air travel payment systems …what is next ? alexander houston airplus international
TRANSCRIPT
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Air Travel Payment Systems
…what is next ?
Alexander Houston
Airplus International
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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.
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Agenda
Credit card economics and practicesAnalysis of different surcharging models and their effects
on:AirlinesCorporationsCredit Card companies
Options for the Corporation and consumerQuestions / Discussion
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Air Travel Payment Systems
• Economics and Technology drive Change!
• Merchant Fees…the cost of the cards continues to rise
• Payment alternatives emerge
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Challenges to the interchange model spell change for merchants and buyers.
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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
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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
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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
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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
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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)
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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
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Almost 50% of Credit Card costs Spent in Rewards and Branding !!!
Rewards
Branding
Processing
Source: Diamond Partners
Typical Corporate Card / Cost breakdown (USA)
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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
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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
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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
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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$
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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
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„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
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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
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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
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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
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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 €)
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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
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Differential Surcharge Example from Denmark
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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
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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
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Ok…So what do we do ?
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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“
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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
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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
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Difficult for Credit Card Companies and the Airlines to Change the Business Model by Themselves
SurchargingAnnual Fees
Open BookLow Cost Cards
Traditional Interchange
Model
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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
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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
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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!
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Thank you !