HOW PAYMENT REGULATIONS AFFECTING THE TRAVEL INDUSTRY CAN LEAD TO REVENUE OPPORTUNITIES. EQ Global December 2017

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1 HOW PAYMENT REGULATIONS AFFECTING THE TRAVEL INDUSTRY CAN LEAD TO REVENUE OPPORTUNITIES EQ Global December 2017 eqglobal.com 1

2 CONTENTS ABSTRACT INTRODUCTION BACKGROUND SOLUTION CONCLUSION ABOUT EQ GLOBAL 10 RESOURCES 2 equiniti.com

3 $7.6tn GLOBAL ECONOMIC CONTRIBUTION. 73% INCREASE IN INTERNET TRAVEL BOOKING REVENUE IN THE PAST 5 YEARS. Abstract Internet travel booking revenue has grown by more than 73% over the past five years, and the travel and tourism industry is one of the world s largest industries, with a global economic contribution of over 7.6 trillion U.S. dollars in For travel organisations operating in this sector, technology is continuing to play a key role in the growth and capabilities of market expansion, and this is especially true when it comes to payment processing. A number of new rules and regulations set to impact the travel industry have potentially damaging implications on travel organisations operating profit and market competitiveness. However, there are solutions available which have the capacity to turn the profit loss into profit gain by leveraging technology and payment capabilities as a route to open up new revenue streams. This whitepaper will explore in detail both the regulations that will be imposed upon travel organisations, and how to mitigate the risks and channel them into new business opportunities. eqglobal.com 3

4 Introduction The travel and tourism sector is one of the most dynamic and global industries in the world however, it is also exposed to rigorous legislative and regulatory requirements, especially when it comes to payments. The introduction of new regulations coming to the fore in 2018 are set to have significant implications on businesses operating in the travel sector. With the likes of PSD2 carrying new regulations around payment processes, the potential negative impact on profit margins for businesses operating in the travel industry is not to be underestimated. In an already-volatile global business environment, additional legislation is a grave concern for travel organisations. The decision for Britain to leave the EU could impact the way organisations buy and sell globally. This is compounded by the impending Brexit situation for UK travel organisations operating across Europe and beyond, the decision for Britain to leave the EU could impact the way organisations buy and sell globally. With this, there are a number of new regulations such as the introduction of the ATOL bill, which will impact how UK businesses sell across Europe. This whitepaper will examine the challenges that are being imposed on UK businesses operating in the travel industry, and will also outline some key opportunities which will enable businesses to leverage the regulations for competitive advantage. 4 eqglobal.com

5 Background Despite the continued growth of the travel industry, various new regulations around the payments process are presenting challenges for UK travel organisations. At a time when the global economy is already unstable, it is important for travel businesses to be vigilant to impending changes in order to remain profitable and competitive. The new regulations set to impact the travel sector in 2018 are: PSD2: under the implementation of PSD2, the removal of credit card fees and surcharges will have a considerable impact on the travel industry, potentially costing travel companies millions ATOL Bill: under the new bill, UK travel companies are allowed to sell across Europe in a move from Place of Establishment to Place of Sale. PSD2 From 13 January 2018, the second EU Payment Services Directive, known as PSD2, is set to ban surcharging for credit and debit card payments for most transactions, including for online flight and holiday bookings. Under the current rules, businesses are not allowed to profit from surcharging but the actual costs they incur can be passed on to the consumer. However, with the new ban on debit and credit card charges in place, companies may have to absorb this cost, severely impacting the bottom line of travel organisations. According to industry sources, this could cost the European travel industry up to 150 million. ATOL Bill Earlier this year, the Air Travel Organisers Licensing Bill (the ATOL Bill ) was introduced to the House of Commons as part of an initiative for the UK Government to reform existing legislation, bringing it in line with the new Package Travel Directive ( New PTD ). The ATOL Bill is designed to ensure that ATOL keeps pace with advances in technology, and proposes that the ATOL Regulations should be changed To enable regulations to be made covering the sale of flight accommodation by United Kingdom established organisers, elsewhere in the EEA. Effectively, the ATOL Bill will allow the Government to extend the ATOL Regulations 2012 to all sales processed in the EEA by travel companies established in the UK. While seemingly inoffensive as far as regulations go, it could be problematic, because the ATOL Regulations 2012 apply more broadly than the New PTD. Recent expenditure statistics from the UK Cards Association for the first half of the year revealed that consumer credit card spend with travel agents was 7.5 billion. Based on charges of between 0.5% and 2% of transaction value, this indicates a cost implication in the range of between 35 million and 150 million across the sector. This presents a worrying proposition for travel organisations, which, despite a booming travel and tourism market, could be hit hard by the incurred charges now waived for the consumer. The most obvious choice travel businesses will have to face is over whether to absorb the charges with a resulting impact on profit margins, or pass the cost on to the consumer in the form of increased headline charges or booking fees. With a price hike, however, there will be a consequential impact on the competitiveness of travel and holiday packages which could impact a travel operator s turnover. Seemingly, the industry It is unclear as to precisely what sort of travel arrangements will be caught by UK-established travel companies using their ATOL to sell throughout the EEA: whether it will just be package sales, as anticipated by the New PTD, or whether it will also include Flight-Only and Residual Flight-Plus, as currently anticipated by the ATOL Regulations Furthermore, as travel companies will be able to sell Europe-wide, it will provide greater competition across the market for holidays priced in Euros. It is important for travel businesses to ensure that their profit margins are not eaten away by currency fluctuations due to the greater expanse of the Euro zone customer base versus the Sterling customer base. If not managed carefully, this could have an impact on operating profit across the industry. It is equally important for travel companies to remain relevant and competitive in the marketplace if they are to win business across the EU. eqglobal.com 5

6 Solution The introduction of these two crucial regulations, while presenting various challenges, also provide an opportunity for travel organisations to capitalise on the changing payments landscape. Technology is a key enabler for addressing some of the issues that will arise for travel companies. With the use of sophisticated technology-based payment platforms such as EQ Global s solution, payments processes can be simplified and some of the risks imposed on travel businesses operating in a volatile environment can be mitigated. A service such as a EQ Global s Multi-Currency Pricing (MCP) tool can, quite conversely, be used as a revenue stream generator to replace lost revenues, as per the PSD2 credit card charge ban. By taking control of FX margins and applying the exchange upfront using a guaranteed rate, FX risk is removed and can viewed as a source of controlled revenue, rather than a loss of varying size. By utilising smart technology, travel companies can profit from changing regulation. For UK companies selling holidays to consumers travelling internationally, they will traditionally manage their FX using either forward or spot FX. This currently incurs a cost for the travel company both in terms of paying for FX fees and the fluctuations that companies expose themselves to as a result of managing different currencies. By applying the FX upfront and by using an MCP tool, the costs can be controlled and risk removed, and any charges incurred are passed to the customer. This FX fee can provide a new revenue source for the travel organisation, and serves to mitigate risk associated with FX volatility by applying FX at point of sale rather than using a hedging strategy. For travel companies looking to take advantage of the new ATOL Bill proposals, MCP can also be used to ensure travel companies remain relevant to the European customer base by enabling businesses to display prices in local currencies, and also ensuring that profit margins are not compromised by currency fluctuations. The risk management tool works in the same way as for the PSD2 issue, by applying the FX fee upfront and charging it to the customer. 6 eqglobal.com

7 Automation According to ABTA, 76% of people in the UK booked their holiday online in 2016 and technology is only continuing to influence the customer experience. This is also true for the back-end experience if the sale can be made more efficient for the travel companies as well, the whole process is streamlined and simplified. EQ Global s MCP product can automate the FX booking process, splitting out the amount owed to suppliers versus company profit, and link the whole process to the end supplier payment. MCP can also be set up to receive installment payments at the same guaranteed rate (i.e. settlement over the customer s payment cycle). Automating certain processes means there is less operational overhead for the travel company, and the same applies to the payment booking process currently a travel company will receive funds from bookings, and will then have to manually book FX elsewhere. By outsourcing some of the associated administrative effort involved in the booking and sales process, travel companies can focus on more important areas of the business. Simplification Increased competition in the travel industry is positive for the consumer as it drives down purchase costs. While the same may be said for the travel companies and their technology suppliers, by having multiple payment providers and therefore reducing cost, it can also lead to an overly complex operational process. In circumstances where multiple movements of money, say from acquirers to corporate bank accounts to multiple FX providers, payment providers and trust accounts, the process can be time consuming and complicated and this can off-set the cost savings by involving greater accounting administration. A consumer will often select a travel company purely because the interface is user-friendly and the process is simple, and organisations should be wise to this. Having a single provider such as EQ Global which can offer an end-to-end solution, means the operational process is far more efficient and renders the service more attractive to customers and suppliers alike. Reducing exposure For most travel companies, FX volatility can eat into operating profit, and therefore it is important for companies to minimise risks associated with currency fluctuations. Better still, travel companies can, in fact, use this to their advantage especially prudent for travel companies who are exposed to many different currencies, such as large global agencies or tour operators. Removing any unnecessary exposure to FX fluctuations enables travel companies to focus on the key components of their business encouraging more bookings and ensuring customer service excellence. By partnering with travel companies, EQ Global s MCP can link customer collection to supplier payment, removing the FX risk associated, realising existing profit, and generating a new revenue stream. Travel companies can take advantage of this knowledge, as with the provision of currency forecasts and market information, they can plan advertising for holidays to effectively suit the markets they are selling to. This will be particularly important given the ATOL Bill, because travel companies will be able to sell all across Europe and can therefore plan accordingly, by focusing their advertising on UK based holidays in Europe, or vice versa. eqglobal.com 7

8 Conclusion EQ Global combines a reliability and assurance that comes from its 200-year heritage as part of the Equiniti Group Many travel companies are rightly concerned about the impending regulations which are set to potentially damage business profit margins, but as the industry braces itself for a financial hit, it is clear that the sector may require a degree of education and guidance around where it can leverage opportunities. Travel organisations may remain unaware of the solutions that are available to help turn revenue loss into revenue gain, and the capabilities around technology-based payment platforms that can help streamline the whole process, from customer to end supplier. EQ Global combines a reliability and assurance that comes from its 200-year heritage as part of the Equiniti Group, with in-house developed state-of-the-art technology which ensures accuracy, efficiency and minimal manual input due to smart automation. In a volatile global climate, the travel sector must stay current to remain competitive, and by leveraging technology to open up new revenue opportunities and mitigate the risk of economic flux, companies who adopt these strategies will be at the forefront of business growth and market dominance. 8 eqglobal.com

9 About EQ Global 180 countries in over 130 currencies, and with 99.9% straight through processing EQ Global is an expert global payments provider offering scalability and global growth opportunities for a multitude of industry sectors. Founded upon a 150 year heritage of administrative and payments services under the Equiniti Group, EQ Global offers accuracy and security of bulk global payments using state of the art technology. EQ Global helps businesses to send and receive payments to 180 countries in over 130 currencies, and with 99.9% straight through processing on payment delivery, processes hundreds of thousands of payments per year on behalf of global clients. For further information, visit eqglobal.com 9

10 Additional Resources eqglobal.com

11 About Equiniti At Equiniti, we understand the positive effect that employee benefits can have on the motivation and retention of a client s workforce. We are the leading share plans administration provider for UK listed companies and manage one of the largest Flexible Benefits plans in the UK. Our clients vary in size from 30 to over 200,000 employees and span both FTSE350, and overseas listed companies on the NYSE/ NASDAQ, CAC40 and DAX. We are currently the largest provider of SIP and SAYE share plans and provide share plan administration to more than 60% of the FTSE. With a core capability to handle scale and complexity, we use talented people, integrated platforms and innovative approaches to deliver a market-leading proposition. Copyright 2017 Equiniti Ltd. All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the publisher. eqglobal.com 11