibank charging? Are they better than Paypal? Nochex.com might be worth considering too.
@Jon, so basically you’re saying you have to grease and butter, and practically take him to bed (if you’re both so inclined) just so he can “open some doors” for you. Otherwise, you’re naive. I wouldn’t call that naivety, it just looks like corruption to me… ?
I’m not a banker, but I’d advise you to check your markup in a few browsers (IE/FF/Chrome/Opera/Safari). It’s horribly broken in Chrome. The link texts obscures the article text.
Obviously for a different website. But this is not a final design. I’m in the process of a new design. I’d be curious to know which operating system and resolution though?
Had the same problems back in 1999-2000, only back then there aren’t any real alternatives.
Now there are half a dozen companies who provide credit card payment services without the need for a merchant account. A quick google reveals lots of lists and feedback.
I think Jon Atkinson’s response is hilarious! Yes, kiss up to the old boy, and he’ll open doors for you. This is the kind of “continental” BS that allowed america to leave you guys in the dust economically over a century ago…. alas your fabian socialist policies have infected america and now you can’t even move $10k around without the government getting its nose into your business.
The thing is, rather than waste time kissing the ass of an incompetent (and yes, any bank manager whose ass has to be kissed in order to open a merchant account is incompetent) … move to a country that values business. You’ll get better employees too, and grow faster.
The US is still one of those countries for a few years more ,but the future is in asia, and possibly south america.
I know that PayPal is expensive, besides that, what else don’t you like about them?
I’ve lost thousands of dollars through their years due to their malpractices.
We can’t get a mortgage on premises with a 50% deposit and 7 years of rental and business rates payment history … so basically we’re left paying rent to the same bank, a larger amount, than we would have to pay. I can’t see any risk in a 50% mortgage at all and 7 years seems like quite an established history of paying … but there you go.
Can’t see how a startup would manage to get anything past the banks.
Wow, I am a bit surprised by this. My own experience was very smooth. I had an account with Barclays, met with a manager there and had a new account set up with cards and all in 2 weeks. No deposit, no fuss. We do pay a monthly fee, but its quite nominal. Still havnt gotten around to getting VAT numbers sorted yet, so who knows may still all go wrong!
I keep hearing amazing things about Barclays but they just disappointed us.
Interesting story Zach I believe it. Australia isn’t much better, there’s just one bank that will open an account where you can accept USD and to use online services with it you need a dial up modem. It’s slightly easier to setup a AUD merchant account, I think, although I’ve stuck with PayPal as it’s one big expensive headache!
@Andy C: I think you’re talking about a normal “business account”. A “merchant account” is different.
Paypal is NOT a bank. They can lock down your account and keep all your money, and you would have no recourse beyond winning in court.
Bank services suck… Sounds like a biz opportunity.
I agree pretty much with the first comment on this article.
All that being said, I don’t understand your problem at all… Who doesn’t know that banks in the UK suck?!
Good article.. but, there are other options.
In the UK, there are many trade organisations to join, many of which have got very good deals with banks for low fee merchant accounts – this is what I personally do.
Not just UK businesses had exactly the same issue here in Ireland.
UK banks generally are ridiculously frustrating but I’ve got to say that setting up our HSBC merchant bank account and business account was very easy. A few phone calls, a few forms and it was complete. There was certainly no suggestion of any deposit to use a merchant bank account or any bizarre offering of web redesign advice.
This was in 2008 though and I am not aware if practices have changed.
In saying the above though, HSBC have been a nightmare in other ways such as constantly blocking credit card payments and cancelling cards. Their anti fraud system is wholly over the top.
It probably matters what your personal credit is like as well.
w.r.t. PayPal, I have read horror stories about them locking people’s accounts – however I used them for over five years with hundreds of thousands going through and never had a single problem.
Oh and people setting up UK Ltd companies: it is a really good idea to use an accountant. He will keep you on the straight and narrow about what are acceptable business expenses for your level of turnover. He will also make sure you understand your financial year. Also if you have any transactions in other currencies and hold a balance between years in those currencies they will have to be converted to GBP and there are various ways of doing this.
You’ll want to report dividend payments via your own self-assessment tax return (required as a company director) and do corporation tax returns. If you are lucky enough to have high enough turn over there’s VAT to care about.
Don’t get into a mess and pay HMRC fines/penalties later.
I have experience setting up businesses in the US and the UK, the rules are different but aren’t that different in complexity. I do like the isolation of finances that a UK Ltd companies gives over an LLC treated as a partnership (though other options are available in the US, with other caveats)
Having set up companies in both the US and UK they are just as simple or just as complex as each other. The reality is, it’s not that difficult in either.
The main point about merchant accounts I absolutely agree with. I quickly decided not to bother, and go with paypal. I have a dedicated account manager, no deposit, multiple currency support and the fees are fine once you’re billing a decent amount. Also, because I use Recurly to handle all the subscriptions and billing info, I can transfer away from Paypal in the future when our volumes make that worthwhile.
We should have perhaps gone from Paypal but my previous losses because of them made me biased against them.
Saying that, just because Paypal are an easier option shouldn’t absolve the troubles I did have. The truth is for me, my experiences (and many others) have been awful in the UK whereas they’ve been incredibly easy working with the US.
Although I’m a bit late to the party, I think you guys would like to know that in Portugal you can start a business in an hour, with 1€ and get a bank account in the following hour. Setting up a merchant account will take a few days and you’ll be asked for a larger deposit (larger than the 1€ you have to deposit on the company’s bank account). You’ll find friendly account managers who’ll give you direct mobile numbers so they can be reached at any time of the day, wherever they are.
The biggest concern you’ll have is VAT which is not actually a problem if you sell services to companies in other countries (eg. SaaS) as you won’t have to charge for it (but the other companies will have to pay VAT at their home country). As for consumers, if you sell to customers outside the EU you won’t have to charge VAT either. If you do sell to regular consumers (not companies), you’ll have to include a large VAT tax (23% currently).
In Portugal you’ll find the cost of living being low, you’ll be able to hire very talented people. The weather is nice year ’round, and you can get anywhere in Europe cheap and fast (flight to London takes 2h30m, 2h30m to Amsterdam, 3h to Berlin, 1h30 to Barcelona if you’re into mobile)… even flights to the US are cheap (specially NY).
Feel free to get in touch if you want more info, my email is on the site.
I understand that there are other European countries with some of these attributes, but I feel Portugal has a very nice mix of them, that unfortunately are very unexplored.
Did you look at services such as Worldpay? They setup the merchant account with zero deposit and you just pay an annual fee for card processing as per any other banks offering. We’ve used them for years and has no issues getting setup as a startup.
Regards
Neil
Stripe has officially launched and looks great for developers and US based businesses…and causing even more frustration for international Vendors that feel left out. If you’re not from the US, or your not a developer, you may be interested in www.SimplifiedEcommerce.com (I’m the Founder).
We support international businesses and you can get started right away with zero coding – without the long complicated hassle of getting your own merchant account. We cover the full payments stack- gateway, vault, instant PCI compliance, subscription management and Affiliate Marketing.
As you grow you may want to get your own merchant account. Transitioning is seamless- we’re a Level 1 PCI compliant gateway, certified and integrated with 97% of US and a bunch of the biggest international payment processors/ networks.