Direct Debit: Countering Credit & Debit Card Transaction Fees

What payment methods do you accept from customers? Credit card? Debit card? If so, are the card transaction fees and costs of administering these transactions affecting your profit? Have you considered Direct Debit as an alternative?

Consumer behaviour has shifted away from cash and cheques in recent years, with increased use of credit and debit cards. As a result, many organisations are experiencing increased card transation fees. Per transaction, the cost of administering a card payment can be small (and often smaller than processing cheques) but the increased use of credit & debit cards means that the costs add up. In addition, this impact has been exacerbated by the ban on credit and debit card surcharging under the new EU Payment Services Directive (PSD2), which came into force on January 13^th 2018. This initiative has meant that firms have been unable to clawback the cost of the card transaction fees.

Direct Debit: Cheaper than cards

As an alternative to card transaction fees, organisations are turning to Direct Debit and this has been seen recently within the travel industry – an industry that has traditionally relied on credit and debit cards for payments.

Travel Firms: Utilising the benefits of Direct Debits

Mid-Counties Co-Operative Travel have become the latest travel firm to announce they are introducing a Direct Debit option for customers booking holidays¹. This follows similar moves by other travel firms, such as Thomas Cook and Hays IG.

Speaking at the Hays Travel Independence Group (Hays IG) conference in the Algarve, Managing Director John Hays, suggested that the aggregated cost to members of taking credit or debit card payments, was £8.06 per booking.  He estimated that being unable to clawback these costs, had cost the group £700,000 revenue.

Hays also highlighted how credit card payments had more than doubled over the past year from around 15% to approximately 31% – an increase which he expected to cost Hays IG a further £600,000 in costs.

In response, direct debit was rolled out across Hays Travel, where customers pay a deposit and then a series of instalments on a monthly basis. According to Hays, it has already generated “very significant” cost and efficiency saving with a sizeable net reduction in costs versus taking credit card payments.  Speaking of Direct Debit he also added “We knew it was something customers wanted”.

Other holiday firms offering a direct debit option include Thomas Cook (who introduced a Direct Debit scheme in 2016), and now, more recently, Mid-Counties Co-operative travel².

Head of Mid-Counties commercial and marketing, Julie Kendrick, said: “We found that customers were asking for it after Cook rolled out its direct debit scheme earlier this year. It’s an attractive proposition because it allows customers to budget by paying in instalments and it also helps to avoid credit and debit card fees.”

Not just Travel Firms can benefit

Travel firms have not typically taken-up Direct Debit as a payment option in the past, but as these examples show, that could be quite different in the future. The benefits of Direct Debit are clear:

• Cheaper than other options – banks typicaly charge 10p per direct debit transaction (which could be significantly less than the 1% or 2% card transaction fee)
• Can improve sign-up and retention. (Direct Debit is a known, used and preferred payment method for many customers who are protected by the guarantee).
• Safer than cash
• The collecting organisation controls the collection date
• Can be used for variable amounts and dates; one-off and on-going payments
• Eliminates much of the time-consuming reconciliation

Is your organisation making use of the opportunity that Direct Debit presents? Could you streamline your costs whilst providing customers with a payment option that they prefer and gives you greatest control? If you want to learn more about Direct Debit and how we could help you implement a scheme, please see our website or contact us today.

1. Reported in Travel Weekly, November 21^st
2. Reported in https://www.ttgmedia.com October 8^th