What the ban on surcharging means for travel businesses

Surcharges have been a frustration for consumers for as long as low-price deals have existed online. Surprise charges can be excessive, much higher than the actual cost of processing a payment – it’s even been estimated that surcharging cost Brits £166 million in 2015.

With the introduction of PSD2 on January 13th, surcharging has been banned in the UK and the EU. While this is a clear win for the consumer, how will businesses react?

Travel companies offering cheap deals have long been notorious for surcharging. I spoke to Ed Chandler, Chief Commercial and Partnerships Officer, eNett, about the surcharging ban will effect travel businesses.

What will the ban on surcharges mean for businesses, and how can they respond?

The broader impact is that, for merchants, airlines and hotels are no longer able to surcharge for someone using a credit card. Typically, this occurs in the low-cost carriers, like RyanAir or EasyJet. The ban is a real benefit to consumers because they won’t have to pay a surprise fee at the end of what they thought was a cheaper deal – it’s cleaner, simpler, and more transparent. However, for merchants, the cost of acceptance will increase because they can’t surcharge to cover it.

Clearly there’s some leverage the merchants have over their service providers, there’s an opportunity, particularly for the larger ones, for them to negotiate those terms – the cost of acceptance, the cost of their gateway, and the cost of their risk.

Many firms still use old-fashioned payment methods, which means they’re losing around 3% on every international transaction with their suppliers. What can be done about the ‘consumer payments problem’?

It’s down to the merchants to sell their product – they can’t have their cake and eat it. You can’t accept digital payments for products and services and then charge for that. Some choose to just accept cash payments because they think cash is ‘free’ – although I would strongly argue that cash isn’t free. If you want to accept electronic payments then you must include that as part of the products and services you provide.

The smart retailers used to take in the overall cost of providing a service into the price, rather than show one price and lead the customer into a buying journey, then charge them an extra £0.50 or £1 to use their card. That’s not a great customer experience to create. There was only a small population of retailers that were actually surcharging, and it typically was those retailers who were offering very low-priced products and services. So there’s probably going to have to be a re-balancing of how much those products and services are going to sell for, so merchants can cover the cost of accepting card payments. They may stand a chance of renegotiating some of those acceptance costs with their providers.

How can digital payments help to solve these issues?

Using virtual cards is free – there isn’t that issuing cost, the plastic cost or the fulfillment cost. If online travel agencies use them to pay airlines or hotels, they can get a rebate, which they can then use to offset the cost of their acceptance. This can also be offset against the cost of the products and services offered, creating improved customer experience because the customer is paying slightly less.

Lastly, post-PSD2 and Open Banking, how do you think the payments landscape will change in 2018?

I don’t think it’s going to change in 2018. Much of what’s coming down the pipeline isn’t new. The new legislation is good because it takes out some of the grey area, reducing uncertainty. But if you think about what they’re trying to do then obviously part of it is an extension beyond Europe, which will make things easier. There’s better access for third party accounts, whether that’s for information or an AISP, or whether its for the payment initiation of PISP. From an AISP point-of-view, we’ve seen those kind of aggregation products before. I think it will just make it easier for those providers to offer something valuable to the consumer.

So if you’re an insurance provider trying to assess risk, you can access all of a consumer’s accounts and profile their transactions and use this to calculate a risk score. If this can be more accurate than it was previously then the consumer could benefit from a lower premium than they might have received previously. I think this will be beneficial, though these kinds of propositions will take some time to come through. The UK in particular is a card-dominant economy – people like the protection a card provides.

There will be some people leading the way, and there will be some early adopters, but there will also be a lot of inertia. Open Banking could well work, but there needs to be a strong customer value proposition set up around it. There are still a lot of questions to be answered: how do we manage fraud in these situations, or charge backs? Although anything that strengthens SCA is a good thing.

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