For years airlines have made statements that the merchant fees that they pay when they accept cards as a form of payment were ‘next on the list’ of distribution costs that would be in focus. And more recently we are beginning to see evidence that this is true with examples such as United Airlines' reported change of policy when it comes to [some] travel management companies' use of their merchant agreement and KLM’s announcement of a credit card surcharge of EUR 7.50 being debated. However, what seems to be left out of most of the coverage of these developments is an attempt to explain why.
Often people look backwards and cite the airlines' focus on TMC commissions and more recently GDS fees as the precursors to the steps we are seeing taken today. The argument is that airlines have made it a goal to reduce their distribution costs as part of the overall evolution of their product from a good or service into a commodity. I believe that, in fact, the reason the comparison has merit is one similarity of the commercial models that have existed behind these facets of the distribution model: incentive payments. And more specifically, payments that are (or were) made to users of the products that are funded primarily through the fees charged by the suppliers that support them.
I think the understanding of commission pass-through and GDS incentives are fairly well understood, so let’s talk financial incentives in the card world here for a moment. And the area where these incentives are most prevalent and egregious are in the area of corporate payments. Put simply, the value credit from the use of a card payment system by corporations accrues to both the merchants that accept them and the cardholders or corporate accounts that use them for payment and settlement. Yet, in nearly all cases, the users pay little to nothing for the value they receive--and, instead, are offered financial incentives in the form of bonuses, rebates and rewards programs. So in effect, the fees paid by the merchants cover not only the added value they receive but also the value and financial incentives for the users of the cards. Any economist would tell you that this is an inefficient market dynamic that cannot survive. And any merchant--the airlines mostly in recent times--will not accept continually rising card acceptance costs when the model has them financing incentives passed through to a third-party. This is especially true when these parties are major corporations that engage often in multi-million dollar business relationships with the carriers. This is
why the airlines care and are willing to take action to reduce or eliminate these fees.
So why don’t airlines simply negotiate better terms with the card issuers? The answer is simple and complicated at the same time. Suffice to say that the issuers that charge the highest fees and therefore pay the largest rebates are also the banks that provide the necessary capital and financial tools that the airlines need to operate. Or they also act as a TMC that could use its position as the travel consultant to some of the largest corporations in the world, as just enough leverage to cut off any discussion of lower fees. And that is why you see the airlines (and I expect other industry suppliers over time) looking instead at other ways to pass on these costs to the users.
Why would I, an executive from one of the largest corporate card issuers in the world, dare to lay out this dirty little secret? That answer is simple. I believe that payment cards provide tremendous value to all of the parties that take advantage of them. However, in the current economic model that we operate, it is often difficult to clearly demonstrate the added value and potential of a card when the discussion is clouded by talk of financial incentives. I look forward to a more transparent system where AirPlus and all of our competitors can focus on the economic good we create for this industry and (if I may be so bold) the broader economy as a whole and not be reduced to a commodity ourselves.
I think you are totally correct in your assessment, but perhaps just a bit too polite in making the case. Simply put, the rebates that are being paid by card issuers to corporate users of their card products are effectively being subsidized by the very suppliers such as airlins who accept the cards. The rates charged to merchants for accepting corporate card products are higher then consumer cards and the rebates are a key reason for that higher rate. This is exactly the type of situation which has caused the airline/GDS battle over the last 8 years and corporate travel purchasers need to understand that the implication of these payment card rebates will result in travel suppliers looking to reduce their costs by seeking alternative payment solutions. We have all seen this movie before. Given how corporate purchasers rely on card data reporting to manage their spend, this battle can have significant consequences to everyone involved. If a few major airlines start to drive alternative forms of payment, corporate travel purchasers and their travel management partners will find themselves scrambling for alternative sources of data, and the total effort and cost required to do so may outweigh the benefit the company currently gets from the rebate.