The payments industry is experiencing major structural changes that create new opportunities for various stakeholders in the value chain, especially in the airline industry.
Drivers of change for payments include:
- changes in customer expectations such as the ability to split a payment between a credit card and frequent flyer miles;
- digital innovation such as in-app payments: for instance, EasyJet enables one-touch in-app payment via Apple Pay since 2016;
- new entrants such as Alipay: for instance, UATP enabled Delta to accept Alipay since 2015;
- an evolving regulatory environment such as (a) Payment Services Directive 2 (PSD2) in Europe and (b) changes in IATA Resolutions worldwide, and this article will focus on these regulatory changes.
Objectives of EU Regulations: innovation and security
1. PSD2 (EU Directive) and “Open Banking”
In simple terms, the PSD2 requires banks to open up their payments’ infrastructure and customer data to third parties (subject to customers’ prior consent). The aim of “Open Banking” is to enable a financial institution to allow access to customer data/accounts to “new” third-party providers known as Payment Initiation Service Providers (PISPs) and Account Information Service Providers (AISPs).
A customer could give their consent to a trusted PISP (such as their primary bank, if they use multiple banks, or another type of aggregator) that would initiate a bank transfer on their behalf to pay an airline. Thus, Open Banking might enable new use cases that could be of interest to airlines.
2. PSD2 and the SCA (Strong Customer Authentication)
From September 2019, all remote electronic payments by card or credit transfer (with some exceptions, e.g. for low-value transactions) in the EU will require SCA. SCA entails the existence of at least two out of three authentication factors:
- what the payer knows (e.g. password);
- what the payer has (e.g. smartphone);
- what the payer is (e.g. fingerprint).
A lack of clarity is making balancing security and the customer experience difficult for airlines. For instance, it still unclear whether/ which commercial card transactions (e.g. when a corporate customer uses a lodged account or a virtual card) are exempted from SCA. Some airlines still remember what happened when 3D secure was first introduced: they are concerned about the past experience of e-merchants losing up to 40% of their sales right after the introduction of 3D secure 1.0. In any case, airlines need to understand potential exemptions and any required changes in payment processes.
3. PSD2 and Surcharging
Since January 2018, the EU has prohibited merchants from surcharging debit and credit consumer cards issued in the EU and subject to the Interchange Fee Regulation (IFR). This ban is most definitely forcing airlines to rethink their payment acceptance strategy, for instance by accepting alternative payment methods or by only surcharging commercial cards.
IATA: changes in Resolutions and a new standard
IATA is an association that brings together 290 airlines and whose mission is to “represent, lead, and serve the airline industry”.
1. Transparency in Payment (TIP)
One of IATA’s recent initiatives is “Transparency in Payment” (TIP). TIP went live in 2018 in Norway, Finland, and Sweden. TIP focuses on providing airlines with increased transparency and control when travel agents remit funds to airlines. Moreover, it will allow travel agencies to use alternative transfer methods (such as virtual cards issued in the name of agents) with the airlines’ consent. Each airline will therefore need to define its TIP-related acceptance policy.
2. New Distribution Capability (NDC)
The first official release of the NDC standard was in September 2015. The objective is to improve the communication between airlines and travel agents to enhance customer experiences by offering richer and personalised offers (e.g. meals based on the travellers’ choice).
In 2018, more than 100 players in the industry value chain have adopted the standard: airlines (e.g. Air France, Lufthansa), aggregators (e.g. Skyscanner), IT providers (e.g. Amadeus), travel agents (e.g. Ctrip).
NDC standards will ultimately enable airlines to meet their payments-related objectives (e.g. better control over fraud) and to have a more flexibility in terms of payment methods that can be accepted via travel agents (e.g. enabling alternative forms of payment via travel agents when the airline is the merchant of record).
Need for airlines to pro-actively manage “payments”
Recent studies show that optimising conversion is a key goal for large merchants like airlines. To improve conversion, it is key for an airline to understand the type of regulatory changes discussed in this article and their impact.
In order to understand regulatory changes and their impact, and to pro-actively manage the “payments” function, some airlines have put in place a payments strategy team, set up internal payment governance processes, or allocated dedicated internal IT resources to optimise payments. For instance, at Southwest Airlines, a multi-team payment strategy committee oversees the strategic direction of payments and it consists of representatives from marketing, finance, and IT. As another example, a large European airline has a dedicated internal IT team of 15-20 resources focused on payments.
In conclusion, EU’s payments reform agenda as well as IATA’s initiatives play a key role in changing and “opening up” the payments market in the airline industry. It is key for all stakeholders to identify, evaluate, and address payments opportunities and threats, such as regulatory changes, that might impact their business so that they can “play better than anyone else”.
This article was initially published by The Paypers on page 60 of its 'Payments and Commerce Market Guide 2018-2019', which can be downloaded by clicking here.
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).