Card surcharges – nobody likes them, unless you’re the one making the money. As consumers we’re often frustrated when seemingly unnecessary card fees are piled onto purchases for items such as gig tickets and flights. However, the pain point of these fees for consumers is nothing compared to the impact on businesses such as online travel agencies (OTA’s).
Running an OTA is a high volume, low margin game. As the volume of people planning their trips on metasearch engines and user-generated review sites such as Kayak, Skypicker and TripAdvisor escalates, price is becoming an even more important differentiator for an OTA over its competitors. For OTAs making thousands of transactions every day, credit and debit card surcharges can be a big problem. Surcharges imposed by airlines vary but will often be 2% or more taking a significant slice out of already narrow profit margins.
Until recently, OTAs were able to avoid surcharges imposed by low-cost carriers (LCCs) by being savvy with their choice of payments methods. In order for LCCs to be able to advertise their cheap fares they must offer one form of payment that does not incur surcharges. Many LCCs chose that payment type to be Mastercard prepaid. Subsequently, Mastercard prepaid became the preferred payment type for shrewd OTAs, with some OTAs even able to earn a share of the interchange on Mastercard prepaid transactions depending on their payment provider.
However, last month several LCCs decided to impose surcharges on Mastercard prepaid transactions. Crucially, Ryanair and EasyJet were part of this group. This left many OTAs begging the question of how would they now approach the new surcharge environment, with resulting implications for their preferred choice of payment methods.
The first consideration for OTAs to note is that not all LCCs levy the Mastercard prepaid surcharge in the same way. Ryanair, for example, has chosen to surcharge all Mastercard prepaid card types, whereas EasyJet only adds surcharges to Mastercard prepaid corporate cards. An OTA could therefore choose to use Mastercard prepaid consumer cards to avoid EasyJet’s surcharges.
For those LCCs that surcharge all Mastercard prepaid card types, Visa debit or electron cards are now a much more viable option, even though a fee will typically be charged by the payment provider to generate these cards.
It’s also worth noting that some airlines charge an administration fee across all payment types, making the advantage of paying using Visa void. In such a scenario, it is more advantageous for the OTA to continue to use Mastercard prepaid as it will still be able to earn a revenue share from the interchange from certain payments providers.
The payments landscape for OTAs has become much more complicated now that certain LCCs have decided to impose surcharges on Mastercard prepaid transactions. By including Mastercard prepaid as one of the weapons in its payments arsenal, OTAs could previously sleep safe knowing that they could avoid LCC surcharges and even make a small additional revenue stream from interchange if they chose their payments partner wisely.
Given the recent changes in the way several LCCs treat surcharges, OTAs now need to have the facility to access a range of Visa and Mastercard card types in order to accommodate the various surcharge options across different LCCs, and safeguard against future changes. Fortunately, there are payments providers that can offer specialist services for OTAs and do offer this range of card types. As well as looking at available card types, OTAs should also consider the number of currencies, functionality and flexibility of a given payments provider if they are to maximise their profit margins in a challenging business environment.