Airlines Say They’re Taking Back Control Over Payments, But Do They Know How?

Author: Brian Weakliam, Founder & CEO

Some consider the International Air Transport Association (IATA) Financial Settlement Systems (IFSS) to be the backbone of the global air transport industry, facilitating the movement of funds across the travel value chain. In a blog post earlier this month, the IATA contends, “Airlines to take back control of payment,” which begs the question, do they know how? 

The High Cost of Doing Business

Nilson Report notes that the IATA processed $480 billion in payments last year through the IATA Financial Settlement System on behalf of 290 airlines in 120 countries. And while all industries face increasing payment fees, the airline industry’s fees are estimated to be as high as 78% of its net profits.

According to the Airline Reporting Corporation (ARC), more than 90% of all flight tickets bought in the U.S. from January to November 2023 were paid with a credit or debit card. This is expected, given that this industry was one of the first to adopt card payments. Universal Air Travel Plan (UATP) the airlines' own credit card system, started in 1936 and is still in use today.

Figure 1: The last three months of transactions settled by ARC for all U.S.-based travel agencies, including online travel agencies. Source: ARC

Around 70% of the retail transactions in the airline industry are done with credit cards, which is a high percentage. The airline industry also receives revenue from other parts of the value chain, such as tax authorities and airports.

Figure 2: Values shown are as of the selected calendar month, and YTD values for the year through the end of the calendar month selected. Source: ARC

According to McKinsey, airlines could generate an additional $14 billion in value by 2030 if they make strategic changes. With critical changes in approach, McKinsey predicts $2 billion could be saved by reducing payment costs, particularly for B2B or corporate sales. Additionally, $4 billion could be generated by implementing payment enablers to increase direct channel usage and improve payment conversion.

We couldn’t agree more.

Our Two Cents on How It’s Done

Several studies, including the Amadeus Travel Fintech Investment Trends report, indicate that the aviation industry is slowly adopting a more innovative approach to payment optimization.

Figure 3: Share of travel companies in 2022 and their spending plans to travel to invest in Fintech and payment going forward

While this is a step in the right direction, actionable steps need to be taken now to ensure their future success.

Consider New Payment Options

By offering multiple payment options, businesses can cater to a wider range of customer preferences, increasing the likelihood of completed purchases. This flexibility enhances customer satisfaction and reduces the risk of losing potential sales due to limited payment options. Moreover, it demonstrates a customer-centric approach, fostering trust and loyalty in the brand. Popular alternatives include digital wallets, such as PayPal, Apple Pay, Google Pay, and Samsung Pay AliPay, bank transfers, direct debits, popular in many countries, and buy-now-pay-later products. These options give customers a more convenient and preferred way to make payments, increasing their overall satisfaction and reducing the risk of losing interest.

In 2023, digital wallets will account for 50% of global e-commerce spending (+ $3.1 trillion) and 30% of global POS spending (+$10.8 trillion). Worldpay predicts that by 2027, digital wallets will account for more than $25 trillion in global transaction value (49%) across e-commerce and POS.

Garner Payments & Checkout Data Insights

Identify key metrics such as average tickets, transaction costs, fraud rate, false fraud positives, fraud decline rate, bank decline rate, ancillary income, and 3DS outcomes. Don't just measure these globally, but break them down by region, country, card type, issuing bank, acquiring bank (if you have more than one), etc. You'll be surprised by the differences you see and the insights you gain. This will equip you with the information you need to make small changes that can add up to a big impact. Aim to keep improving as things change and challenge the banks in terms of their performance, too.

Keep on Testing

Learn how to A/B test different situations fast and act on the results. Maybe one gateway approves some transactions more than others… send them more of that traffic. Maybe reducing 3DS presentment is worse than the rise in chargebacks in one country but not others. Maybe some banks are rejecting transactions because of the wrong CVV… try removing this field for those banks. There are countless possibilities, but you can find opportunities everywhere if you look at your data with the right questions.

Take a Closer Look at Cost Data

Most fees are passed through and set by Visa and Mastercard. You can’t do anything about it, and the acquirer makes a tiny fee on top, right? Well, kind of. Acquirers don’t always apply the right pass-through fees. You may also be suffering from downgrades, which carry higher interchange fees, or maybe there are errors in your pricing. When you’re paying millions in fees, it’s difficult to spot the anomalies, but they can be significant. If you don’t have the expertise to analyze interchange data forensically, there are companies out there that can (like Bankhawk).

Embrace Flexible Fraud Prevention Measures

Too many merchants apply too broad a brush in the fight against fraud. If your fraud % is below a certain level, you’re probably also blocking many good customers. Those customers often go elsewhere, so finding the right balance is key. Selectively use 3DS where possible, even in Europe, where there are exemptions to SCA regulations. Generate opportunities to have customers store credentials on file and use network tokens to increase trust with issuing banks. More than anything, don’t assume that an approach that works in one country or region will work in another. Test and iterate. There are also some third-party fraud companies with good coverage in this industry that screen in real-time and will guarantee approval levels.

Foster Organizational Agility

This one is obviously easier said than done, but it’s critical to improving in the above areas. Consumer preferences, local regulations, technology protocols, and fraud threats are constantly changing. Those with the technical and cultural capabilities to keep up with and respond to such rapid change will win the battle to grow profitability in the years to come.

These measures reduce operational costs and contribute to a more robust and resilient financial structure within the industry.

Honing your payments strategy and executing that strategy is an incredibly daunting undertaking. It’s going to take time, and it will look very different for every business. One thing is for sure, though: if you get it right, it can mean adding millions to your top and bottom lines. Bankhawk helps to remove the guesswork and accelerate your journey toward payments optimization.