Posted: October 06, 2009
Credit card merchant fees ahead?
A change -- or a charge -- might be on its wayRobert Polk
In June, United Airlines informed a very small number of agencies that the agencies will be required to process all credit card transactions through their own merchant accounts, not United Airlines' merchant account as most agencies do.
The American Society of Travel Agents (ASTA) "ganged up" on United and, with the help of Congress, won a 60-day delay to the initial date of July 20 to deny access to their merchant account. Because of the serious repercussions this has to travel agencies, airlines, and, most importantly, consumers, United will also be required to offer some rationale for the change (which they have not yet done).
What is this mess anyway? What are merchant fees and why do the airlines care?
I had the recent pleasure of co-hosting an educational breakfast on this topic for our clients, staff and friends in connection with AirPlus, a corporate card and account issuer, and Concur, a company that creates software and expense integration for corporations related to their travel program. I must tip my hat to Alexander Houston from AirPlus and Jennifer Smith from Concur for teaching all of us a great deal about the subject.
Merchant fees are the fees that merchants pay to banks in order to accept credit card payment for their product. So when you purchase an airline ticket, or any other product, using your credit card, the seller of that product has to pay a processing fee to a bank in order to charge your credit card. These fees range from 1 to 3 percent based on the type of card you are using.
So on your $500 airline ticket that fee will range from $5 - $15 depending on the credit card used. Multiply that a few thousand times a day and those fees add up in a hurry for airlines.
Shifting these fees to agencies would have a severe impact on small agencies that simply cannot cover those costs, and, I am sure, leave a negative taste in the mouth of the consumers where those fees would inevitably land.
So, what options do the airlines have to reduce their costs for processing credit card transactions? While other options are already in process in Europe, they really have three main options here in the US.
They could create a zero-commissions environment with regard to credit card fees where the fee is passed on to the end consumer based on the card type selected. Using this model, the consumer can decide which card to use based on the applicable fees, and a corporation can select the lowest priced option for their travelers to reduce expenditures.
The pro for this idea is that they can shift a majority of these merchant fees to the end user, but the downfall comes in implementation, which would have to be simultaneous for every credit card issuer, which is a daunting task at best.
They could begin surcharging consumers a flat rate to cover their fees. This sounds easy, but it really does not change their cost at all in the long run. The surcharge will likely not equal their actual cost, and based on state and local laws, surcharging for payment processing fees may not even be legal. How will they accommodate for each and every law variance while creating an across the board solution?
They could create new products that will alleviate the need for credit card processing. Using debit cards would be ideal from the merchant perspective, but most debit cards, PayPal, CheckFree, and other debit card processors are valid for Business to Consumer transactions only. What are corporations left to do? There are a few options, including a direct debit solution, but the real scope of what is possible in this area has not been fully explored.
So -- what do I think will happen? Truthfully, this article is more informative than it is predictive as only time will tell. Mr. Houston began his presentation with a story in which Einstein was questioned by his assistant about including the exact same test questions on a physics exam two years in a row. His response? "The questions may be the same, but all of the answers have changed."
I suspect what we think will happen today will be inconceivable a few years from now.
From an agency and consumer perspective, airlines should offer incentives to consumers and corporations to use cards with the lowest possible processing fees. Because some cards are better for airlines than others, they could also investigate co-branding and negotiating lower fees for these cards with the banks. And, as always, they should investigate new technology that will simplify the process and allow them to create alternatives to drive down costs.
We really don't know how this will flush itself out, but you can bet your stash of frequent flyer miles that every airline is watching intently to see what happens with United. And whether it is good or bad for agencies or consumers will dictate what comes next for everyone.
Robert Polk is CEO of Polk Majestic Travel Group, Denver's largest independent travel agency. He welcomes your comments and questions at Robert@polkmajestic.com.