January 28th 2020
Trouble in Paradise: Combating High Fees, SCA and Holdbacks to Stay Afloat
It’s no secret the travel industry is full of risk, and this is no less true when it comes to payments.
In addition to holdbacks, risk premiums and fraud, merchants in this sector are maligned with card acceptance fees reminiscent of unregulated rates around the world. While 2015’s Interchange Fee Regulation (IFR) sought to achieve lower prices for all, the travel industry has been left out in the cold.
As a result, processing payments in travel is highly complex and risky, as well as particularly expensive when compared to other sectors: in this article, we explore how holdbacks, SCA and rising scheme fees have been disproportionately damaging for travel and hospitality.
Fees are continuing to rise across Europe – with Visa’s latest increases estimated to cost merchants an additional €260 million per year. These changes to the Acquirer Association Fee depend on a few factors – such as country, payments channel and card type – and can result in increases as high as 79%.
These changes alone could be extremely costly for travel and hospitality merchants. However, they already encounter significantly higher fees than most other sectors due to 4 key characteristics of their payments profiles.
- High Average Transaction Value (ATV). While the ATV in Europe is around €35, hotels, travel agencies and airlines are dealing with much higher value payments – so increases to ad valorem fees, and the fact the interchange is charged as a percentage of the transaction value, will have a much bigger impact than for low ATV merchants.
- High credit card spend. When paying for a holiday, it’s common practice for consumers to purchase it using credit over debit. Historically, merchants have been able to manage these high costs through steering methods such as surcharging. PSD2 banned this practice on card types covered by the IFR, resulting in a migration from debit to credit card spending and increased card costs for travel merchants by an estimated 9%.
- High commercial card spend. The travel sector sees a higher proportion of commercial cards and American Express than most other industries. These card types, excluded from the IFR caps, can cost merchants upwards of 2% per transaction.
- High volume of international cards. Transactions involving cards issued outside of the EEA and merchants located within the EEA attract substantially higher fees than domestic or intra-regional transactions (where the card is issued in a different EEA country to the merchant). While domestic and intra-regional scheme fees can vary between 5 and 10 basis points on average, inter-regional charges average around 90bps – meaning merchants will likely still pay over 1% in merchant service charges despite the new interchange caps.
- Large amounts of card not present. Merchants operating online face significantly higher card acceptance costs than in-store. Recent Visa Card Not Present scheme fee increases for January 2020 are estimated to cost European merchants around €75 million annually. Additionally, new fees for 3D-Secure have become significantly more impactful due to SCA, costing e-commerce merchants in Europe an additional €61 million per year.
With many payments being taken months in advance of providing the goods or service, travel and hospitality merchants face additional challenges not seen in other sectors. Holdback provisions – where an acquirer keeps a percentage of the merchant’s revenue as collateral – played their part as the nail in the coffin for Europe-wide tour operator Thomas Cook before it entered insolvency in September of 2019. Although acquiring banks do face increased risk due to the in-advance nature of bookings, as well as their liability for chargebacks raised against a merchant which has gone bankrupt, CMSPI has observed the amounts of holdback provisions are often disproportionate to the acquirer’s actual liability.
Consumers have multiple options and channels through which to claim back travel expenses in these scenarios – for example via the relevant country’s consumer credit act or package travel protection (under the EU Package Travel Directive) – before raising a chargeback. Therefore, acquirer liability may be limited for certain merchants.
Through holding back such large sums, the system around holdbacks can drive merchants in this sector into serious cash-flow problems. Additionally, due to the perceived increased risk within the travel industry, CMSPI has observed merchants in this sector struggling to agree on competitive rates with their suppliers – further increasing costs.
Strong Customer Authentication (SCA)
As part of PSD2, Strong Customer Authentication (SCA) has threatened to cause irreparable damage to well-established business practices within the sector. Mandating that two authentication factors are used on most online transactions, SCA rules are inherently incompatible with the setup of the travel industry.
With five or more intermediaries involved in transactions – including Online Travel Agencies, group websites, and the individual hotel receiving the booking – passing SCA messages through complex transaction flows is a conundrum yet to be solved. While additional time has been granted for the payments industry to comply with SCA, this time may not be sufficient to formulate and execute a plan to introduce the rules specifically for the travel industry. In addition, with credit card use going up, the impact of SCA will rise even more.
All these areas combine to give merchants operating in the travel sector a complex, costly, and ever-changing payments landscape to navigate – and that is just for card acceptance. More than ever, it’s now crucial for merchants to work with key players in the payments industry to ensure these issues are taken as seriously as they deserve – or else continue battling higher fees and poorer customer experiences than their peers in other sectors. Whilst voicing their concerns to the regulators, merchants must independently audit their existing payments architecture to ensure they have the best possible set up to support their businesses into the uncertain future.