How the travel crisis has fostered payment orchestration solutions
In 2020, the COVID-19 pandemic propelled 43 commercial airlines to file for bankruptcy – exacerbating the often fractious relationship between an airline and its acquirers.
From an acquiring perspective, travel is an inherently risky business. According to Bloomberg, if the airline is bankrupted – which remains a threat in 2022 as travel is slowly growing back to pre-covid volumes, it is the bank that must refund the chargebacks for unfulfilled tickets.
The larger the airline, the greater the risk. History has seen airlines filing for bankruptcy and blaming the acquiring partner for being the root cause of that failure (Frontier & First Data – 2008).
In 2021, Edgar Dunn & Company (EDC) witnessed an upheaval in the travel payment ecosystem. Airline acquirers’ risk appetite in the travel sector was significantly altered, and merchants in the industry saw their acquiring contracts updated with much more constrained commercial terms – most of the time, in a take it or leave it manner. The hot topics discussed were exclusivity, risk clauses, contract duration, termination, pricing, amended Service Level Agreements, reporting, and chargebacks. Airlines cannot simply change acquirers overnight, such implementation for a flag carrier may take as much as 6 to 12 months.
To recapture bargaining power when negotiating acquiring services with financial institutions, airlines understood how crucial it became for them to dilute volumes to a set of different acquirers. Finding a solution that would allow airlines to regain agility and provide the ability to switch volumes rapidly became an exciting perspective for the industry. Payment Orchestration Platforms (POPs) became a subject of interest. Yet, POP solutions have a history in the market and have helped a few airlines to diversify their payment-related policies and gain complete control of their payment strategies.
Turning challenges into opportunities
An airline business model is unique. Air carriers accept high volumes of low-value transactions with a high percentage of changes (such as changes in travel date or purchase of upgrades), refunds (for example, a cancellation of a business class ticket) and exceptions (such as group travel, bookings requiring payments among travel agents). They run multiple direct sale channels (e.g., web, call centres, counters, mobile, social media etc.) in different geographies and support high volumes of cross-border payments. To make it more complex, airlines operate on very thin margins and depend on a plethora of different suppliers across the value chain, including Global Distribution Systems (GDS), gateways, Payment Service Providers (PSPs), technology vendors, acquirers, etc.
In 2019, IATA and EDC conservatively estimated annual payment costs to have reached $10.2 Billion for airlines. Acceptance fees, fraud-and-risk related costs, costs of cash flow and costs of payment processing were the main identified drivers.
Airlines’ payment system configurations would typically have multiple connectors between the different selling platforms and 3rd party gateway(s) as the below chart illustrates:
A configuration of multiple connections can help airlines increase acceptance rates, support expansion into new markets and allow for load balancing and technology system risk mitigation. This configuration has often been built over the years, if not decades, and is rarely optimal. It exacerbates potential technical complexity, increases time to market, does not optimise processing payment costs and does not harmonise PCI data with a ‘universal token’ strategy.
Payment Orchestration Platforms can alleviate many of the above pain points and allow airlines to centralize their payment partners and multiple payment capabilities into one platform and potentially across all their channels.
Integrating with a POP to simplify the management of payments by having a unique payment vendor between the Passenger Service System (PSS) and payment providers allows airlines to connect existing systems with different payment gateways, acquirers, and payment method providers through a single Application Program Interface (API). This configuration aims to maximise conversion rates, minimise payment costs, and ensure a global payment and reporting experience. Accelya, Cell Point Digital, Spreedly and Adyen are among the POP candidates that may help airlines deploy such solutions.
Alternatively, an airline could look for a POP that is already integrated within its PSS system. Amadeus offers its Amadeus Payment Platform (APP), which may fulfil that role if the airline uses Amadeus as its PSS provider. As with any other POPs, a PSS integrated payment solution gives airlines the agility to partner and integrate with any providers connected to the orchestration layer.
In both scenarios, the airline has the possibility to plug and unplug gateways and acquirers more swiftly, reducing the implementation timeframe from 6 to 12 months to 6 to 12 weeks.
Now, returning to the ongoing discussions between airlines and acquirers, PSS integrated orchestration solutions and POPs are far-reaching companions for airlines. Airlines that have the modernised ability to swiftly and seamlessly incorporate new acquirers in a concise period of time will find themselves in the driving seat when negotiating with acquirers.
EDC has seen implementation costs varying between $200,000 –$400,000 from different payment orchestration providers. Yet, some POPs claim to offer a payback period of 6 months thanks to the optimization of false positives and payment processing costs.
A typical POP can route payments to the optimal acquirer for each location of the point of sale where a payment has been completed so that transaction processing costs are minimized. A POP also optimises sales conversion rates as it accepts a wider range of currencies and Alternative Payment Methods (APMs) than a traditional gateway would do. In the event of a transaction failure, POPs will automatically retry with the second-best acquirer to capture acceptance, and so on.
POPs allow airlines to select new global or local payment methods rapidly, whether international or domestic, card-based payment methods or Alternative Payment Methods (APMs). Leading POPs available in the airline industry claim to connect airlines to +400 acquiring banks, +300 APMs and +20 payment service providers in multiple markets across the globe.
Orchestration versus the traditional Gateway configuration
An airline has multiple ways to switch from a gateway model to an orchestration model. In the above chart, option A of the orchestration model describes how a PSS integrated POP can be operated exclusively or embedded in another POP. Option B describes how an airline may decide to use a POP not already integrated into the PSS environment of the airline. The more layers, the riskier it becomes for the airline from a technical standpoint.
Selecting a PSS integrated POP provider can reduce the costs, the time, and the resources to deploy the solution compared to an external POP player. Airlines could also benefit from lower complexity to consolidate booking and payment information as the same application manages both services. Yet, putting all your eggs in one basket may not be advised in certain circumstances, and an airline choosing that path may increase its dependency on its PSS provider.
Alternatively, going for an external POP solution commits to a heavy implementation phase and implies having the POP connected separately to all the sales channels. This may become a hurdle for agility and time to market perspectives if the airline expands into new markets. However, this solution may allow the airline to pick only the payment orchestration solution for only one of its sales channels – making it an ‘a la carte’ solution and potentially a cheaper alternative than if it had selected a PSS integrated POP solution.
The COVID-19 pandemic has reshaped the travel sector, and airlines are seeking to optimise their payment infrastructures and costs. EDC supports airlines in redesigning their existing payment configuration, identifying priority payment opportunities, and selecting the right partners to initiate strategic changes. Considering the existing setup, the relationships with the airline’s payment partners (acquirers, payment gateways, etc.) and the PSS environment are variables that our experienced travel payment consultants can anticipate when conducting EDC’s proprietary 360° Payment Diagnosis.
EDC has a deep understanding of the benefits payment orchestration platforms can deliver to the airline industry. For more information, you may contact our travel practice team at www.edgardunn.com.
The content of this article does not reflect the official opinion of Edgar, Dunn & Company. The information and views expressed in this publication belong solely to the author(s).