Credit Card Surcharges Boom In Europe

The rash of new or expanded credit card surcharges imposed in recent months by airlines in Europe has forced the travel industry and regulators in the United Kingdom to take a closer look at the benefits and costs of credit card payments, and determine exactly who pays for what. It appears that card association rules and laws in 10 U.S. states prevent merchants from extending the latest distribution fees to the United States—at least for now. But global travelers and travel programs in coming months should expect to see the impact of new surcharges legally permitted in Europe as the industry monitors the legal and competitive implications of this emerging topic.

For nearly a decade, regulators have debated economic theories on how best to balance costs in the complex network through which payments are passed from buyer to seller. On a global basis, merchant fees dramatically have been rising for about that long. In a white paper issued last August, BCD Travel said merchant fees had become the "single largest distribution cost" for airlines.

"What started out as a low-cost carrier phenomenon, predominately out of the United Kingdom, is becoming far more pan-European and one with more global implications," said AirPlus International marketing executive director Spencer Hanlon.

[Click here for a table detailing all current airline credit card surcharges.] 

For global corporations, projecting the total cost implications has been tricky as surcharge amounts vary by market, carrier and point of sale. "From a European perspective, surcharging is here to stay," Hanlon said. "From a U.S. travel manager perspective, if they have a global program, or even if their travelers are purchasing tickets in Europe, they are going to be impacted by the surcharges imposed by European carriers in that point of sale."

When the Lufthansa Group in August announced credit card surcharges in several European markets, it indicated the fees would be assessed at all points of sale, including in the United States. However, "at the eleventh hour," according to BCD Travel Americas supplier relations vice president David Mitchell, Lufthansa executives told the agency and ARC officials that the surcharges wouldn't apply in the United States, for now anyway.

"Lufthansa has decided not to implement the credit card surcharge for point-of-sale USA at this point in time," an airline group spokesman confirmed to Business Travel News while declining to comment further.

Amadeus noted that it implemented a service-fee product "for one airline in the U.S. market, but is pending and cannot be used for the time being due to local regulations regarding credit card fees."

Regarding U.S. regulations, "we think there is an ample amount of gray," said ARC credit card services director Chuck Fischer. "We were not concerned enough to take a position that we could not, would not support" a Lufthansa implementation in the United States. "The main concern," he said, "is making sure that whatever the carriers do doesn't disadvantage the travel agency system and is applied across all distribution channels."

The Lufthansa Group said its Optional Payment Charge wouldn't apply before March to corporate negotiated tickets. "We'll see if they follow through on that," said BCD's Mitchell. "They'll definitely get some pushback. We'll see how successful they are at bringing that in without having the big corporate clients negotiate it back out."

Mitchell said the entire topic of surcharges "is fairly isolated from a U.S. standpoint to those big multinationals that have a lot of traffic from those points of origin where fees have been implemented. I don't think it's really big on everyone's radar in the U.S. for that reason."

Areas Of Influence  

AirPlus' Hanlon said there are "three areas of influence" for the applicability of such surcharges in various regions: the "legality in individual markets; rules of individual card schemes, such as American Express, MasterCard, Visa and UATP; and the decision-making of individual carriers." Such surcharges are prohibited by statutes in California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas.

In an antitrust settlement approved in July, MasterCard and Visa agreed to change their rules to allow merchants to offer discounts for cash and check payments and inform customers of their preferred or cheapest form of payment. Card association rules previously prevented merchants from such practices. American Express, however, did not settle and will fight the U.S. Department of Justice's lawsuit, expected to go to trial next year.

Visa's website indicated that surcharges or "checkout fees" are allowed only in certain countries. MasterCard "does not partake in airline surcharges," a spokesman told BTN. "Our rules are straightforward and state that a merchant must not directly or indirectly require any cardholder to pay a surcharge or any part of any merchant discount or any contemporaneous finance charge in connection with a transaction." American Express did not respond to requests for comment, but its rules also had prevented merchants from surcharging.

After much debate, Visa and MasterCard now allow government entities to assess a "convenience fee" to cover merchant fees.

Regulatory Scrutiny  

In Australia, regulators in 2003 first allowed surcharges, but the Reserve Bank of Australia this year said it was considering a cap to rein in merchants who charged fees beyond their costs. The bank cited an East & Partners survey that found "average surcharge levels have increased substantially over the past few years. In December 2010, the average surcharge for MasterCard credit cards was 1.8 percent, for Visa it was 1.9 percent, for American Express it was 2.9 percent, and for Diners Club it was 4 percent. These average surcharge levels are around 1 percentage point higher than merchant services fees for American Express, MasterCard and Visa cards and around 1.8 percentage points higher for Diners Club cards."

Qantas first introduced credit card service fees in 2003, when it charged a 1 percent surcharge included in the fare on all domestic and net fare tickets purchased on credit cards in Australia. In 2006, Qantas began to use a flat per-ticket fee of A$6.60 for domestic bookings in Australia and trans-Tasman Sea New Zealand service, and A$18 for international bookings. In September 2008 it increased those fees to A$7.70 and A$25, respectively, and in December 2010 raised the latter fee to A$30.

U.S. banking reforms last year covered debit but not credit cards. However, federal regulators and Congress for several years have been studying merchant fees, interchange rates and the dramatic rise in costs to merchants to accept plastic. The United States often cites the Australian experience but is tracking developments in the United Kingdom and the European Union. EU ministers in October approved new consumer protections that prevent merchants from surcharging customers more than they are charged by card companies. It is expected to take more than a year to implement in each member state.

Noise Louder In Europe  

European buyers loudly have voiced concerns about the latest credit card surcharges. "It increases the cost of travel up to 2 percent for Germany-based customers," said Areka Consulting CEO Pascal Jungfer. "It prevents clients from fair comparison at the time of booking because the fees are presented only at the end of the booking."

"There is no visibility of fee until you go to checkout," added BCD's Mitchell. "Until you pick the form of payment, you'll not see anywhere in the shopping ribbon that there may be or is a merchant fee if you use a credit card on this transaction."

That lack of visibility is one concern being explored by a U.K. Office of Fair Trading inquiry on airline payment surcharging. "The OFT's view is that payment surcharges should be available through a clear link," according to a spokesman. The office secured voluntary agreements from a number of airlines to improve the transparency of their payment and booking fees, and obtained data about fee volumes from airlines. OFT estimated that U.K. consumers in 2010 paid to 10 major airlines £300 million in payment surcharges. The office decided not to make a market investigation reference to the Competition Commission, requested additional comments this fall and "will publish its final decision shortly."

"Airlines are forcing these surcharges on the ticket, regardless of whether you're a small, medium or large organization, and the impact is potentially a high cost and an increase in the cost of that ticket," said Andy Nicholas, Citibank commercial card director of sales and account management in Europe, the Middle East and Africa. "The corporates have looked at this a great deal and have few options: either take the hit or renegotiate their agreements with the airlines from a card perspective."

Is Debit An Option?  

As part of its Optional Payment Charge plan, implemented last month, Lufthansa told customers in Germany that they could avoid card surcharges if they used a new debit card product from its AirPlus subsidiary. "It's been wildly successful, so much so that we've needed to bring in additional staff to man the inflow of applications," Hanlon said. Within a few weeks, hundreds of corporations applied. "It's in the double-digit share of our German customer base. We didn't anticipate in 20 days being anywhere near double-digit percentage penetration."

To make the debit card product financially viable for carriers, AirPlus included the "characteristics of payment tools corporations have become used to in credit or charge cards" but stripped others, such as extended payment terms.

Through a new product called AirPlus Speed of Pay, the customer pays for additional payment days—day by day—to extend the date of payment withdrawal from a bank account. The cost is €0.12 per day, and "50 percent of all applications have also bought this separate product, so the price seems to be one that customers appreciate," Hanlon added.

As merchants, airlines still benefit from "guaranteed payment, information flow and the eliminated need to deal with cash," Hanlon explained. "But AirPlus direct debits from the customer [bank account] the day we invoice for that transaction." The invoice is presented "soon after the point of settlement. We have many thousand customers on direct debit today, so there is no change there."

AirPlus also adjusted reporting to show card surcharges for those who opt to pay with a traditional credit card and the cost per day for those who opt for the debit and Speed of Pay products. "They can quickly make the business case as to whether they're reaping the commercial benefit of using the debit card, enjoying the surcharge-free environment, offset with additional cost of payment terms if they decide to extend payment terms," he added.

"It's not the same as a consumer debit," Hanlon said. "It has vastly increased amounts of data that come with it. There are no shortcomings to the data quality, management information systems, control and all the other things corporations need for business travel."

Noise from its client base about the growing airline card fee surcharges prompted Citibank to "start due diligence on debit solutions," Nicholas said. "Early indications are that there is no need for a debit solution. The impact to the overall payment process really unties so many of the positives associated with a charge/credit card solution, which you lose with a debit solution."

For example, "the end-to-end payment process, integration into expense management solutions data passed through a charge card. Data is not at the corporate level through a debit solution. Then it's the financial arrangement that a corporate would have with a charge card provider—rebates—that wouldn't be relevant on a debit card solution," Nicholas said.

Debit is typically an immediate debit with a five-day period. In the last couple years, Nicholas said "large-market corporates are requesting extended payment terms of 35, 45, 55 days or more." Rebates typically are reduced or eliminated with longer payment terms, he noted, "but there are very few clients who see more of a benefit in a shorter cycle versus extended credit."

Payment Practices And Policies 

"Travel purchasers are increasingly challenged to ensure that the form of payment they use to reimburse suppliers is cost-effective to the supplier," said Egencia supplier relations vice president Chris Vukelich. "We're encouraging our clients to explore some of the alternatives."

In its white paper, BCD Travel advised corporate customers to "determine the cost to the organization of airline merchant fee offsets" and "assess the impact to the company of credit card rebates based on overall spend." The TMC also recommended buyers redress costs related to merchant fees by negotiating lower corporate fares, include provisions in air agreements that trigger renegotiation in the event of merchant fee offsets and work with card issuers to protect against surcharges.

"I would counsel U.S. colleagues to get informed and start to make decisions on what they would want to do in the future if it were to come stateside," Hanlon said.

Areka consultant Jungfer said some clients have attempted to eliminate card fees by negotiating with carriers, but "the airlines have been reluctant to do so."

Jungfer advised travel decision-makers to "be ready to revisit your card strategy, bring the fee to the negotiation table with airlines, calculate its impact and ask for compensation. Base your strategy on total cost of travel when you source and decide on preferred carriers."

This report originally appeared in the Dec. 12, 2011, issue of Business Travel News.