This year, the big players in the travel-payment marketplace will be pulling and hauling at each other for your business, and you may have to make some unexpected decisions. Credit card or debit card? New payment systems? A "digital wallet" in your pocket? I can raise the key questions, but I'm not about to predict how all the pieces will fall into place. Maybe you have a good idea.
Ditch Credit Cards? Led initially by a few airlines, some suppliers are trying to persuade you to switch from credit to debit cards when you buy tickets or accommodations. The reason is simple: to cut their costs. Processing a debit-card payment costs 21 cents, whereas credit-card processing takes anywhere from 2 percent to 4 percent of the transaction value.
Initially, suppliers will probably feature debit payment as a "cash" discount, even though on an online purchase, real cash is nowhere in sight. Credit-card contracts require sellers to agree they won't ask higher prices for credit purchase than for cash. So, in a twist of logic that might make Socrates dizzy, they post the "full" price for credit-card buys but knock off a "discount" for a debit purchase.
So far, Allegiant is the most prominent North American airline to adopt a debit-card preference. On a typical trip from Rockford, Illinois, to Orlando, Florida, it posts a base fare of $94.99 one-way, net of a $4 debit-card discount. You can still pay with a credit card, but you pay $98.99. Several overseas low-fare lines have done the same thing. On a recent ticket buy, EasyJet charged me a bit under $3 to make a credit-card booking, and Ryanair charges 2 percent of the total transaction cost.
Keep Credit Cards. Although some airlines want to steer you toward debit cards, so far, the big ones are happy with the current setup. Their co-branded credit cards—the ones that earn airline miles—are cash cows. The issuing banks pay them about one cent each for all those zillions of miles they "give" away to eager travelers: I figure an aggregate mileage credit take by the big U.S. "legacy" lines was well over $10 billion last year.
Price or Protection? The choice between debit and credit cards involves a trade-off between a potentially lower price and extra benefits:
- As many of us have pointed out over the years, credit cards provide some important consumer protections and benefits. Federal law requires issuing banks to refund payments for services not received—for example, if an airline or tour operator goes bankrupt or can't fulfill its obligation to you. Many credit cards offer modest "protections" against baggage loss and delay expenses, most protect you against unauthorized use, many provide references to services you may need while traveling, and a few include "concierge" programs that help with various arrangements. Of greatest monetary value, most credit cards provide backup coverage for collision damage to rented cars, a secondary coverage that becomes de facto primary outside the United States. And, of course, there are the "miles" or points you earn, the equivalent of a 2 percent rebate on the most generous cards. Cards co-branded with American, Delta, and United provide no-charge checked baggage, and cards from Alaska, Hawaiian, Frontier, JetBlue, US Airways, and Virgin America offer companion tickets and other benefits. And, finally, you can pay off over time if you want.
- Debit cards, by contrast, provide none of those protections or benefits. They're a direct pipeline to your bank account. Because they carry no annual fees and get so little per transaction, they have no margin to add any goodies to the deal. You may pay 2 percent or so less, but you lose out on a lot.
New Players. Pretty soon, use of cash in travel may be obsolete. Various forms of a "digital wallet" are on the horizon and may someday be the only way to pay. That won't happen in 2013, however; I'll have more to say about those developments later. For now, current payment systems are complicated enough.
Ed Perkins on Travel is copyright (c) 2012 Tribune Media Services, Inc.
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