United wants travel agencies to foot the credit card processing bill

Jun

2009

Posted by: Mark Ashley

United Airlines is innovating again… with new ways to pass costs onto others. This time, the issue is credit cards.

United [on Wednesday] informed a currently unknown number of travel agents that they would no longer be able to use the industry reconciliation system, ARC, to process tickets which were paid for with a credit card.

United is asking these travel agents to process credit card transactions themselves and then report the sale as a cash transaction. Until now, when a travel agency (or OTA) has sold a published ticket on United (or any other carrier) the credit card is actually processed by the airline. As such, the airline is responsible for paying the 2-3% (in rough numbers) that Amex, Visa, Mastercard and Discover charge for using their cards. In the new world proposed by United, agents will process the credit cards themselves (presumably along with an additional consumer fee) and then remit the full amount of the ticket back to United. This would obviously save a considerable amount of money for United if widely adopted.

“If widely adopted.” Which, in the airline industry, means that this practice is about to become universal.

This could mean the reversal of the online travel agencies’ “no fee for airline bookings” policies that took hold with the majors in the last few months.

And reinstating the fee would be justified, frankly, if this goes beyond United. If the agenc is the one charging the cost of the ticket, then the agency is the one who bears the financial risks (primarily from chargebacks), and the agency is the one who would need to seek the refund of their money from the airline.

This also messes with the economics of ticket sales from the airline’s perspective, and not necessarily in an obvious way. Previously, airlines wanted to bring all sales to their own websites. Now, there’s actually a financial incentive for United to have the agencies book the ticket. A $200 ticket purchased on united.com yields about $195 for the airline, after credit card fees are backed out. The same ticket sold by an agency would now yield $200 for the airline.

The bottom line: This is going to tick a lot of people off. Agencies are already upset. Customers will be soon.

Categorized in: United Airlines, credit cards

10 Comments

10 Responses to “United wants travel agencies to foot the credit card processing bill”

Jean - OurExplorer Tour Guide Says:
June 30th, 2009 at 8:37 am
Every small change leads to chain results and usually affact more than one party. Hopefully it’s not ending at charges on customers.
Carlo Says:
June 30th, 2009 at 9:54 am
I’d rather the agent not be the one actually processing the payment. It opens the agent up to an invitation for fraud. If the agent runs the credit card and never sends the money, the traveler could be on the hook twice for the cost of travel. If you find a reputable travel agent, this shouldn’t happen, but sometimes, even the best travel agents hire expert embezzlers. And if you are on the hunt for a good travel agent and end up with a dud, well…
Jonathan Says:
June 30th, 2009 at 10:42 am
Another consequence of this move – what happens if an airline goes out of business? Currently, if the airline has accepted the credit card as payment, passenger has recourse through the credit card company. If a travel agency becomes the vendor – what protection will the traveller have? Also, puts an unfair burden on the travel agent.

I can see travel agents booking tickets directly on United’s site using the passenger’s credit card info – I would!
Mark Ashley Says:
June 30th, 2009 at 11:39 am
Agreed, there are numerous possible problems here, possibly unforeseen by United.

I “like” Jonathan’s idea re: booking tickets via United.com. The risk is transferred back to the airline, though I’m not sure if that would violate the agency’s agreement with the airline.

It wouldn’t surprise me if the largest agencies were able to negotiate some more favorable terms, and that the smaller agencies would be forced to accept United’s terms (or stop booking with UA). The worry for agencies should be widespread uptake by other airlines of similar policies.

For what it’s worth, the agencies’ trade group is fighting this. Here is the letter sent by ASTA president Chris Russo to United, in its entirety. He echoes some of the arguments made here, plus makes some others.

Dear Mr. Myrick,

Several of our members have received letters indicating that United has terminated their right to accept credit cards as agents of United. We ask that you rescind this policy immediately. A few points suffice to show that this new policy is both unjust and commercially unfeasible.

While there is a fairness issue at hand, there are many technical and administrative issues that make United’s Merchant Access program impossible. First, over 63 percent of travel agents’ access to merchant services is limited to the Airlines Reporting Corporation’s (ARC) Travel Agent Service Fee (TASF) program, and this program is designed to process service fees, not airline tickets. ARC has a US$500 limit on transactions processed through the TASF program.

Second, United is requiring these agents to absorb United’s cost of doing business. The travel agent is an “agent” and is not the provider of the transportation services to the customer. By acting as the credit card merchant and identifying the agent as the provider of the service on customers’ credit card statements, you are asking agents to absorb the risk of credit card chargebacks related to United’s service performance. Agents already bear the credit costs of charging their service fees. It is not reasonable to expect them to bear your costs, too.

Third, United will save no credit costs if the result of the policy is that consumers, or agents on behalf of consumers, book on credit cards at United.com. This suggests the real purpose of this policy [is] to drive agents away from GDSs to less-efficient booking processes so United can avoid GDS fees.

Fourth, travel agents have been given insufficient time to prepare their systems and procedures to accommodate a process change of this magnitude. Many agents have back office, mid-office, front office, and consumer-facing booking tools that must be reprogrammed to accommodate such a change. Current online booking tools do not have automatic controls that allow an agent to refuse a certain airline’s booking based on the form of payment or to automatically charge a customer’s credit card as a merchant for an individual airline. Agents would need several months, or more, to have their systems reprogrammed and redesigned to accommodate such a change.

Fifth, travel agents’ cost of doing business will increase well beyond the agent absorbing the credit card merchant fees that United will avoid. Agents’ ARC bonds will increase, as agents’ cash sales, presumably, will go up. However, I point out, and believe you know this too, that doing cash sales on a significant volume of business in today’s world is not feasible for most agencies.

Finally, consumers will be disadvantaged as costs shifted from United to travel agents will ultimately be borne by consumers in the form of higher service fees on top of the existing fare level. History shows that fares will not be reduced to reflect the claimed savings in credit costs.

We, therefore, ask that United immediately rescind this policy, which is unfair and commercially unreasonable.

Yours truly,
Chris Russo
President
m Says:
June 30th, 2009 at 3:03 pm
i’m not sure you can pass those CC processing fees back to the consumer. IANAL and I’m not familiar with all the rules regarding retailers accepting CCs, but if you could charge these fees back wouldn’t all retailers add a transaction fee for using CC? This is why you get a discount on a big purchase if you pay cash, cause the retailer doesn’t have to bear the fee. I would think the big CC would just stop allowing united to use their services and then where would united be? Flyers sending in checks? Cash ticket sales on the day of the flight? I think if you mess with the CCs they will mess with you right back. These fees are a huge portion of their revenue.
JB Says:
June 30th, 2009 at 4:11 pm
Agencies are not going to be able to get credit lines of millions of dollars from credit card processors.
Bela Fleck Says:
June 30th, 2009 at 8:38 pm
Agents can certainly pass on the cost of credit card processing fees by adding to their booking fees. They cannot, however, charge a “credit card” fee because that violates the merchant agreement with the credit card companies.
Jeff G Says:
July 1st, 2009 at 9:37 am
“If the agency is the one charging the cost of the ticket, then the agency is the one who bears the financial risks (primarily from chargebacks), and the agency is the one who would need to seek the refund of their money from the airline.”

This is big on another front, besides just forcing the fees onto the agents.

Credit card companies don’t always give the vendor the money (less fees) right away. If it’s for a future service, as in the airlines, the credit card company will hold back a certain amount based upon what they see as a risk of having to refund the money. IIRC, it was a major change in the holdback percentage that knocked Frontier Airlines into bankruptcy last year, where the card processor wanted to increase the holdback from 50% to 100% – in other words, Frontier wouldn’t see *any* money until a passenger actually flew.

Simply put, if the credit cards are processed by the travel agents, they’re the ones with the holdbacks as well as the fees; the airline gets *all* their cash up front. I’m not sure what the holdback percentage is for a major airline like United, but I’m sure it’s something more than zero, and that makes for instant cash for them.
Jeff G Says:
July 1st, 2009 at 10:07 am
… as a followup, I found this on another travel blog http://blog.taragana.com/n/united-airlines-passing-credit-card-fees-to-some-travel-agents-citing-high-costs-95956/

“At this time last year, United had $382 million held back, or *25 percent* [emphasis mine] of advance credit card sales. United reached a deal with Paymentech and JPMorgan Chase Bank to cut that amount to $25 million, but the amount would rise if UAL’s cash balance declines. UAL would also have to post reserves with American Express if its cash balance falls below $2.4 billion — it was $2.46 billion on March 31, according to regulatory filings.”

It sounds like this is the real reason behind the sudden push.
Mark Ashley Says:
July 1st, 2009 at 10:27 am
Jeff G, I think you’re exactly right here. The holdback issue was a killer for Frontier, so United’s move looks like a way to cut their dependence on the credit card processors, who potentially hold all the cards and can determine the viability of the company as an ongoing concern.

I admit that I forgot writing the linked post from April 2008, in which I predicted:

For travelers, though, there are longer-term implications here: If airlines’ financial viability is a dance on a razor blade, and if accepting credit cards can create a risk of survival, then travelers are likely to see cash-payment incentives (or credit-payment disincentives), going forward.

European airlines have been charging a credit card surtax for some time, to dissuade customers from charging it. And a few months ago in the U.S., discounts were floated as a way of getting customers to pay by cash. And despite the fact that every airline has an affinity credit card that generates points in their loyalty program, Frontier’s bankruptcy is going to put more pressure on airlines to reduce the reliance on credit.

Looks like that’s coming true.