But a definite loss for consumers if it goes that way. No automatic travel insurance!

I think we are more likely to see the airlines threatening to stop accepting credit cards and switching to EFT and other payment schemes and that threat, if believed, will result in the credit card companies allowing them to charge a surcharge.

We won’t see an elimination of credit card acceptance. But we will see changes.

And if merchant rules get changed in the process, then all the better. The control over cash flow which the credit card processing bank has over the card-accepting business client is chilling.

It’s not uncommon for merchant banks to screw small businesses by suddenly increasing the amount of money they hold in reserve after an unusually large transaction has been made.

Here is an example: The merchant agreements require those that accept credit cards to accept them for all transactions. So a small business that normally does $200 credit card transactions makes a huge sale to their biggest customer for $10,000 and the customer insists on using a credit card. They run the charge but they find out a few days later that only $5,000 got deposited in their bank – not even enough to cover their costs on the sale. The merchant bank decided that the transaction increased the risk profile of the small business and decided to put a $5,000 reserve on the account effective immediately and will consider refunding it in 6 months.

That is the sort of action that happens all the time in the merchant card industry. I think most sophisticated businesses understand this goes with the territory of accepting credit cards.

What the Frontier incident highlights for me is the need for the credit card industry to figure out a better way to handle dealing with changing risks without putting businesses in such a bind because of the changing risk that their only out is bankruptcy.

But I’m not sure we want the government to legislate that the credit card companies must be forced to assume risks that they are not able to cover by charging different fees as risks change.

Upgrade: Travel Better has an interesting post about how he thinks the airlines may be changing the way they accept credit cards in light of the Frontier bankruptcy. I’ve posted my thoughts on the issue in the comments section of Upgrade: Travel Bette…

And neither wants to stop credit cards from being accepted – they allow people to buy tickets that they wouldn’t otherwise buy and they bring in a lot of business for the credit card companies too.

If the risk to the credit card companies is too high for airline transactions then they need to be charged a higher discount rate to account for the risk.

But we know that the airlines can’t afford to pay more with the thin margins and huge fuel costs.

With the current credit card policies the airlines are not allowed to pass on that risk to the consumers.

If you are right on where things may be headed, I think we are more likely to see the airlines threatening to stop accepting credit cards and switching to EFT and other payment schemes and that threat, if believed, will result in the credit card companies allowing them to charge a surcharge.

While I wouldn’t want to have to pay a surcharge, and while it certainly goes against the general credit card marketing and culture of the USA, I would gladly pay a percentage or two in order to keep my protections and other card perks.

Of course, I hope you are wrong.

I don’t think we want the industry switching away from credit cards though – they provide the most affordable protections for consumers. If people pay cash and then their airline goes bankrupt they become another creditor in the bankruptcy proceeding.