Air Travel Payment Systems

…what is next ?

Alexander Houston

Airplus International

United To Shift Card Costs To Agencies

The Beat ~ a travel business newsletterNew York City6/24/09 7:30 PM

United Airlines has informed an unknown number of travel agencies that as of July 20, they will be required to process all credit card transactions using their own merchant accounts.

Agenda

Credit card economics and practicesAnalysis of different surcharging models and their effects

on:AirlinesCorporationsCredit Card companies

Options for the Corporation and consumerQuestions / Discussion

Air Travel Payment Systems

• Economics and Technology drive Change!

• Merchant Fees…the cost of the cards continues to rise

• Payment alternatives emerge

Challenges to the interchange model spell change for merchants and buyers.

Cost Transparency – Unbundling “Challenges to the current credit card business model will result in greater transparency to the components of the interchange model, and ultimately, to the unbundling of interchange pricing and shifting of roles in the payments value chain among current and new players.”

- A New Business Model for Card Payments, Amy Dawson and Carl Hugener.

Source: “A New Business Model for Card Payments” by Diamond Management Consultants – October 2006

What are merchant fees? What is Interchange?

• Merchant fees are the fees merchants pay to the banks to accept the credit card

• Interchange refers to the fee banks charge to process a credit card as a form of payment

Current four-party system of the credit card industry

Annual fees are often an exception for medium and large corporationsRebates are on the way to becoming a standardBonus programs are on the rise for SMEs

Merchant fee

Annual fee

(optional)

Incentives, rebates,

bonus programs(optional)

e.g. 1.90%

of X

(Corporate)Cardholder

Acquirer

Merchant

IssuerInterchange fee

e.g. 1.80% of X

The cost of cards

• Pressures on Interchange / Merchant fees– Regulatory and litigation– Merchant pressure for transparency– Non-acceptance and increased competition

• The transformation is underway– Surcharging – Alternative forms of payment

2/3 of Corporate Card Volume is Spent in Air and Hotel

Lodging23%

Meals13%

Car rental7%

Ground transport

4%

Others12%

Air41%

Source: Runzheimer International Mobility Report, Oct 2006

Typical Corporate Card Usage (USA)

Merchants Pay a Significant Proportion of the Costs!

Source: AirPlus estimate

Card Holders Merchants

• Annual fees, if any• Conversion fees• ATM fees• Late, overlimit fees, etc• Revolving credit

interest

70% - 90%of total

10% - 30%of total

• Merchant Service Charge

Almost 50% of Credit Card costs Spent in Rewards and Branding !!!

Rewards

Branding

Processing

Source: Diamond Partners

Typical Corporate Card / Cost breakdown (USA)

Distribution Economics – The Downward Spiral

•Airlines overpay distribution intermediaries for their services

•Rebate/Incentive competition drives airlines costs higher

•Travel intermediaries use the excess funding to buy the business of their customers

Airlines and other merchants cut distribution costs

Credit Card Charges

GDS fees

Surcharging for full content

???

Travel Agency Commissions

Zero-Commission

Major distribution cost elementsfor an airline

Terminator 1

Terminator 2

Terminator 3

Merchant Service Fees Range from 1.0% to 2.5%

Airlines, Hotel, Car Rental for Corporate Cards

Amex 2.0% – 2.5%

Visa / MC

UATP

2.0% – 2.4%

1.0% – 1.65%

Source: Airplus – fees shown typically air only

Average Credit Card Merchant Feefor an Airline Ticket is $12

OAK-LAX80 US$

Expensive Credit Card Inexpensive Credit CardTicket Price

2 US$ 0.80 US$

Avg. Ticket for network carrier:

520 US$13 US$ 5 US$

ORD – LHR4,000 US$

100 US$ 40 US$

Airlines Increasingly Focus on Credit Card Costs

„Today Northwest pays more to credit card companies than to GDS‘“

-- Al Lenza, Vice President of Distribution and E-Commerce for Northwest Airlines --at The Masters Program 2005

„Today Northwest pays twice as muchto credit card companies than to GDS“

- Al Lenza, Vice President of Distribution and E-Commerce for Northwest Airlines -at The Masters Program 2007

There ARE Options !!

Distribution Intermediary Costs Catalyst for Change

Travel Agency Commissions and Overrides

• The Internet and E tickets

• Online direct sales

• Orbitz, Expedia, Travelocity

• Web fares

GDS Fees • Direct Connect

• G2 Switchworks

• ITA

Credit Card Costs • PayPal

• Check Free

• Google Pay

• Western Union

• UATP

• Direct Debit

Airlines have four major Options Objective:

Bring credit card costs down

Zero-Commission

Change credit card business model to user pay principle

Do not accept (some) credit cards on (some) corporate rates

And/or

Surcharging

Flat: Charge the same amount for all credit card bookings

or

Differentiated: Charge according to credit card costs

Regulate/Negotiate

European Commission&Anti-trust cases

CO branding

and

New Products

Consumer products like debit cards or PayPal

Corporate –low cost credit cards &Direct debit

and/or

Regulate / Negotiate:More likely overseas than in US

Zero Commission:Overwhelming Benefits but with Implementation Issues

New products:Technology can reduce costs, but it takes time

Flat Surcharging:Sounds Easy, But Does Not Change the Costs At All

Zero Commission:Overwhelming benefits, but with implementation issues

Pros Cons

What‘s happening in Asia and France

• Merchants can cut up to 90 % of costs,

they pay little or no fee • User pays, user selects card• Corporations can choose an

inexpensive provider• Price authority with issuer

• Implementation has to be simultaneously for all credit cards

• if not, credit card providers with no zero-commission have an advantage and an increase in market share

• Card holder pays for credit card usage

• Hong Kong:- Credit cards not accepted on corporate net rates. Travel agencies surcharge a fee for credit card usage on Corporate Net Rates. Same for British Airways in the UK.

• Mainland China:- Travel agencies surcharge a fee (~4 %) for payments with international credit cards

• France:- Low local interchange fees, leading to high annual fees for cardholders and high transaction fees when used outside Eurozone (e.g. 2.4 % of trx volume + 0.70 €)

Surcharging:Sounds easy, but does not change the costs at all

Pros Cons

What‘s happening in Europe

• Increased revenue through additional

surcharge• Easy implementation• Increased transparency via differential

surcharging as costs vary card to card

• Corporate / card holder has to pay for

card usage• Surcharge does not equal costs• Not legal in all areas• Sends unintended message that credit

cards are not preferred

• Merchants surcharge either a fixed amount or a percentage to cover their collection costsExamples in the airline industry:- Lufthansa: € 3 on economy tickets for credit card online sales- British Airways: £ 3 for credit card online sales with invoice address in UK- Ryanair: € 2.50 per coupon for credit cards; no charge for VISA electron;

Amex is not accepted- Germanwings: € 6 for credit card sales, except for proprietary credit card

Differential Surcharge Example from Denmark

Pros Cons

What‘s happening in the USA and EU with the authorities

• Low cost strategy, because legal approach

• Merchants can co-operate and hide behind associations

• „Smash banking fees“ popular approach for regulators

• Lobbying initiatives focus on VISA and MasterCard as easy targets

• No level playing field as Independent providers will immediately benefit

• In B2B merchants risk to increase costs

• USA: - Authorities have not yet focused on this market

• European Commission: - Harmonization of internal market: Single Euro Payments Area (SEPA) to be

introduced in 2008- Visa / MasterCard interchange fees are subject to investigations by European

Commission and national anti-trust authorities

Regulate / Negotiate:Not likely in US

New products:A territory not yet fully explored

Pros Cons

What‘s happening

• New products make new pricing more

easily accepted• Debit card ideal from a merchant‘s

perspective

• Debit cards, PayPal, Check Free etc.

are B2C products only• New corporate products will require

implementation efforts like zero-

commission for travel agencies

• Airlines upgrade the acceptance of debit consumer cards

• Direct debit options for corporations

• New corporate products not available yet

Ok…So what do we do ?

The United States is a Mature credit card Market

• Credit card usage is culturally ingrained• Incumbent issuers with strong brands and resources• Regulations vary between states

But

• Cost of the cards keep increasing• Technology is enabing alternatives• It is not just an …“airline thing“

What do I Prefer…?

• Zero-commission aligns credit card costs with other payment options for merchants/airlines

• Issuer must cover its costs with its own fees

• Stronger price competition between issuers will drive overall costs down

• More transparency

Zero-Commission

Differential Surcharging

What do I think will happen…?

• Carrot rather than the stick approach in a mature market

• Some payment options are better than others for merchants/airlines

• Acceptance of new technology in a changing demographic base

Incentives to Use lower cost options

Negotiation and co-branded cards

Technology enabled alternatives

Difficult for Credit Card Companies and the Airlines to Change the Business Model by Themselves

SurchargingAnnual Fees

Open BookLow Cost Cards

Traditional Interchange

Model

Credit Card Costs: WHAT can I do ?Move Your Cheese or Someone Else Will

• Transparency - Information on credit card costs needs to become available…

you are paying for it !

• Corporations – be aware of and/or move to a low cost form of payment

• Airlines – Incentive for the use of low cost form of payment

• Focus on costs will drive costs down

• First movers will make the market, e.g. open book policy with credit card

company

There ARE Options !!

Distribution Intermediary Costs Catalyst for Change

Travel Agency Commissions and Overrides

• The Internet and E tickets

• Online direct sales

• Orbitz, Expedia, Travelocity

• Web fares

GDS Fees • Direct Connect

• G2 Switchworks

• ITA

Credit Card Costs • PayPal

• Check Free

• Google Pay

• Western Union

• UATP

• Direct Debit

My prediction….

• Economics and Technology will continue to drive Change!

My Advice….

• Know what options are available for your program …Be ready to move!

• Proact don’t React!

Thank you !