Airlines Are Headed for a Bumpy Course
Author: Steve Glover, Payments Lead
The airline business is getting a whole lot messier. Earlier this month, Congress passed the Securing Growth and Robust Leadership in American Aviation Act, which mandates airlines refund customers for domestic flight delays longer than three hours and international delays longer than six or offer customers five-year credit. On April 24, the U.S. Transportation Department finalized new rules requiring automatic cash refunds for canceled flights when passengers choose not to take a new flight. A week ago, Congress revised the language in the aviation reform bill to ensure quick refunds for airline passengers whose flights are canceled and who are not seeking alternative flights. This move has the potential to wreak havoc on the travel ecosystem.
The Issue
This new rule could significantly impact airlines' cash flow and financial stability. Typically, when flights are canceled, airlines offer passengers the option to rebook or receive a travel credit instead of a cash refund. This allows airlines to retain the cash and manage their cash flow effectively. However, with the new regulations mandating automatic cash refunds, airlines will face immediate financial strain as they refund passengers for canceled flights.
Moreover, the timing of this change couldn't be worse for airlines already struggling with the fallout from the COVID-19 pandemic. Many airlines grapple with reduced demand, high debt levels, and operational challenges. The sudden requirement for automatic cash refunds adds another layer of complexity to an already precarious situation.
While the new refund rules are intended to protect passengers' rights, their implementation could have far-reaching consequences for the airline industry. Navigating these turbulent times will require innovative solutions and careful financial planning to ensure airlines' survival in the post-pandemic world.
The Nuts and Bolts of Refund Fees
Credit card refund fees for merchants can vary depending on the card network, the type of transaction, and the merchant's agreement with their payment processor. Here are some general insights into credit card refund fees:
Interchange Fees: Merchants pay fees to the card-issuing bank for each transaction. When a refund is issued, the interchange fee is typically refunded to the merchant, but not always. The exact refund policy depends on the card network and the specific terms of the merchant's agreement.
Assessment Fees: These are fees charged by the card networks (Visa, Mastercard, etc.) for processing transactions. Like interchange fees, assessment fees are usually refunded to the merchant when a refund is issued, but not always.
Processor Fees: Payment processors may charge their own fees for processing refunds. These fees can vary widely depending on the processor and the merchant's agreement.
Chargeback Fees: If a customer initiates a chargeback (a dispute with their credit card company), the merchant may be subject to chargeback fees. These fees can include a processing fee as well as the amount of the disputed transaction. However, if the merchant issues a refund before a chargeback is initiated, they can often avoid these fees.
Refund Fees: Some processors or merchant agreements may impose a flat fee or a percentage-based fee for processing refunds. This fee typically covers the administrative costs of processing the refund.
The average chargeback rate alone across all industries is 0.60%. The travel industry, including airlines, hotels, and travel agencies, reportedly experiences higher chargeback rates of 0.89%.
Source: https://www.clearlypayments.com/blog/chargeback-rate-by-industry-and-business-type/
This means that airlines are already dealing with a higher risk of chargebacks compared to other sectors, and that doesn’t take into account the other types of fees. With the new refund rules in place, the number of fees could surge, further burdening airlines' financial health.
Optimize Refund Fees
It is more important than ever to optimize payment refund operations. Optimizing payment refund operations is crucial for several reasons:
Customer satisfaction: Quick and hassle-free refunds enhance the customer experience. Customers appreciate when they get their money back promptly, which can lead to positive reviews, customer loyalty, and repeat business.
Reducing churn: A smooth refund process can prevent customers from churning. If they encounter difficulties or delays in receiving refunds, they may lose trust in the business and take their business elsewhere.
Operational efficiency: Streamlining refund operations can save customers and the company time and resources. Automated or efficient manual processes can reduce the workload on support teams and minimize errors.
Cost savings: Inefficient refund processes can be costly. Manual processing, errors, and delays can increase labor costs, tie up resources, and even lead to chargeback fees or penalties from payment processors.
Compliance and reputation: Meeting legal requirements and industry refund standards is essential. Failure to comply with regulations can result in fines or damage to the company's reputation. Optimized processes ensure compliance and protect the brand image.
Data insights: Analyzing refund data can provide valuable insights into customer behavior, product performance, and areas for improvement. By optimizing refund operations, businesses can better understand their customers' needs and preferences.
Optimizing payment refund operations is about efficiently issuing refunds; it's about ensuring customer satisfaction, reducing costs, maintaining compliance, and leveraging data to improve overall business operations.
Next Steps
Credit card refund fees can eat into company profits if not carefully considered. Here are some strategies to optimize credit card refund fees:
Minimize Refunds: The best way to optimize refund fees is to minimize the number of refunds you issue. Make sure your products or services meet customer expectations, provide accurate descriptions, and offer excellent customer service to reduce the need for refunds.
Clear Refund Policy: Have a clear and transparent refund policy that is easily accessible to customers. This helps manage expectations and may reduce refund requests.
Partial Refunds: Instead of issuing full refunds, consider offering partial refunds or store credits whenever possible. This way, you retain some revenue and avoid paying the full refund fee.
Timely Processing: Process refunds promptly to avoid additional fees. Delayed refunds can lead to chargebacks or higher processing fees.
Negotiate with Payment Processor: Some payment processors may offer reduced fees for refunds, especially if you have a high volume of transactions. Negotiate with your payment processor to see if you can get better rates.
Choose the Right Payment Processor: Compare different payment processors and choose the one with the most favorable refund fee structure for your business.
Monitor Chargebacks: High chargeback rates can lead to additional fees and penalties. Monitor chargebacks closely and take proactive steps to prevent them.
Use Prepaid Cards: Consider using prepaid cards for refunds instead of credit cards. Prepaid cards often have lower fees for transactions and can help you save on refund costs.
Educate Customers: Educate your customers about your products or services to reduce the likelihood of refunds due to misunderstandings or misaligned expectations.
Optimize Customer Service: Invest in excellent customer service to address any issues or concerns promptly. Resolving customer issues quickly can prevent refund requests and potential chargebacks.
By implementing these strategies, businesses can optimize credit card refund fees and reduce their impact on the bottom line.
