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United we fall

By Dave Birch posted Jul 29 2009 at 12:54 PM

[Dave Birch] I think that the decision by United Airlines to make some smaller travel agents process ticket sales on their own merchant accounts (and therefore pay the merchant service charge, or MSC) is one of those developments that seems on the margins at the time but actually signals the start of the supertanker's turn. United's new policy, starting 20th July, is for one reason: cost.

United would say only that the move was prompted by rising card-acceptance costs. “Credit card processing costs are escalating at a high rate and represent several hundred million dollars of cost each year,”... All travel-agent ticket sales on cards in 2008 totaled $79 billion, according to ASTA estimates, with an average discount rate of 3%.

[From News]

Never mind the average 3% MSC, the figure I thought was really shocking in this report was that brick-and-mortar agents account for nearly half of all airline ticket sales. I haven't been in a travel agency for years (except to buy prepaid payment cards), all my personal travel is bought via web sites and all our corporate purchases go through invoices, so I was genuinely surprised to read that....

At the same time, airlines depend on so-called traditional, or brick-and-mortar, agents for somewhere between 40% and 50% of their ticket sales, with online agencies accounting for another 20% to 25%,

[From News]

Wow. To me, that was a genuinely surprising statistic. Anyway, that led me to wonder if people buy airline tickets with debit card given the price incentive -- many airlines make an explicit charge for credit cards, but no charge for debit cards -- or if the benefits of a credit card in these circumstances are seen as being sufficient to outweigh any surcharge.

Personally, I never buy airline tickets using anything other than a credit card, even though many airlines surcharge and try to get you to use debit cards. That's because if anything goes wrong -- let's say the airline goes bankrupt, for example -- then if you paid with a credit card you'll get your money back. I'm more than happy to pay for the peace of mind. My top tips for avoiding fraud: use a credit card for everything in all circumstances and never use your debit card for anything except ATM withdrawals.

There's a more general point here, of course, which is the increasing focus on the cost of card transactions. Now whatever you might feel about the amount of the charges, there's no doubting that retailers are framing a wider debate purely in terms of the magnitude of the charges. Just to choose one almost random example I picked up from Payments News the other day (when following a story about the 7-Eleven petition)...

At a 7-Eleven in a blue-collar neighborhood in St. Louis, the owner, Mike Foster, is hoping the petition in his store will help convince Congress to approve curbs on interchange fees. He said he can make adjustments to curb other expenses in his store, but he cannot do anything to change interchange fees, which cost as much as much as $1,600 a month. “It keeps getting bigger and bigger and bigger,” he said. “And I got zero control over it.”

[From Card Fees Pit Retailers Against Banks - NYTimes.com]

Zero control? No, Mike. There's at least two things you could do. For one thing, you could not accept cards, and watch your customers go next door, which would seem to indicate that cards are delivering customers to you. For another thing, you could get 7-Eleven to quit complaining and start their own payment card like Starbucks or, for that matter, like 7-Eleven in Japan where there are several million of their nanoco contactless electronic payment cards in use.

Retailers don't want to stop taking cards and go back to cash, but neither would they expect the product to be provided for free. So what is the real dynamic? Many people might sympathise with the retailers' central complaint, that interchange has not evolved to reflect the modern retail payment environment, while being sceptical that a regulatory transfer of resources from one group (banks) to another group (retailers) will result in any benefit to the consumer. But there is a dynamic, so we cannot be static in response. We as an industry (by which I mean the electronic payments industry) need to demonstrate to retailers that our products are worth paying for. As I'm learning from the Innovation in Payments work over at the CSFI, if we restrict the value proposition to the payment transaction, this is difficult. It's the value-added services around the payment transaction that create our future proposition. These services exploit the fact that electronic transactions generate information that can be exploited. Hany Fan, the Group General Manager for MasterCard UK & Ireland, summarised this point well at the British Retail Consortium annual conference, noting that

Each time a consumer uses a credit or debit card, that information is an opportunity for the retailer to understand them better, provide more value and keep them coming back

[From ePayNews]

I would say that experience in a number of areas show that some of the benefits obtained from this additional information were completely unexpected at the time of transition. An excellent case study, centering on Manchester City Football Club's transition from paper to contactless smart cards a few years ago can be found in that indispensable volume, Digital Identity Management. The case study, by the head of retail at MCFC, shows what dramatic revenue opportunities arise from knowing simple facts about transactions where there were none before. Let's shift the customer proposition around electronic payments from "how much will it cost" to "how much more can I make".

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]

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Comments

I would rather take the chance and save the money by using my debit card. I think it is the credit card mentality that everyone has come accustomed to that is causing much of the financial difficulty. I guess it is just in my frugal nature.

Payments work best when vertically integrated. But the structure of the payments industry is stuck in the horizontal axis. Probably this is a hangover from the days when the banks ruled payments, and flat-earth thinking ruled for as far as we could see.

The vista might be getting clearer. Curiously, the EU e-money directive practically banned vertical payments systems a decade ago, and now the new directive is sort-of maybe encouraging them.

this is quite interesting post and the analysis made is very good

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