Taking payments online (in Europe) in 2013
In order to make money online a business needs to be able to take payments. This may sound like a simple thing to set up - but it can be rather complex, and disruptive US companies such as Stripe and Square have yet to launch in Europe.
Finding a way to take payments for Vinetrade has been one of my biggest challenges (from which I’ve learnt a lot) and I thought it would be worth writing up my thoughts on the card payment market, where it’s going and what Europe needs.
Why it’s hard
The easiest way to take payments online is via card (credit or debit). Behind all card payments are a number of bank transactions. Consumer protection laws make it possible for buyers to claim a refund from their bank if something goes wrong (e.g. they pay for goods that never arrive). If the bank can’t reclaim those funds from the business that took the payment, they’ll make a loss.
This means that banks will put a lot of effort in to minimising their risk. Often this means rejecting new applicants outright (a number of banks led us up the garden path, taking us through month-long processes and getting us to submit detailed documentation only to tell us that we wouldn’t have been accepted anyway because we’re such a new company). Other methods include charging high fees (sometimes 5% or more of each transaction processed), or holding a rolling balance (such as 20% of the value of all transactions processed for 6 weeks to cover the cost of any chargebacks).
Traditional Options - Banks, WorldPay or PayPal
Until recently there have been three main options for UK based entrepreneurs wanting to take payments online: applying directly to a bank for a merchant account or signing up for a WorldPay or PayPal account.
Applying directly to a bank can be a painful process - you’ll need to be prepared to submit a lot of documentation (business plans, cash-flow forecasts, director identity verification, shareholder identities etc) and spend a lot of time waiting and chasing for an answer. On the plus side you will get a lot more control of how you take payments (e.g. ability to keep buyers on your site without having to redirect them to an external service), relatively low charges (around 1.5-2% of transaction value for credit cards or fixed fees of around £0.40 for debit card payments) and defined payment dates in to your main account (so you can spend the money).
For those who have had difficulty applying directly to banks, WorldPay has been a common alternative and they have a relatively easy online signup process. The downside is that they hit you with a lot of fees (in my experience £150 to open an account, a significant deposit and around 5% of all transactions) and are very restrictive on the type of businesses they’ll accept payments for (e.g. nothing related to alcohol or anything that could be defined as an adult product).
PayPal has always been popular and will allow almost anyone to open an account and take payments. Fees are relatively reasonable (around 3% of transaction value), but the downsides are poor technology (their API can be a nightmare to work with) and bad customer service. Unfortunately PayPal is pretty much an unregulated bank and there are a number of horror stories about them closing accounts, freezing funds and making life very difficult for entrepreneurs. This is likely because they have traditionally been a target for fraudsters, and it’s much cheaper to side with buyers and provide unconditional refunds than conduct a detailed investigation in to each dispute.
New entrants to the market
A number of new players have entered the market in the past 12 months, founded by entrepreneurs who get the need for better solutions. These new entrants make it much easier to get started and accept payments, take reasonable fees, pay out to your bank account quickly and have a short approval process (if any).
GoCardless (UK only)
Perhaps the most innovative of the new entrants, GoCardless allows anyone (in the UK) to take payments via Direct Debit (straight from the buyers bank account - bypassing the card system).
Direct Debit is particularly suited to recurring payments or one off charges for services. Unfortunately it’s not particularly suited to payments for physical products that need to be shipped quickly, as there can be a short delay (3-4 days) in setting up bank account mandates and taking payments.
The Direct Debit Guarantee can open businesses to fraud as buyers can request unconditional refunds from their banks (although this isn’t much different to chargebacks on credit cards). Bypassing the card payment network does mean that GoCardless can charge low fees - currently 1% up to a maximum of £2 per transaction.
A US company that has gained quick traction (they handle payments for well known sites like Github, Airbnb, Fab, Uber, 37 Signals) and recently launched in Europe. Their model is to provide a simple API and transparent pricing. They’re easy to integrate with and customer service appears to be excellent. You still have to submit a range of business information and they need to get approval to support you from their underwriting bank (Adyen in Europe), but this process is relatively painless and they require less documentation than you’d have to submit by going to the bank directly. The application process is also much faster - so you can get started in days rather than weeks.
A German startup that is effectively a clone (from Rocket Internet) of US based Stripe. Like Stripe, they have an API that is easy to integrate with and you can get going quickly (they also require some business information and identification from you, but this does not appear to be particularly stringent).
The solution we use
Vinetrade has the kind of business model that scares banks and card payment providers. We trade high value goods (prices in the region of £1.5-20k) that are rarely delivered to the buyer (they’re stored in remote warehouses).
Eventually, thanks to our investors opening some higher level doors, we were able to open an account with BarclayCard. Unfortunately the process wasn’t easy, and because they’re forcing us to use their own gateway (limited documentation, little pre-built open source software to use) we haven’t completed the integration work. So we’re still taking payments by manual bank transfer (luckily the default in our market) while we get things up and running.
What I’d do next time
If I were to start another company (or product) today I’d look at using GoCardless, Braintree or Paymill for payments and do a better job of building payment costs in to the business model. There’s no longer a reason to go through the pain of applying to banks individually, dealing with rejections and jumping through all of the hoops required to get started. While fees may be a little higher than going directly to a bank (an extra 1-2%), you get started much more quickly and can focus on validating your business model (you can optimise payment costs later).
In the past I would have used PayPal as a default, but for now I’d steer clear and only use them as a payments provider of last resort.
What the market needs
With companies like Braintree and Paymill now launching in Europe, and more innovative services like GoCardless, it finally looks as though the payments market is heading in the right direction.
Any progress that reduces the need to interact directly with banks, and makes it easy for consumers to pay for products and services they want is a good thing. Hopefully the result will be stronger European internet companies, and an ecosystem that truly rivals that of the US.