Airlines: The Real Cost of Banking & Payments Has Doubled Since 2019

So, What’s the Problem?

Legacy arrangements and systems have helped the banking and payments industry generate billions in extra profit from the Airline industry. Higher interest rates and increased card payments complexity is costing the Airline industry billions in lost profits.

This challenge can be addressed by Finance teams deploying industry experts to help re-optimize banking and payments post-pandemic without making major changes.

Some Background

The impact of Covid-19 on the airline industry was unprecedented. There was a drastic decline in demand which placed an enormous financial strain on such a capital intensive industry. Airlines also had to act fast to allay safety concerns, manage uncertain regulatory environments around the world and refund processes had to be overhauled.

More recently, growing interest rates are placing a heavy toll on cash flow costs coupled with geopolitical turmoil, which has increased inflationary pressures on major costs like wages and fuel.

However, coming into 2024, there are reasons to be optimistic, and some airlines are responding to the chaos by finding innovative ways to evolve.

IATA expects 4.7bn people to travel by plane in 2024, which exceeds even pre-pandemic volumes. Top performing airlines are beginning to realise the value of a good payments strategy but most still lag behind those in other sectors such as retail and general ecommerce which have come to view payments as an enabler rather than simply a cost to be minimised.

According to a study by Edgar Dunn & Company, commissioned by IATA, airline revenue in 2019, the last “normal” year, was $977bn with payment costs of $20.3bn. 82% of these dollars were spent on merchant fees for cards and other forms of payment like digital wallets.

To make matters worse, approval rates for airlines are lower than other sectors at only 85%. Very few airlines have practices in place to monitor this figure on an ongoing basis and develop tools to incrementally improve on it. This means airlines are losing tens of billions in sales each year.

Part of the reason is the complexity of the airline business model; part of it is the legacy systems in place. However, a major reason is also a lack of resources and focus.

Six Strategies on the Flight Path to Best Practice

So what can airlines learn from other sectors to help tackle high payment costs and low conversion, as well as enable them to unlock more value from customers?

Look beyond Card Payments

From BNPL to bank transfers to digital wallets, customers are increasingly put off if their preferred payment method is not available. This doesn’t have to mean offering all things to all people. A localized approach is paramount. Even in Europe, different countries have very different preferences, and aside from increasing conversion, some are much cheaper than cards and have lower fraud/chargeback risk. It can be a win-win for everyone.

For U.S. carriers, offering PIN debit and having a proper routing strategy can save 20-30% in interchange costs vs major card schemes. However, this is no small feat without dedicated expertise. Card schemes, banks, and some acquirers make it difficult to do this effectively, but the rewards can be huge. Debit networks (like Star, Pulse, NYCE, etc.) are hungry for volume and will incentivize volume by offering fee discounts, which can reduce costs even further.

Leverage Insights from Payments & Checkout Data

Develop ways to measure key metrics such as average ticket, transaction costs, fraud rate, false fraud positives, fraud decline rate, bank decline rate, ancillary income, 3DS outcomes. Measure these not just globally but cut the data 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 this brings. This will equip you with what you need to make small changes which can add up to a big impact. Aim to keep improving as things change and challenge the banks on their performance, too

Test, Test, Test

Develop the ability to A/B test different scenarios quickly and respond to what they tell you. Perhaps one gateway has a better approval rate for some transactions but not others… give them more of that traffic. Perhaps 3DS drop-off outweighs the increase in chargebacks in one country but not others. Perhaps some banks are declining transactions due to invalid CVV… try dropping this field for those banks. There is an endless list of possibilities, but opportunities are everywhere if you’re asking the right questions about your data.

Scrutinize Cost Data

Most of the fees are passed through and are 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 forensically analyze interchange data, there are companies out there that can (like Bankhawk).

 Adopt Flexible Fraud Prevention Measures

Too many merchants apply too broad a brush in the fight against fraud. If you’re fraud % is below a certain level, you’re probably also blocking a lot of good customers. Those customers will 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 being able to make improvements in the above areas. Consumer preferences, local regulations, technology protocols and fraud threats are constantly changing. Those that have 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.