Why Ryanair charges you a fee for paying by credit card

I've already stated my love for European low-cost airline Ryanair. It's also a business model I closely watch to see what's looming ahead for the US airlines.

As the US airlines layer in fees, they are slowly evolving towards the Ryanair model - however, with one KEY difference. That difference being that Ryanair layers fees on top of super cheap base fares - fares as low as 1 Euro (That's about $1.60). US airlines like US Airways (who, yes, remains dead to me) tries to layer fees on top of $400 airfares.

$400 and I still have to pay $2 for a coke? Read my lips: It just doesn't work and only pisses off your angry customers further.

Anyway, I digress. Back to Ryanair - they've increased a somewhat unique fee and you can bet your bottom dollar the US airlines are paying attention. This fee is based on how you pay for your airline ticket:

The airline (now) imposes a fee of £4 per flight, per person, for payments by credit or debit card. Ryanair claims the punitive charge is "to defray the substantial administration costs we incur when processing credit and debit cards". The only way to dodge the fee is to pay with a Visa Electron card. Ryanair stresses this is a "special offer" that applies "for a limited period only".

Yeah, Delta Air Lines also used that "limited period" malarkey as they announced a fees for booking a mileage/free ticket...

So this means that Ryanair charges you a fee just to pay for the ticket you are trying to buy on Ryanair. Seems counterintuitive, doesn't it? The only way you can avoid this surcharge is by paying with the Visa Electron card (and further note, that's the Electron card and not any Visa cards). For potential customers in the USA, Canada and Australia, who can't get an Electron card you pay the fee absolutely.

The deal is this. Ryanair pays a lower interchange or merchant fee for payments made via Visa Electron vs. other forms of payment (and it's also possible Ryanair has a side deal that makes these rates even more favorable). Interchange fees are a cost hidden to most consumers and run from about 1% to 3% of sales. This can really add up when you're a business that does tens and even hundreds of millions transactions per year. I suspect - and just suspecting here - that Ryanair is trying to put the squeeze on the other payment providers to bring their fees down. That is what is meant by the "limited period" crap. But, in the end if Ryanair is getting compensated by you - the consumer - for the difference in interchange fees amongst forms of payment then they really don't care, do they? You want to pay with an expensive form of payment? You pay the additional cost. In fact, if you want to pay with AMEX card you can't book Ryanair at all.

While the interchange rate is debated to be excessive, it does cover necessary costs - most notably fraud protection. This is why you've seen more retailers - especially internet retailers - ask for that little 3 or 4 digit code. That's one way to help reduce fraud. But these fees are excessive and if you look at the P&L of any credit card company (mostly Ps not Ls), you'll see what I mean. It's big business.

So, will this one catch on stateside? It's possible over time but probably unlikely today. Based on a landmark legal case between discount retailer Wal-Mart and the credit card cartel, retailers are now able to individually negotiate these interchange fees. I expect those in the travel biz are doing just that.

Other retailers, like H&M have also stopped accepting expensive AMEX. I don't know of any US airline that has done that, but I could be ill informed. As American Express is the card of choice for the majority of high-yielding business travelers - and - is the home of several airline-branded credit cards (like Delta), the most expensive form of payment kinda has the industry by the you-know-what. Ryanair doesn't care about catering to business travelers, they take the approach that business travelers should cater to them (for the rock-bottom fares and reliable service). It's still a bit different in our neck of the woods.

But if any airline is crazy enough to throw out a surcharge for booking via credit card, it's probably those nuts at US Airways...also, I'll put an outside chance on Northwest Airlines as their head of distribution has openly complained about credit card costs for some time.

If anyone listens my advice (and, seriously, why should you?), any airline choosing to go down this route should consider offering credits for certain payment methods vs. others. As they bear the full interchange rate expense today, it'd be nice to see Airline X offer me a discount for using PayPal or a debit card. Just sayin' - and I know it's not that easy as I'm dead certain each form of payment has "most favored nation" clauses and/or provisions for non-discrimination.

Which means, like I said, the credit card cartel has the airlines by the you-know-what.

On a closing note, it is going to be quite interesting to watch Ryanair over the next 6 months as starting January 1 they need to communicate "true cost" to the customer in their adverts - and that's obviously more than the 1 Euro base fare.

But I'll write more on that topic later...

Something to declare: Ryanair fees [Independent]
Visa Electron [Wikipedia]
Ryanair [Official Site]