There has been much coverage about how payment card surcharges will be prohibited in Europe from January 2018. According to research by Bankhawk the new regulations could cost Airlines up to €1.5bn a year. The effects on Airlines and how they are responding is set out below.
How are Airlines being impacted?
The head winds of PSD2 are already being felt. The second Payment Services Directive will prohibit surcharges for credit and debit card payments from January 2018 and will force some serious rethinking about payment costs for 2018 and beyond.
An assessment of the impact of the surcharges ban has already been completed by many Airlines. This has fed through to pricing strategy for fares and potentially the consideration of passing on other costs to passengers.
With interchange fees already capped at 0.2% and 0.3% for Visa and Mastercard branded debit and credit cards respectively, the Airlines have known for some time about the pending prohibition on payment card surcharges. The question is how to respond to the changes in a way that does not alienate their customers and concede competitive advantage to other Airlines.
Significantly the PSD2 ban does not apply to commercial cards. Some merchants have a challenge here in that their payment system do separately identify commercial cards at point of sale.
The UK has gone one step further. The ban of surcharges extends to Amex, Paypal and ApplePay. Furthermore, where the ban does not apply merchants, surcharges must be proportionate to the costs incurred.
What steps are Airlines taking?
Airlines are looking at changes from three points of view:
Firstly, they are revisiting their payment charges to see how they can be optimised.
The Airline industry pays over $7bn to card operators to accept card payments. A chunk of this cost is addressable and many Airlines are now reviewing their pricing arrangements. They are looking hard at interchange optimisation, reducing scheme fees, acquirers margins, FX costs and chargebacks and increasing revenue from dynamic currency conversion.
Secondly, those Airlines that operate frequent flyer programs, reward schemes and co-branded cards are looking at the wider picture to replace the lost revenues. They are looking to reposition their reward schemes points both to compensate the airline and to keep the customer incentivised.
Finally, some Airlines are considering introducing or increasing service fees. This is risky from a public relations viewpoint. Others are reviewing their fares pricing strategy to see how best to absorb the loss of revenue.
The $20tn Card Payments Industry
According to the influential Nilson report for 2017, card payments globally will grow from $20tn in 2015 to $54tn in 2025.
It is a very lucrative business with card issuing banks generating huge margins on credit card lending. According to the Federal Reserve, in 2017 US credit card debt has passed the $1tn mark, the highest level since the global financial crisis. The delinquency rate is now only 2.3%, down from a peak of 6.8% in 2009 making the risk and cost of bad debts much lower.
In the US, the average interest rate is 13.9% for existing cardholders and 15.7% for new card holders. As only one third of outstanding credit card balances are cleared in full hefty interest charges are generated.
On the other side of these transactions are merchant acquirers like Worldpay (Vantiv), Bank of America and Barclaycard. Worldpay processes two in every five card transactions in the UK. Recently they were acquired by Vantiv and the combined entity will operate under the Worldpay brand.
The Card Schemes
Visa posted net profits of $6bn for 2016, Mastercard $4.1bn and Amex $5.4bn. Add this to the billions earned by the card issuing banks and all of the providers in the card payment ecosystem and we have an industry that can generate massive profits for years to come.
Amex’s business model is different to Visa and Mastercard as they also play the role of the issuing bank thus completing the loop themselves. As a result they have a greater level of control of the revenue stream and pricing.
China Union Pay dominates the payment card market in Asia and is rapidly growing market share. Unlike Visa, Mastercard and Amex it is effectively a payment association operating under the approval of the People’s Bank of China (Central Bank of China).
What are the Opportunities for Airlines?
Bankhawk is working with large merchants to help them to better understand the implications of the PSD2 prohibition. There is a huge opportunity to optimise payments partnerships and looking at the card payments industry as an opportunity to grow revenue.
Bankhawk is helping B2C companies to successfully navigate the payments ecosystem to ensure their own commercial position is optimised. Using better partnership arrangements Airlines and other merchants can earn a bigger slice of the payments ecosystem pie.