Consumer Travel Alliance — United Airlines tries to shift credit card fees

This is one is a series of articles about my work for travelers through the Consumer Travel Alliance (CTA). This organization is a tax-exempt non-profit, so any donations are fully tax deductible. We have been working in Washington, DC, for about a year now and have had some significant successes. Anyone who has worked through Congress and regulatory agencies in our nation’s capital, knows how very long most bureaucratic actions take.

I have found that government workers are a talented and good group who will work with average citizens to change rules for the better whenever they can without Congressional action. And sometimes, mid-level government workers at the FAA, FTC, DOT and others have a lot more power to make small, but important, changes than anyone realizes.

In late summer, United Airlines announced a new program where a select number of travel agents would no longer be allowed to use the airline’s merchant account to process ticket purchases. United wanted the travel agents to process the cost of the airfare through their own merchant accounts and then wire the full airfare amount to United.

This maneuver was an obvious attempt to save the three to four percent credit card processing fees and shift them to travel agents.

The Consumer Travel Alliance saw a more ominous outcome — the possible loss of important consumer protections provided by credit cards against possible airline bankruptcies and non-performance of service.

In a letter to the Consumer Federation of America, of which we are a member, the Alliance noted that this action would hurt consumers because of increased costs, loss of consumer protections and increase complexities in case of problems with billing, ticketing changes and customer service.

United Airlines claimed that their actions would only affect a small number of travel agencies, but the American Society of Travel Agents (ASTA) came out swinging. ASTA was certain that should United succeed in shifting the burden of these transaction fees to this select group of agencies, this “test” model would spread to other agencies and be employed by other airlines to add a new cost level to travel agent operations.

The ASTA approach
ASTA approached the problem by lobbying Congress to stop this tactic. They argued that it would harm thousands of small businesses in the U.S. They held press conferences on Capitol Hill to generate some pushback against United Airline’s actions. They succeeded in getting a 30-day delay in the implementation of this proposed new payment system.

The concerns of the Consumer Travel Alliance were for the consumers. We realized that consumers might be faced with an increase in costs should ASTA members pass these new expenses on to consumers and we recognized that by adding a new link in the payment chain that refunds and changes to tickets would become more difficult. However the most important issue for the Consumer Travel Alliance was the possible loss of the credit card consumer protections.

The Consumer Travel Alliance approach
With that in mind, I researched the issue and learned that consumer protections were embodied in what the credit card companies and the Federal Reserve Board calls Regulation Z. Since we are a media-based organization, I contacted the highest levels of public relations and press officers at the Federal Reserve Board, American Express, Visa and Mastercard for their assistance in researching the consumer implications.

In late August 2009 I asked the Federal Reserve Board for their assessment of the impact of the proposed shift of these credit card fees and the ticket processing from the airlines to travel agencies.

I need a read from the Federal Reserve Board about how this changes the relationship between the passenger and the airline when the airline is not the merchant processing the credit card.

Of course travel agents and corporate travel managers are up in arms because it will add the processing charges to their costs. Consumers will probably have to pay an additional 3-4% in order to absorb these credit card processing charges.

However, my biggest concern is about the consumer protections when it comes to contesting charges in the case of non-performance of services.

I believe current credit card laws allow consumers to receive refunds from their credit card provider in the case of non-delivery of services and bankruptcy. Indeed, airline passengers have used such protections in the not-so-distant past and I have been told that many credit card merchant agreements include an additional fee collected from airlines to insure them in case of such occurrences.

This merchant account shift by United Airlines creates a credit card transaction with a travel agency and not with the actual provider of the service (the airline). Consumer protections conveyed by the federal Fair Credit Billing Act (PL 93-495) would be undermined by this shift in credit card transactions announced by United Airline.

The credit card transaction will be with the travel agency and not with the airline. Should the airline fail, American consumers would be left high and dry with no recourse other than bankruptcy court. Such a situation would be unacceptable to the American public.

Is my reasoning correct?

In response, the public affairs officer of the Federal Reserve Board arranged for me to speak with a pair of attorneys who assured me that the consumer protections under Regulation Z would remain in place.

I then asked them, “Who would be responsible for reimbursing the consumers should there be a bankruptcy?”

The Federal Reserve Board answered, “The issuing banks.”

In the meantime, American Express, Visa and Mastercard, in developing answers to similar queries from the Consumer Travel Alliance had reached the same conclusion — if United Airlines shifted the credit card fees to travel agents then ultimate financial liability for any service problem, bankruptcy or refund problem with United Airlines would be shifted to the issuing banks.

Through back-channel messages, I learned that these major credit card companies contacted the issuing banks involved and urged United Airlines to abandon this path toward savings. Issuing banks did not want to be faced with that kind of additional liability. They reminded United Airlines that they are some of their biggest creditors and big customers for millions of frequent flier miles.

United Airlines quietly dropped their proposed change in billing tactics.

Obviously, ASTA’s actions, Congressional protests and an uproar from business agencies had an effect. However, I like to think that when the Consumer Travel Alliance alerted the issuing banks to their pending liabilities and backed up our comments with a legal assessment from the Federal Reserve Board, the banks’ “no-uncertain-manner” protests to United forced the airline to reconsider their plans.

Consumer Travel Alliance is a member of the Consumer Federation of America. Our work is supported by consumer traveler member donations. We are asking for $25 a year to help us work to make the travel experience better. If you can help with a bigger donation we are happy to accept — send me a message at [email protected]. $25 membership donations are accepted online.