What is PSD2?
According to Payments UK, the trade association for the payments industry in the UK, PSD2 is a fundamental piece of European payments related legislation. It is a product of a review of the original Payment Services Directive and requires payment service providers (PSPs) to make significant changes to their operations.
PSD2 aims to increase competition in payments, bring new types of payment services into scope, enhance customer protection and extend the reach of the original directive.
When the directive becomes law in January 2018 a ban will come into force on debit and credit card surcharging for most transactions, including flight and holiday bookings. Travel Weekly reported that this could cost the travel industry in the UK alone up to £150 million in 2018.
Are travel companies prepared for PSD2?
We held a panel discussing PSD2 at our Virtual Payments Summit in London this autumn, senior figures from travel companies across Europe were asked how comfortable they were with PSD2 and the implications it will have for their businesses:
- 36% were not comfortable
- 36% were somewhat uncomfortable
- 14% were comfortable
- 14% were fairly comfortable
- 0% were very comfortable
Farina Azam, Partner at Travlaw, a panellist at our summit explained that while the notion of PSD2 is honourable in its intentions of protecting consumers, it will be travel companies that are most affected:
“The problem is that the travel industry is going to be one of the industries hit hardest, because credit card fees are widespread and very commonly used. Unfortunately it will be the smaller companies in particular who are hardest hit by the credit card surcharge ban. I think there will probably be quite a few companies out there who properly don’t comply, especially initially. Time will tell how much the industry is actually affected.”
Martin Alcock, Director of the Travel Trade Consultancy, also sat on the panel corroborated:
“While on one hand PSD2 is trying to protect consumers, it is actually going to push up prices. Travel is unique in that consumers are paying so far in advance of departure and the one thing that stops more people booking on credit card is that fee. If you take away that fee, or you make every payment method the equivalent in price, then why wouldn’t people spend on credit card because they get the financial protection, as well as all the other benefits of paying by credit card. The agents will bear the brunt of it, the bigger agents will be able to negotiate to an extent with tour operators, it’s the smaller agents ultimately who will pay the cost of this – in that part of the market commissions have been cut historically and it’s difficult to make money.”
Farina explained that companies who are not prepared for PSD2 may be hit and end up having to absorb the costs of taking credit card payments:
“The sooner you start preparing for PSD2 the better. Where your strategy is to increase prices and you are already allowing customers to make bookings and are taking deposits where the balance payment is due after January 2018 – if you haven’t already included an increase in price you’re actually going to have to absorb the cost of credit card payments. You won’t be able to charge customers a fee after January when they make the balance payment.”
Prices likely to increase for travellers
In the UK, AITO (the Association of Independent Tour Operators) recommended that tour operator members apply an extra 0.5% commission to travel agent’s bookings for payments taken after the introduction of PSD2 in January 2018. Our audience was split as to whether this was a good idea or not – with 48% agreeing with the advice and 51% disagreeing.
We also asked our audience of travel industry insiders what their preferred route for tackling the need to remove surcharges for card payments:
- 29% plan on passing the cost through to consumers by increasing prices
- 25% will absorb additional costs
- 21% plan on passing the costs through to consumers via a booking fee
- 21% will seek alternative payment options
- 4% say costs will be covered by increasing commission
Farina warned: “If you want to charge a booking fee it has to be regardless of the payment method, so it can’t be just for credit card payments, you have to have a booking fee of that price for all bookings and it will then need to go in the headline price anyway because it’s compulsory payment.”
“I would also be very wary of giving alternative payment methods, because if you are going to offer a reduction for an alternative payment method, arguably that’s a credit card fee just by a different means.” Farina also cautioned.
Our panellists agreed that passing on costs to consumers through increased prices seemed the most attractive option for travel companies and the least problematic.
As the deadline looms European travel companies need to ensure that they are ready come 13th January 2018 to stop surcharging for card payments and that they have considered the implications this will have on their business.