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Month: March 2009

How to get a merchant account

Update: This article was written in 2009. Back then, the advice below made sense, since getting a merchant account was necessary to be able to take payments online.

Today, this is no longer the case. Skip the article below: just use GoCardless or Stripe.

Back to the article…

Getting a merchant account is a necessary step before you can take credit and debit card payments. That’s essential for the vast majority of Software-as-a-Service (SaaS) start-ups, and for many other kinds of business too. Unless you’ll be making all your money from advertising, you’ll need to be able to take payments, and if you want to be able to do so efficiently, you need a merchant account.

Considering how many businesses there are out there, one would think this process might be smooth and painless by now. Just apply for a merchant account, sign on the dotted line, and receive your merchant id in the mail a couple of weeks later. Unfortunately, this is not the case. Obtaining a merchant account can be a long and complex process, particularly if you’re a new, small business that’s going through this process for the first time.

I don’t claim to be an expert on this process. However, I’ve gone through it a few times, and I know people who are very familiar with it, so I put together this guide to obtaining a merchant account, from the cash-strapped start-up’s point of view.

Why do you need a merchant account?

If you’re building a typical SaaS business, you’ll need a merchant account in order to process credit and debit card payments. You could use Paypal, but some customers may feel you’re less credible because you don’t charge like everyone else. You could use one of the gateways that don’t require a merchant account, but typically they take fees of up to 10% of the transaction amount.

As of the publication of this post, the standard, most cost-effective way to take payments for SaaS products is still merchant accounts, managed by a regular bank, and going through a payment gateway.

1. When should you start this process?

Getting a merchant account can take anything from a few days to more than six months (if you make many mistakes). If you’re going through it for the first time, you may find yourself stuck at various points in the process. These sticking points can result in massive delays. You don’t want to be sitting there with a business that has users who want to pay you, but can’t because you don’t have a merchant account. Unforeseen delays in this process can cost you dearly, and if you’re going through this for the first time, there will probably be unforeseen delays.

On the other hand, there is little to no cost in obtaining a merchant account too early. Until your first transaction, the account just waits, unused, costing you nothing.

Therefore, you should start this process as soon as possible — today, if you can. Don’t underestimate how long this might take. Banks are often ridiculously slow in processing merchant account applications, when compared to the pace of the internet.

A small addendum to this advice: you need to have some sort of website (even if it’s just a placeholder) up before you start the application process. The bank will look at it. But this needs not be the same website that you actually launch with.

2. Apply to more than one bank

When you apply for a merchant account as a fresh new start-up, you’re in a position of overwhelming inferiority. The bank can dictate whatever terms they want to you, ask you for money up-front, impose ridiculous charges, etc. There’s a simple way around this: apply to several banks.

It takes more time and effort, but it gives you bargaining power. Banks don’t talk to each other much, so you can play them against each other. If all the banks are demanding an up-front payment, you can tell each one that another bank that you’ve applied to didn’t demand it. Banks do want your business, especially if you’ve conveyed the right impression, and so they’ll be willing to negotiate terms if it looks like you’re going to go somewhere else.

If you end up with more than one merchant account, so much the better. Sometimes banks can act irrationally and freeze your merchant account (particularly early on when you’re still relatively tiny), at the first hint that maybe there could be fraud going on (whether there really is or not). Having another merchant account set up gives you the ability to minimise the damage by switching over to your backup account. And, as I said earlier, unused merchant accounts don’t cost much.

3. Exaggerate your volumes

When you’re preparing your internal business plan, you should be conservative with your sales forecasts. However, when you’re talking to the bank, you should convince them that you will be a successful business that will bring them significant revenues. This shouldn’t be too hard — after all, you are optimistic about your start-up’s prospects, aren’t you?

Don’t lie. You need to be able to justify those numbers. However, if your internal, conservative goal is to get 500 sales a month by the end of the year, say you’re looking at internal projections of 1500 to 2000 sales a month. Be realistic, but optimistic. Ideally, you want to convey a turnover that will soon rise above a million dollars, so that your account manager feels that it’s worthwhile dealing with you and giving you a good deal. Don’t tell them that you’re hoping for those numbers. Tell them that those are the numbers you expect, based on current usage patterns. Now is the time for unwarranted confidence and optimism, not for cautious realism.

Your projected volume will also influence how big a cut the bank asks for. If your volumes are very small, they will want a comparatively large percentage of your transactions. If you’re planning to process a lot of transactions, on the other hand, they may be happy with a smaller cut.

Once your rates are negotiated, the bank is extremely unlikely to increase (or decrease) them if you fail to reach the volumes you predicted. So make sure you get good rates from the start by being optimistic.

4. Know your fraud-stuff

Banks still exist in a universe where “online businesses” are a scary new idea. They often don’t quite understand it, and they are scared to death of fraud. Even though you are honest, some of your customers may not be.

Your account manager will need to convince her fraud department that you’re not a great fraud risk. In order to do this, you need to convince her that you know all about online fraud, and that your business has covered all the bases to prevent fraudulent activity.

You should make sure you know all about chargebacks, 3D-secure, and AVS/CV2. You should also think ahead and figure out how someone might attempt to defraud you. This is harder because there is not all that much advice about how fraudulent individuals screw over businesses. Most of the readily available advice focuses on helping consumers avoid fraudulent businesses, but many businesses go broke dealing with fraudulent customers. It’s important to think ahead to what you’re going to do when (not if) someone uses a stolen card number on your service.

Do you pay commissions to affiliates? You’re automatically a higher fraud risk. Do you sell intangibles (like a web service)? People might call in chargebacks to get refunds. Sell to businesses? You’re a lower fraud risk, so make sure you highlight that. Adult industry? Multi-level marketing? Other “shady” businesses? Chances are the bank will not even touch you.

It is important for your own business that you think about fraud ahead of time. And it is extremely important for your merchant account process that you convey that you’ve thought about fraud and have it covered. Make the bank feel safe, or they’ll delay your application forever.

5. Be serious

The last thing any bank wants, understandably, is someone who’s going to blunder their way through figuring out how to charge credit cards, making costly mistakes along the way, getting defrauded left and right, and finally going broke and winding down the business because they couldn’t handle the complexity of it all. As part of your discussions and emails with your account manager, you must convince him that you’re serious, you know what you’re doing and, ideally, that you have help from someone who’s done it before, successfully.

If you don’t have access to such a helper, find one. Again, this shouldn’t be too hard — presumably you know other people who have started businesses before and they had to apply for a merchant account too. Once you’ve found that person, make sure your account manager is aware that you’re not helpless.

Be serious about security too. There are a lot of security regulations tied to internet transaction processing, and you want to be aware of them and convey that you are aware of them. For example, it’s probably a good thing to name-drop PCI-DSS in the conversation, and explain how you’re compliant with it.

Finally, do convey that you’re a serious business and you’re going to succeed. This is not the time to declare that you’re a fresh new business and you don’t have formal titles within the company, and don’t care much for rigid formality. This is the time to introduce yourself as the managing director and sound exactly like your stodgier competitors might.

6. Read the fine print and negotiate the charges

Banks will often present you with complex charges that are hard to compare with the offers from other banks. Unscrupulous ones may even use tricks like high termination fees that hit you when you least expect it. Others may ask for high up-front fees, suggest they hold your money for 3 months, etc.

All those points are negotiable.

The extent to which you can negotiate is largely driven by how much they value your business (see point 3) and by how many other offers you can choose from (see point 2). None of the merchant accounts I’ve been involved in have ended up having to pay an up-front fee, although the bank always asked for one.

Rates are an obvious one to compare, but don’t forget to also negotiate how long the bank will hold your money before passing it to you (many banks hold your payments in a separate account and pay your corporate account at the end of the month). Anything more than 1 month should be considered unacceptable. You should consider how important that is for your cash flow.

In conclusion…

Getting your first merchant account can be a real nightmare, but it doesn’t need to be so. Following these tips will maximise your chance of looking back at this process and thinking “Heh, it wasn’t so hard after all”. Doing the opposite of these tips can practically guarantee you’ll never get a merchant account. Here they are again:

  • Start the process early because it might take much longer than you think it should
  • Apply to several banks to give yourself leverage in negotiations
  • Exaggerate your volumes (realistically) to obtain good terms and good attention
  • Know all about fraud to make the bank feel safe about doing business with you
  • Be serious to ensure the bank feels you’re a trustworthy business
  • Read the fine print and negotiate the terms, as you may be able to get much better terms than initially offered

I hope these tips help others avoid some unnecessary headaches. Do you have any other advice? Please leave it below.

Thanks to appletizer and lifo for reviewing a draft of this article.

Starting up with a friend

It seems like a fool-proof plan: start up with a close friend. You’ll get along (obviously), and you’ll get to share the exciting, fantastic, scary experience of starting up with someone you care about. It’s not a bad idea, but there are a few caveats that you should be aware of before you proceed1.

When I started my first company with one of my closest friends, I expected things would go very well between us. We understood each other in ways that would take years to build up (and did take 10 years). We knew each other, and we knew we could rely on each other. We were prepared to have many surprises along the way — starting a business is always going to be a scary adventure.

What we weren’t prepared for was that the main problem would come from us and the dynamic between us.

What happened, in brief

I’m not going to go into all the details of what exactly went wrong, for a number of reasons (among them, it would be a one-sided account and inherently unfair on my friend and first cofounder). The long and short of it is, we had different expectations about the business. I left my safe, comfortable corporate job to work on it, so I needed it to succeed, or else I would find myself back in the corporate world. By contrast, my friend had already started several companies and was comfortably well off, so he didn’t have the same expectations and requirements.

It turned out we have a different definition of “the business isn’t working out”. For me, it was working out if it was making enough money to cover my expenses. For my friend, it wasn’t working out unless it was making enough money to also add to his existing wealth and thus justify the time and effort which he poured into it. Both those views were correct, but because we knew that we understood each other, we didn’t realise that our views were different until that difference had grown into a huge misunderstanding.

This core divergence of views could have been resolved easily if we’d known about it and discussed it ahead of time, but we didn’t know about it, so it festered and turned into dozens of other misunderstandings, so that by the time it finally became clear what our main divergence was, much of the damage was already done and it was entangled in a huge mass of emotional misunderstandings2.

This almost cost us our friendship. We got through this thanks to the help and mediation of another very good friend, who helped us to communicate to each other how we felt, so that we could move forward together rather than against each other.

I’m glad to say the mediation worked, and we’re still friends (perhaps even stronger than before). Nevertheless, I learned some important lessons from this.

1. Make your agreements explicit

The first lesson is to keep agreements explicit. It’s not enough to think that your friend understands what you think: make sure he does by discussing it openly with him. As my mediating friend phrased it, “unspoken promises” have a tendency to turn into broken promises (which are always hard to swallow). Avoid unspoken promises.

Here’s an example of a really bad thing to keep implicit: “We’ll only call it quits if the business is bankrupt and can’t raise any more money.” The promise here is that we’ll keep going until the very end. This may seem obvious to one party in the business, but it may not be so to the other. One partner could, for instance, feel that the time to call it quits is when the business has 3 months of cash flow left. Another may feel that it’s worth going deep into credit card debt territory before giving up.

Don’t make this mistake: keep those agreements explicit.

2. Detail your agreements

Once you make some agreements explicit, it should become clear that you need further discussion to figure out exactly what your explicit agreement is. Don’t be afraid to do this. It’s not “too early to discuss this”.

Here’s an explicit agreement that’s not detailed enough: “We want the business to make a lot of money”. Really? How much are you happy with? 10’000 pounds a month? A million? What is the definition of success? It’s almost certain that you and your business partner have different views as to what “a lot of money” is. Being on the same page about what you expect out of your business will ensure that you don’t pull in different directions when things are going well. Think of how mortifying it would be to find out that your partner wants to pull the plug when you think that the business is successful.

3. Don’t be afraid of discussing the bad stuff

This really happened!

There are a number of subjects which seem almost embarrassing to discuss when things are going well. For example, “What if one of us decides to pull out?” Your first reaction to this topic might be “What? We’re barely getting started, and already we’re talking about what happens if one of us pulls out?”

The reality is that people’s life circumstances change through time. They get married, or decide to leave the country, or get engrossed in a different pursuit, etc. Many things can get in between a founder and his start-up. Similarly, many things can go very wrong with a start-up. When those things do go wrong, or when one of the founders decides to pull out, is not the time to discuss these things. You need to discuss them with a clear head when no one is thinking of pulling out and the business looks healthy and hopeful.

When you discuss your start-up’s future, do not be afraid to talk about the disaster scenarios. Also, when you negotiate what will happen if a partner quits, don’t be so sure that it won’t be you.

4. Write things down

There are two reasons to write things down: first, people’s memories of conversations are faulty. Writing things down also ensures that there is no disagreement, later, about what was decided. You don’t need a long document for this — even just one or two pages describing your agreement is enough to avoid later misunderstandings.

The second reason is that people may think they have reached an agreement when in reality they never agreed about the details. Once you put something in writing, you give it a certain air of finality that teases out those last remaining disagreement. Basically, putting an agreement in writing is like putting a new piece of functionality in code. Until it exists in that form, it’s just vapour.

Halfway through my misunderstanding with my friend, we thought we’d figured out a way forward. I wasn’t sure that we were both thinking the same thing, so I made the effort to put it in writing, in the form of a business plan. When my friend read it, and understood more clearly what I meant, he recanted, and the agreement fell through. It’s a good thing that it fell through, because it would likely have resulted in even more problems later on if we’d gone through with it based on our flawed understanding of each other.

5. Don’t make it work at all costs

Yes, I know this is your friend that you’re starting up with, and this is your great opportunity to start your own business. However, if, in those discussions, you find that there’s an intractable disagreement, don’t fall into the trap of thinking that the most important thing is to smooth things over and start the business.

Starting up with someone is almost like marrying them (temporarily), in a way. You’ll be talking to them almost everyday, and possibly even more than with your significant other. You’ll be working on a “baby” (your business) for many months. It’s a big commitment, basically, and much like any other kind of significant commitment, you shouldn’t go into it if you think there are major problems, because those problems will only get worse.

6. Don’t assume things will get better with time

It’s easy to rationalise away big problems by assuming that things will get better with time. In some cases, they will, but in a majority of cases, they won’t. What this means, for example, is that you shouldn’t assume that your inexplicably small share of the business will magically grow to 50% later on. This is even less likely to happen if the business is working well (if the business isn’t working out, chances are it doesn’t matter anyway).

Sample questions

This article wouldn’t be complete without a list of questions that you might go through and discuss with your cofounder. Use them as a guideline or as a checklist, as you please.

  • What do we both mean by “the business is successful”?
  • What do we both mean by “the business is not successful”?
  • What happens if one of us needs to voluntarily pull out, for any reason?
  • What happens if one of us cannot work on the business anymore, for involuntary reasons?
  • What are the conditions under which we’d call the business a failure and pull the plug?
  • What is plan B for each of us if we do pull the plug? Are we both prepared for that plan B?
  • What do we expect of each other, both in terms of responsibilities and in terms of attitude and effort?
  • What is and is not an expense? What is the maximum amount someone can spend on an expense without checking with the other? (from Sebastian Marshall)
  • When and how will profits be distributed? How much will be reinvested? What will the reserves be? (from Sebastian Marshall)
  • What happens if one partner needs cash and the other wants to reinvest it into growth/expansion? (from Sebastian Marshall)
  • How will you handle it when (not if) the hours each partner is working are unbalanced? (from Sebastian Marshall)

This is not a final list by any means, but it should at least provide some starting points to make the implicit explicit. If you have other suggestions, please do add them in the comments below.


I don’t regret starting that business with my friend, but I do regret not clarifying those kinds of questions upfront. It would have saved me a lot of worry. If your business is struggling, you don’t need the additional pain of seeing your friendship unraveling under the stress of accumulated misunderstandings.

So, do yourself a favour, and set out to:

  • Make your agreements explicit so that you don’t break implicit promises
  • Detail your agreements so that your promises are clear
  • Don’t be afraid of discussing negative scenarios, so that you don’t add the stress of misunderstanding to already bad situations
  • Write things down so you’ll remember
  • Don’t make things work at all costs, so that you don’t spend the next years living with a deal that’s not acceptable to you
  • Don’t assume things will get better with time, so you’re not surprised when they don’t

I hope this helps others. Your comments below are much welcome.

1 It’s worth adding that this advice can be useful for any kind of adventure, not just business. However, given the propensity of businesses to crank up the pressure to diamond-producing levels, and what can often be at stake, it’s particularly important in this context.

2 Although this sounds like a barely mitigated disaster, I must add that, on the whole, the business was a success (it made money, I learned a lot from it both about myself and about start-ups, and it provided a jumping board from which to start my next business). It wasn’t as much of a success as it might have been, and there were some times when it looked like it might turn into a small disaster, but on the whole it turned out reasonably well.

College vs Startup

Let’s say you’re 17, a high school student, passionate about web start-ups, and you just know that you’ll be starting your own one day. Should you go to university first? Should you get a degree? What use will it be? Is it worth it? Should you study computer science? IT management? An MBA? Physics? Maths? None of the above? Which will best prepare you for start-up life? More importantly, is that why you should go to university, or are there better reasons?

It’s a tough question, particularly since it’s going to have a big influence on the rest of your life. If you skip university, your life will be radically different than if you don’t. If you’re keeping track of the pulse of conversations online, you might have spotted a few discussions on the topic recently, such as The Great College Hoax (HN link), published on Forbes, which makes the bold claim that colleges are outright scams, or a milder one by celebrity VC Fred Wilson, which claims that you don’t need a degree to be an entrepreneur (HN link).

My opinion on the subject is simple: if you have a thirst for learning, and you don’t have to enter the workforce immediately (i.e. you can afford, somehow, a degree, without being financially irresponsible), then you absolutely should go to university, even if you have a start-up that you could work on right away. This is not because you need the degree for your future career, but because it’s a great thing to spend your next 4 years on.

Here’s a breakdown of reasons why you should go to university rather than work on your start-up 1:

Business ideas are a dime a dozen

Perhaps you feel that you have the idea of the decade, that will make you millions. If so, I encourage you to read this essay by Paul Graham, the friendly uncle of the start-up world. Don’t worry about ideas. You’ll have just as many, if not more, ideas when you come out of college as when you went in. Having a great idea is not a good reason to skip university.

You can drop out

If you go to university and you decide that it’s really not for you 2, or if you work on your venture on the side and it takes off, you can always drop out like many other famous entrepreneurs did before. No one’s forcing you to stay. But at least, you’ll drop out with the knowledge of what you’re giving up, and, hopefully, you’ll do it for something concrete that needs all your attention right now.

A good time

University is an enjoyable way to spend four years. Start-ups aren’t the only thing in life. If you focus yourself on work alone, without enjoying other pleasures along the way, you may well find out later that you missed out on the more fun parts of life.

You don’t need a degree to start a start-up, that’s true. There are many other things that you don’t need for your start-up, but which are still enjoyable and worthwhile parts of life. Having a girlfriend/boyfriend, and eventually a wife/husband and children, is not essential to your business. Neither is a university degree. But both can be great things to have in your life.

Learn things you would never have learned by yourself

Many people think they need to do a degree in the profession that they will follow later (and, for some, such as architects, doctors and lawyers, that is true). For web entrepreneurs, an IT-related degree can seem like the obvious option. I believe that it’s far more useful and interesting to study something else, something that you’re interested in and that you know that you’d never get around to studying in depth otherwise.

In my case, I’ve always had a thirst for figuring out how things work, so I quenched it by doing a degree in Physics. Many things I learned there are not directly useful to my life. Indirectly, however, my four years of Physics have shaped the way I think, the way I approach problems, and my approach to learning complicated topics. I would not have absorbed all these things if I hadn’t done a Physics degree. There are some things you really have to be taught by someone, to learn them properly.

I was genuinely interested in Physics, and that’s why I chose that subject. This leads me to an important point: you should choose a subject based on your interests, rather than career usefulness. There is an unhealthy fashion these days to link degrees to jobs, as if a degree was the best way to train for a specific job (e.g. degrees in “Communications and Media” as training for Marketing or PR people). This isn’t helping anyone, least of all the universities. You should do a degree because you care about the subject, not for the career prospects. Ultimately, university is supposed to train you for life, not for a job.

Doing a degree in a subject that does not end up being your career gives you an extra perspective to look at things, an extra string on your bow.

The last place where people care to teach you

Once you enter the workforce (for your own business or otherwise), no one cares what you learn. Corporations will make a token effort to give you some opportunity to better yourself via a training budget and various work-related courses, but university is truly the last place where you’ll have teachers who really care about teaching you things (if they’re any good at all).

Moreover, they’ll care about it for a long time. For years on end, a relatively small group of people will care about what you learn, will care that you become a better person through their teaching, and will care about your intellectual development. Believe me when I say that that will never happen again in your life (unless you go back to university, of course). The most attention you’ll ever get from a corporate course is a couple of weeks of somewhat bored oversight.

A shelter where you can develop yourself

The “real world” is a harsh place, where, as I have said, no one will care whether you’re growing as a person. Once you’re working full time, on your start-up or otherwise, it becomes incredibly difficult to find the time to invest in extra-curricular things which you really want to do. At university, it’s easy — you might decide to learn a new language, or even start a start-up on the side, and still have time for your social life and to take your studies seriously. Once you leave that shelter, however, you’ll have to surmount tall obstacles to find the time to do what you want.

Meet interesting people

Last but not least, to me, the most fascinating aspect of university was the people I met there. I’ve yet to find myself again surrounded by so many smart and interesting people, from college professors to students. Moreover, you get to meet all those people in a low-stress, low-competition environment 3 where you can really become friends with them. Making friends in the work-place is much more delicate and takes a lot longer 4.

Even if you’re looking at it from a start-up point of view, you will meet many more potential start-up cofounders at university than by going straight to work — whether for your own business or for someone else’s.

But the important thing there is really that you’ll make friends that you otherwise wouldn’t have made, at a stage of their life where they’re growing and learning many new things, and build personal connections that are priceless not from a business point of view, but from a personal point of view. Life is about more than business.


There are many good reasons to go to university. You’ll notice that I didn’t list job training among them, because, unless your vocation requires a degree, that is not the best reason to go to university. If you can go to university without being financially irresponsible, then it is personally irresponsible not to — especially if your reason for avoiding college is that you have a start-up idea to work on.

I hope this helps. There are no doubt many other reasons to go to university. Let me know your thoughts below.

1 These are largely based on my personal experience of university, in Oxford University in England. Different universities can vary greatly, though in my opinion you can get a fairly good idea of what life will be at a specific college before you apply, through open days and other ways.

2 Please give it a couple of years before deciding that… the first year is usually significantly less interesting than the rest of a degree course, because the university first has to ensure that everyone has the baseline level of competence in the subject.

3 It’s worth noting that not all universities, and not all parts of the world, are equal. Asian universities, as my friends who studied there tell me, have a much stronger emphasis on study and don’t care so much about developing their students socially. That’s a mistake, in my opinion.

4 It can happen, and does happen, but in many cases, a work relationship will get in the way of a personal relationship and, at the very least, slow things down so that what might have taken a couple of months of hanging around each other will take a year of careful exploration. And then there’s always the potential for becoming your friend’s boss, which throws spokes in the wheels.

Thanks to Kelvin Koh for reviewing a draft of this article.

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