Analyzing Hot Topics in Payment

With both regulatory and consumer-focused changes on the horizon in the payments industry, BTN sought opinions from four senior executives in the corporate payment space—Grasp head of product and innovation Michael Duffy; UATP president, CEO and chairman Ralph Kaiser; HRS Pay CEO Kurt Knackstedt; and ARC director of payments Jennifer Watkins—to gauge how those issues could shape corporate payment trends in the coming years. An edited transcript of their responses follows. Read the second installment here. 

Pay-as-You-Fly Models

The "pay as you fly" model made news in recent months when the German state of Lower Saxony issued a call for airlines to make it the dominant model, abolishing advance payment on flight bookings. The German Business Travel Association has been pushing the model as well, and Lufthansa last year launched such a program for corporate customers on some flights within Europe. But could this become a more widely used model in the global airline industry?

Jennifer Watkins: Lufthansa was the first one to do it and is still doing it in some markets. Alaska Airlines does something similar, but it's more like a subscription model where you can sign up and get access to certain flights at a set rate that is set at the beginning of the year, and it's in specific markets. The big challenge always is, how does an airline manage their inventory in that environment? Corporates kind of have the same flexibility when they buy nonrefundable tickets. You don't have anything to lose, basically, with a nonrefundable ticket, although with the refundable ticket situation, there's a lot of refunding back and forth, which adds noise into the ecosystem that maybe people would like to get rid of. 

Michael Duffy: It is a different way of looking at it. When I think about any time I'm buying goods or services, it is different when you pay and when you consume the service. A hotel, you pay after. You pay prior with air. Restaurants, you would pay after you've eaten. A concert you pay ahead of time. So, there is some variation. Lufthansa is certainly on the forefront. From a corporate travel point of view, would this possibly eliminate unused tickets, because if you're boarding the plane, there's no unused tickets? You're paying as you're consuming it, so it sounds really good. Would this eliminate fraud as well, because if payment is only supplied as the traveler flies, could fraud even be possible? So, from a corporate point of view, it sounds quite attractive. From the airline side, is it good for them? Think of their costs, when they're putting up prices for airfare, they have a lot of future contracts for fuel, so I would expect buying a ticket now would align to purchasing a future contract and mitigating risk and volatility. If it's pay-as-you-fly, I guess the airline would be taking on the risk of the volatility. I'm not sure where things will end up, but it's quite interesting, and it might have some potential. 

Ralph Kaiser: It's a little bit of a headscratcher. The way the industry works today, the reason you have nonrefundable airfare is because you need a certain amount of base revenue every day, every week, every month to keep everything going, because there are a lot of mouths to feed in the airline industry. I could be sitting here and say, "Hey, I'd like to go to Hawaii for Christmas." So, I'm going to book a flight and reserve my seat for the Dec. 22 to fly to Honolulu. Then, on the 20^th, I decide not to go to Hawaii, so I cancel. If everyone did that, all this inventory opens up, and maybe consumers like flying on empty planes, but airlines don't like it. How do you control that aspect of it? Corporate is a little different. Our book-to-fly time is on average 17 days for UATP corporate charge card, so that's easier to manage. But maybe there's a conference they want me to go to, so I book it 10 days out, but the morning of, I have too many things to do, so I can't go. So, you drop the flight, and maybe it's a business-class ticket, and there's no way the airline is ever going to recapture that revenue. So, how do you do it?

Kurt Knackstedt: Payment for airlines has always been this challenging thing where you pay for it now and consume it later. Corporates by and large don't like that, because it's all about cash flow. The airlines that are experimenting are listening to some part of the market, because it's difficult to pay for something so far in advance when you know that half the time something is going to change. It's going to be hard to know whether buyers and suppliers and find a way to make it work, given the dynamic nature of corporate travel. All the infrastructure around airline payments has been around so long that it will be difficult to undo a lot of that stuff. I do think you'll find buyers and suppliers willing to experiment and find use cases that would work. As long as the industry allows room for experimentation, I'm curious to see how it plays out. 

Duffy: There's probably some work for the airlines to do that and have the revenue management align with all that, and prices will likely be higher for that kind of model, but maybe there is a benefit for the corporation in not managing the unused ticket components. It'll be interesting to see how that plays out and if it's something desirable. The change fees, I wonder how long it will last. The pandemic was a trigger for that, but to say no to revenue, airlines may come back to that. 

Watkins: Our entire infrastructure is really built on "pay now and fly later," so there would be an infrastructure change. We have our eyes on everything that's happening in payments and making sure that we're in a position to support whatever new payments come up. From a corporate perspective, it's pretty far out there, but it does have some applicability. For ARC, we would have to make some changes for our system, and it would be billing on the flight date, things like that. If an airline really wanted to do it, they could make it happen, but it is very different for them and changes their model with their acquirers as well, because acquirers are paying some—probably not the U.S. airlines—at the time of flight, so it could change that as well.

Kaiser: A lot of the infrastructure is there. If you're paying on the day of your flight, you can still use traditional payment methods. A lot of the cool payment apps out there today – it's all the same plumbing underneath, but it just has a new fancy cover on it. We do programs that are prepaid. A company can give an airline $50,000 and have a declining balance on a UATP account, and they can book the flight this morning for this afternoon, and it gets charged. The difference is the airline already has the money. So, even if I book five days ahead of time and cancel and get my refund, they have my $50,000 and have already allocated to their revenue projections for the year. If they don't have it prepaid, that's where it gets difficult. Probably the people who want the instant-pay option aren't the ones who have $50,000 to give an airline.

The Credit Card Competition Act of 2022

Introduced this summer by U.S. senators Dick Durbin, an Illinois Democrat, and Roger Marshall, a Kansas Republican, the Credit Card Competition Act, in Durbin's words, aims to end "the Visa-Mastercard duopoly" by requiring banks to loosen restrictions on the number of networks on which transactions could be processed. Banks would be required to allow at least two unaffiliated networks to process transactions, one of which must be outside the Visa and Mastercard networks, which Durbin said would both open the door for new entrants, such as debit-only networks, as well as lessen fees charged by Visa and Mastercard. Critics argue it will have little benefit for consumers and instead would cause harm in reducing rewards and rebate programs, which are fed by card revenues. The bill currently faces an uncertain future, as it failed to pass as an amendment to the National Defense Authorization Act as proposed, but should it pass, what effects could the corporate card industry see?

Knackstedt: I tend to be in favor of the market driving these things rather than the government, because market forces are usually a good indication of demand. In some cases, when you do have strong incumbent positions, government nudging isn't always a bad thing, but direct intervention isn't always the best way to do it. If you look at what's happening in the rest of the world, the payment marketplace and dynamics are changing. In some cases, the governments are getting very involved or partially involved. If you look at Australia, the government got directly involved years ago, where they capped interchange fees for cards because there was rampant surcharging for years. Any time you tried to use a card, the merchant would charge whatever they wanted to cover the merchant costs, which in some cases ended up as profiteering by merchants. You're getting various forms of that in other markets. The U.K. and the EU have dabbled in these areas as well, but the U.S. for years has just let it rip. 

Kaiser: They could say, we're going to run this on UATP because it's cheaper. Or Discover? You'll get a common denominator of pricing maybe, but is that the best way forward? There are probably some giant unintended consequences of doing that. Europe has a [interchange] cap on Visa Mastercard, but not Amex, so a lot of banks got out of the Visa Mastercard issuing business especially for corporate, and just ceded the market to another brand. Is that really what the EU wanted? They wanted to reduce costs, and politicians think when you lower the infrastructure costs, the merchants will pass the savings on to the consumer, which happens about zero percent of the time.

Watkins: There could very well be some unintended consequences. Looking at what the first Durbin [amendment, part of the 2010 Dodd-Frank financial reform legislation] did, they're not proposing doing that sort of regulation of pricing for cards. Card issuer prices, their revenue basically from cards, I don't foresee changing, and that's the biggest piece of the expense for merchants. So really, you're talking about whatever basis points you pay to the network for their rails. It's the smaller piece. For air, the challenge is that airlines have got their feet in both camps. They're merchants, and they have relationships with issuers and card brands. I can't really say whether it's a good thing or a bad thing. It might have smaller consequences than the original Durbin, that actually regulated debit pricing.

Knackstedt: In the last several years, you've heard of governments and central banks getting involved in new payment methods, more real-time payments becoming technically feasible. The technology is now there certainly to offer alternative ways to pay and settle than credit card rails, and SWIFT or ATF transfers. That's why the market should drive what wins, whether it's a technical superiority, a data exchange superiority or a commercial superiority. In the U.S., you're going to see continued innovation here, because it's such a huge market, whether it's card-rail-based or non-card-rail based. 

Watkins: It's potentially a lot of bluster about nothing. Seeing that pass is kind of hard to imagine. I'm having a hard time wrapping my head around what It looks like for cards. Does that mean issuers are going to say this is now a Visa and a UATP card, and you can route it down either one of those networks? What does that look like at authorization at settlement? There's a lot of complexity there. I have a hard time looking at the travel agency distribution channel specifically, imagining how that works in a GDS environment.