How Airlines Are Adopting Alternative Electronic Payment Channels

With credit card fees having become one of their biggest operating expenses, airlines are turning to alternative, lower-cost payment options. The aim is to reduce the collective $1.5 billion in card-acceptance costs airlines pay annually, according to a recent study by Edgar, Dunn & Co. Houston-based Continental Airlines has moved aggressively in this area, adding e-check acceptance through the automated clearing house and credit-based sales through Bill Me Later as payment options on its Web site. It also allows cash payment for tickets ordered online through Western Union agents. “Reduction of distribution costs is a major focus for us, and card fees are a big component of distribution costs,” says John Slater, managing director, distribution and e-commerce for Continental Airlines. “That has helped motivate us to offer lower-cost, alternative forms of payments that can better serve customers' needs.” Offering alternative payments is a way to differentiate Continental's Web site and drive more traffic through it at a lower cost. Slater points to Latin America, where credit card penetration remains low compared to that in the United States, as an example of a prime market for such payment options. The savings from alternative payment options can be substantial. E-checks cost about half of the $1.22 merchants pay on average to accept a paper check, according to payments experts. Airlines pay Bill Me Later a transaction fee of between 1.50% and 1.75%, less than the average blended interchange rate of 1.85% + 10 cents for Visa and MasterCard card-not-present transactions. Cash, of course remains the lowest-cost form of payment. Airlines are spared the merchant fee by Western Union, which shifts the cost to the consumer in the form of a transaction fee. Consumers buying a ticket through Continental's Web site can pay for the purchase at one of Western Union's more than 46,000 locations in the U.S. Once payment has been received, the airline sends an e-ticket to the customer's e-mail. Continental has expanded the service to the United Kingdom, where Western Union has more than 2,200 agents, and Latin America, where Western Union has about 6,000 agents in Mexico alone. Bill Me Later, which Timonium, Md.-based I4 Commerce Inc. launched in 2001, is an electronic invoicing system. After obtaining a consumer's Social Security number and date of birth, Bill Me Later pulls a credit history and provides an instant credit decision. It then sends the consumer an invoice to be paid within 30 days of the purchase date. Consumers electing to pay the balance over time are charged 17.9%. Continental says less than 2% of sales through its Web site are paid for with Bill Me Later. “We are just starting to promote this option,” says Scott Stachowiak, senior manager, distribution planning for Continental. “But we feel our alternatives to credit cards are helping alleviate consumer fears about making card transactions online.” Phoenix-based America West has also added Bill Me Later and says it is considering incentives for hotel and air packages through online travel partners, such as Expedia.com, for customers paying with with the service.