Originally published on the Server Density blog.
With the beta of our server monitoring application, Server Density, coming to an end, over the last few weeks I have been in contact with various banks in the UK to arrange a merchant account so that we can take payment for the service. I have written a follow-up to Daniel Tenner’s excellent post, “How to get a merchant account“, with some detailed information about the pricing I negotiated (I managed to get the fees down quite a bit) but this post is focusing on one company:
Barclays. Specifically, Barclaycard Business.
I like Barclays bank. I have several personal accounts with them and used their business banking services for my last few startups. I have had business and personal accounts with all the major UK high street banks so it’s not just the nice blue logo and website design that has seen me stay as a Barclays customer for many years. Equally, I have used Barclaycard Business in the past for merchant accounts for past startups and never had any problems. So you might say I have a long history with the bank and its group companies.
When I contacted Barclaycard Business to go through the process of setting up the merchant account for Boxed Ice, I was expecting them to provide the best rates (they have in the past) and since I had been through the process before, I knew what to expect and how long it was going to take. But this time round, it seems they have introduced a new policy:
45 day deferred settlement for all software / internet companies. A blanket policy. No exceptions. No appeals*.
This means that when a customer pays you, you won’t get the money for 45 days. Barclays keep it. If a customer pays you on the 1st Jan, you have to wait until 14th Feb, plus another 3 days for the actual transfer to complete. And they won’t be paying you interest either.
When you’re a startup, one of the most important things is cashflow. Profitability is the goal, but without good cashflow the company dies. That’s what all these “credit crunch” bailout loans are about – improving cashflow. If you have to wait almost 2 months for customer payments to become available then that is 2 months you have to survive and supply the customer with the product or service at a loss.
Looking at it from Barclays’ point of view, selling intangible goods like downloadable software and SaaS may well be seen as a higher risk because the customer does not ever receive anything physical and you can’t point to a Royal Mail delivery signature to prove the product was delivered. However, that is actually a false risk. In our case, we bill the customer after their first month of usage. This is the same for a lot of other tech companies, especially in the case of free trials and usage based billing. The customer has already received the service and been using it for weeks before they are billed.
This means the customer might actually be using your product for almost 3 months before you get any money – 30 day free trial + 45 day settlement + 3 day transfer time.
With a physical product, if the customer wins any chargeback then the company has to get the product returned (which might not even be worth the expense if it’s a low value product) and there are losses on packaging and shipping. There’s no such risk with a software sale because there is no unit cost (ignoring hosting costs), just overheads.
There are actually a relatively small number of banks that will provide merchant accounts and an even smaller number that give favourable terms and allow recurring billing. If you can’t get a merchant account then you are stuck with PayPal or Google Checkout and those services can hurt conversion and usually aren’t flexible enough. This leaves you at the mercy of the banks to impose horribly restrictive terms.
Luckily there are other banks who are willing to do this and provide good rates, details of which I will provide in a future post. They are exactly the people who should be in the best position to help new companies with more favourable terms and better rates, especially when they have government support to do so.
As a long time and generally happy customer of Barclays, I am pretty disappointed at their new policy, particularly when the tech industry is supposedly one of the best to work through the difficult economic climate. What makes this even more annoying is they are even applying the policy to existing customers who have a proven history.
Barclays will be missing out on a lot of good business if they continue this policy. Maybe they have decided they don’t want to service the tech industry. That’s their choice, but it seems like a bad one to me. From what I can see, Barclays hates tech startups and wants to keep their money for as long as possible.
* I was told on the phone I could appeal the decision by contacting my local business account manager but after speaking to his Barclaycard Business contact, he said there was nothing he could do, regardless of my past history.