Expect Change In Airline Merchant Model

Last year, United sent tremors through the industry when it informed two dozen travel agencies that it would no longer act as the credit card merchant of record for their ticket transactions.

The full story of that move has never been told. Some agents feared that it was a trial balloon that would lead to a wholesale shift of credit card fee burden to travel agencies. The furor died down when United hinted that specific issues related to the selected agencies caused it to take action.

But change is likely on the horizon, according to a payment industry executive who predicted that a major airline will make “a significant move” in the area of payment in the next 12 months.

Speaking this week at The Beat Live, a business travel conference in Chicago, Chris Vukelich, senior vice president for the Americas at eNett International, said airlines have serious incentives to get out from under the growing credit card burden. Merchant credit card fees have grown sharply as card issuers have become involved in loyalty programs and premium cards that offer a range of services and perks not available to holders of “plain vanilla” cards, he said.

“There has been a significant increase in the cost of credit card acceptance in the U.S.,” Vukelich said. From 1999 to 2009, corporate credit card rates increased 36% at Visa and 82% at MasterCard. Vukelich said the increases have come as the card companies introduced products that mimic American Express card programs.

From 1991 to 2009, the increase in merchant costs for the highest-rate cards – those with lots of perks and programs – was 54% at Visa and 56% at MasterCard. American Express cards were not included in the study because they are technically not credit cards, but their merchant fees are even higher.

“People like cards,” Vukelich said. They use them for financial control, reporting capabilities, out of habit, or for the rebates. And therein lies the rub. Someone has to pay for the perks and programs, and it is generally not the user, it is the merchant of record. Why is the airline paying a higher rate so that a passenger can collect miles or points? Vukelich asked.

He believes that trend is unsustainable. “Change can happen in two ways,” he said.  Airlines either will no longer accept credit cards or will no longer be the merchant of record for all transactions, he said.

Should the latter scenario come to pass, it will have a significant impact on U.S. travel sellers. There is precedent elsewhere in the world: Vukelich noted that in Europe a larger percentage of travel agencies have their own merchant accounts, and they tend to have a lower cost of acceptance than airlines have.

The corporate travel arena would also be profoundly affected by a change in airline payment methods. “If I were a travel procurement manager, I would have a conversation with the airlines,” Vukelich said. “Those who have a vested interest should figure out a way to reduce the costs “and share in the cost reduction.”