BTN's annual answer book for business travel managers.
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
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
"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
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
After much debate, Visa and MasterCard now allow government
entities to assess a "convenience fee" to cover merchant fees.
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
Noise Louder In
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,"
"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,"
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
"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."
originally appeared in the Dec. 12, 2011, issue of Business Travel News.
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