Overcoming the challenge of the increasing complexity of airline payments

If the old formula of ‘cash is king’ always remains true, even more so in lean times, then ‘card is queen’ is definitively what comes to mind when taking a look at payments in the travel vertical, and especially at airlines. When combining direct sales and sales conducted through Travel Agents, airlines collect more than half of their passenger revenues by card, and this does not factor in all instances where the client will pay by card the Travel Agent, who then remits to the airline.

Airlines represent one of the few retail sectors with a true global model, where the same entity does sell in most if not all countries around the world. Driven by the need to manage card acceptance globally, the airlines drove their acquirers to build with Mastercard Worldwide and Visa International the concept of ‘central acquiring’, the embodiment of a unified and global approach to card payment remittance and collection.

However, we have been witnessing the emergence of strong national card payment schemes such as RuPay in India or MIR in Russia, which are reducing the scope of global acquiring as defined by Mastercard and Visa, and are bringing back fragmentation in card payment. Moreover, let us not forget UnionPay, which is now vying for an international acceptance at par with all other card schemes. Where previously there were a handful of large international card brands, it seems today that there is a plethora of brands, each with their own transaction format requirements, business rules, and economics.

But payment complexity is also coming from the client’s demand: IATAs Global Passenger Survey 2018 shows that the proportion of clients preferring to pay by card decreases steadily by age group (53% in the age group 55+ versus 31% for 24 year-olds and younger). At the same time, online wallets are quite popular among millennials (19% in age group 18-24) versus older generations (2% in age group 55+). And the formidable success story of the likes of AliPay and WeChatPay has further fragmented the global payment environment. Hence, airlines are reaching out for the delicate balance between meeting customer’s expectation that his/her preferred payment instrument is accepted and avoiding run away acceptance costs that destroy sales profitability, a basic merchant concern that not all promoters of new payment instruments always have in mind.

Airlines adapt by partnering with payment providers such as the IATA Financial gateway who ‘paper over’ that complexity by providing an integration layer or go as far as ‘collecting on behalf’, where the provider steps into the actual collection of the financial settlement, before remitting the funds to its client. This concept is not new to IATA, which has been operating for years ‘on behalf’ of card payment collection services in order to help Travel Agents collect their customer service fees. IATA is now looking at a similar approach to facilitate acceptance by airlines of instant (or near real time) bank transfers for direct sales. Instant Bank Transfer is the new comer in card payments for global and cross-border sales, with its ability to notify the merchant at time of transaction that the payment transaction is successful.

The increasing demand for higher security is another factor leading towards fragmentation and complexity. While all retailers embrace the need for safe and secure payments, IATAs Global Passenger Survey 2018 shows that an astounding 16% of airline clients report not being able to finalise their sales because of last minute payment issues. This is why airlines that successfully implemented 3D Secure 1.0 to protect their on-line sales all reported doing so in a dynamic fashion, as recommended by the card schemes then, by authenticating only the transactions at the greatest risk of fraud. There is a natural concern in the industry today about what will be the impact of Strong Customer Authentication mandated in Europe. And not only because the entry in force is a Friday 13th (of September). Alleviating those concerns, a lot of expectations ride on EMV 3D Secure, or 3D Secure 2.0, for a reduced need to ‘step up and challenge the cardholder (the part of the payment transaction most at risk of technical failure or abandon) in favour of a more focused transaction risk analysis that will decide to leave unchallenged the transactions less at risk of being fraudulent.

However, the complexity of the payment landscape does not stop for airlines at collecting from their customers. In half of the sales made by Travel Agents on behalf of airlines, the agent collects from the client, and then reports the sale and remits at a later time to the airlines, through the IATA BSP, or ARC in the US. IATA has introduced new options for agents to remit those ‘airline monies held in trust’, in order to introduce more flexibility in the management of their related financial guarantees. This was done with IATA EasyPay, for example, modelled after the pre-funded walled concept, for example, and with the Transparency in Payment Project through which agents can use their own payment card as a remittance vehicle, subject to the airline’s prior consent.

Airlines see their worldwide card payments moving towards more fragmentation, while at the same time the customers appetite for new payment instruments demands the management of an ever-increasing complexity. The challenge for the airline community is to identify early on which payment innovations will take root, and to build the related customer payment experience, guaranteeing that their clients successfully complete their purchase transaction, promptly and hassle-free.

This editorial was first published in our Payments and Commerce Market Guide 2018-2019. The Guide presents the key trends and developments in global and regional payment methods by highlighting the innovation, challenges, and developments in the use of the most important payment methods across geographies and verticals.

About Christophe Kato

As Head, Payment Services at IATA, Christophe represents the interests of the airline industry with all major international card schemes while supporting numerous industry card projects such as Transparency in Payment (TIP) and New Distribution Capability (NDC).

About International Air Transport Association (IATA)

The International Air Transport Association (IATA) is the trade association for the world’s airlines, representing some 290 airlines or 82% of total air traffic. IATA supports many areas of aviation activity and helps formulate industry policy on critical aviation issues.
www.iata.org