Comment: The great credit card con
Derek Moore, chairman at Aito comments on the recent implementation of the Payment Services Directive 2 – PSD2.
Saturday 13 January 2018 saw the implementation of the Payment Services Directive 2 – PSD2 for short – the introduction of which had been lobbied against by the travel industry for some time.
It is now illegal for travel businesses to levy an additional charge on consumers who choose to pay by credit card.
In fact, this measure affects not only the travel industry, but all sectors of commerce, whether retailers or wholesalers selling furniture, white goods, holidays or theatre tickets and much else besides.
But the media immediately chose to attack the travel industry over their previous habit of imposing ‘rip-off charges’ for credit card users, and for the intention of many travel businesses to increase their prices to cover credit card charges levied upon them.
Time then to look at a few facts:
Firstly, it was not only travel companies who, up to January 2018, levied a credit card charge. Many other commercial organisations did so, and, with payments for council tax and payments to HMRC incurring an extra charge, even the Government itself was at it. So why pick on the travel industry?
Secondly, the media attacks the travel industry because many operators are reportedly likely to increase holiday prices to cover the charge. Why should that be, outsiders may ask.
The simple fact is that many industries can afford to absorb the additional costs imposed by PSD2 because their margins are high – much of the fashion world seems to be completely happy with 100% margins, just to take one example. But tour operators’ margins tend to be around 3 to 4 % and the net margin for many travel agents is around 2%.
Travel agents work on a fixed commission rate (typically 10%) from their suppliers, yet with PSD2 they have to absorb the 2% bank charge within that commission payment. This means a catastrophic 20% reduction in their income, straight from their bottom line. The Government has ignored lobbying in this respect, despite the problems it will cause such SME businesses.
Such wafer-thin margins leave little room for manoeuvre for many in the travel industry, so costs have to go up. Research has shown that 2% is typically the additional cost that operators added to cover credit card charges. But 2% is actually the minimum amount the operators are charged; many card companies charge in excess of 2%.
The consumer demand for ever-cheaper holidays means that many travel companies would find themselves in a financially parlous situation if they absorbed the additional credit card charges, and it is in no-one’s interest if travel companies are forced to the wall due to their making insufficient margins to survive.
Put simply, either holiday prices go up as a result of this Government action or the consumer could suffer as travel companies fail. A simple choice.
On 24th July 2013, the EU proposed a cap on bank charges for credit and debit card transactions of 0.3%. This was adopted in the UK on 8th June 2015 and should have been of benefit to consumers. However, the merchant acquirers (bankers) simply increased other administrative fees, negating any consumer advantage, to maintain their profits. This has nullified the intended benefit to consumers.
This really is a classic case of the law of unintended consequences. The Government said it wanted to protect the consumer from being ripped off (in the way that Government websites were also doing) but PSD2 is likely to lead to increased prices, fuelling inflation and leaving the consumer worse off. Moreover, PSD2 will, in all likelihood, lead to even greater use of credit cards – since there is now no financial penalty for doing so, which will increase the probability of more consumers moving further into debt – something the Government does not want to see.
AITO – the Association of Independent Tour Operators – lobbied, along with ABTA and the rest of the travel industry, for a long time to try to stop the Government imposing PSD2. Our rationale was that it would cause an increase in holiday costs, for the reasons explained above. We lobbied against the law; we did not plan or seek to benefit from it. But the Government chose not to listen.
The Government claim that they wanted to save consumers money by preventing companies that accept credit or debit cards in payment for goods or services from charging customers for the privilege. But the opposite has happened due to a lack of regulatory control over the banks’ credit card charges.
The banking sector should be called to account by Government and required to lower its fees and curb its super profits. Only then we might reach a conclusion satisfactory to government, the travel industry and the consumer.
Then we can all celebrate by going on vacation – with no credit card fees and also no holiday price increases to spoil the holiday.