Goodbye, card surcharges. Hello, Direct Debit. Why the travel industry must offer alternatives to card payments
By Nicki ChoMay 20183 min read
At the start of the year, millions of Britons escaped the grip of winter by flying to warmer climes. At the same time, a different kind of chill was descending on the holiday industry.
New pan-European legislation came into force at the start of the year banning surcharges on credit and debit cards, a move that hit many businesses’ profits hard. But holiday firms, with their big-ticket products and already slender margins, were affected more than most.
Plastic is still the most popular way to cover vacation costs for many people. Consumers spent £19.3 billion on credit cards with travel agents between January and October last year, according to the latest data from UK Finance.
It’s obvious why customers like cards – they’re accepted everywhere, easy to use and provide extra protection if things go wrong. The travel industry liked card payments until January, too – prior to the ban, travel firms typically charged customers who paid by credit card 2 per cent, roughly what they themselves were being charged by the banks to process those payments.
It may not sound like much, but cutting that 2 per cent surcharge equates to an equivalent loss of £385 million to the UK travel industry over that January to October period.
It’s no surprise some travel firms have opted to raise prices and introduce new charges to make up the shortfall, with so-called handling, processing or convenience fees appearing on many holiday bills in recent months. It’s perfectly legal for a company to charge a general administration or booking fee, as long as it’s not linked to how someone pays.
Raising prices hasn’t been an option for travel agents however, who typically agree fixed commission percentages with tour operators.
In any case, consumer groups have been quick to criticise the lack of transparency around some of these newly devised costs.
Alternative payment options for travel firms
Incentivising people to pay for holidays through non-card routes, which are good financially for both merchant and customer, is another option for travel operators looking to mitigate the impact of the ban.
GoCardless already works with many travel companies, including Destinology and Hays, offering their customers an easy, convenient, and dependable way to pay for travel using Direct Debit, with lower transaction costs than cards.
Since the card surcharge ban came into effect, online agent Iglu has stopped taking credit card payments to settle the balance on holiday purchases. Instead, it now allows travellers to pay by Direct Debit via GoCardless, by bank transfer, or by cheques.
It’s easy to see why Direct Debit is the most attractive payment option for travel firms. It’s cheaper than cards (at around 1% per transaction) and it’s much more flexible than standing orders (allowing for variable instalment amounts and payment dates). Because it’s set up and managed by the business, it’s also better for cash flow than cheques, standing order and bank transfers, which all rely on the customer to initiate.
Direct Debit also helps to reduce admin time and costs for businesses, since payments are set up once and then collected automatically when they are due (no more chasing payments).
Companies who set up GoCardless through their billing or CRM software (using our API or pre-built apps within leading software like Traveltek) also benefit from automatic reconciliation of payments.
The customer point of view
Consumers may not immediately think of using Direct Debit to pay for a holiday. Yet, they’re familiar with bank-to-bank payments of this kind in other areas of their lives -
9 out of 10 British adults already have at least one Direct Debit commitment
Direct Debit is the UK’s most popular payment method for recurring payments - accounting or 74% of all recurring payments made by volume (Finance UK, 2017).
Direct Debit presents the opportunity to pay for big travel adventures in small instalments. It can make a holiday more affordable, given individuals may pay a low deposit or no deposit upfront at all - without any additional charges. And it makes booking that holiday in the first place a less daunting proposition.
It also gives consumers the assurance of the Direct Debit Guarantee, which acts as a safeguard if errors occur. There’s no such safety net for customers paying by bank transfer – transfers are hard to retrieve once the bank has sent them through.
Direct Debit is a familiar, efficient way for individuals to budget and pay for a high-value purchase, whether it’s a dream honeymoon, last-minute break, or long-distance voyage. And, if embraced by the holiday industry, it could have the warming effect that everybody wants.
GoCardless is used by over 55,000 businesses around the world. Learn more about how you can improve payment processing at your business today.