Airlines to launch payments system to rival credit card groups
Industry strikes alliance with Deutsche to cut billions of euros in transaction costs
A frontal assault on credit card companies is being launched by the global airline industry and Deutsche Bank with a new electronic real-time payment system for plane tickets that seeks to save carriers billions of euros in transaction fees.
The new system for web-based ticket sales to individual passengers, which does not have a brand name yet, is scheduled to be rolled out across Europe from the end of 2018, with Germany as the first market.
“We are developing an industry-wide payment solution that is an alternative to credit cards,” said Javier Orejas of the International Air Transport Association.
Iata estimates that the global airline industry’s payment processing costs add up to $8bn a year, with credit card companies such as Visa and Mastercard usually charging between 1 and 3 per cent in fees.
In contrast, the system developed by Iata and Deutsche Bank will charge a fixed fee which will be “a matter of cents”, said Mr Orejas.
The project is made possible by a new EU’s payments regulation that is forcing banks to give third parties access to customer data and initiate payments.
Combined with a looming pan-European scheme for instant electronic payments this year, the second payment services directive (PSD2) will make possible electronic money transfers between bank accounts in a matter of seconds.
The rationale behind this so-called “open banking” idea, which is at the core of PSD2, is to promote competition within the financial industry and encourage innovation from tech companies and other non-bank rivals.
Customers using the new payments scheme would enter their bank account data and Deutsche would then check in real time if the passenger has sufficient funds, collect the fares and transfer the money to the airline.
“Most banks view this in a defensive manner and only reluctantly open their data,” said Shahrokh Moinian, global head of cash products at Deutsche, adding that Germany’s largest lender takes a different view. “For us, it’s an opportunity for change. We have asked ourselves: Why can’t we behave like a tech company?”
Payment solutions — long seen as dull and unappealing compared with more sparkling investment banking activities — have become one of the most attractive areas in banking, because margins are high and revenues stable.
“Over the last decade, payment system providers were the best-performing segment of within financial sector,” said Reinhard Höll, associate partner at McKinsey.
Deutsche’s new chief executive Christian Sewing wants to strengthen the lender’s global transaction bank, the largest clearer of euro-denominated transaction. The unit generates a quarter of Deutsche’s overall corporate and investment banking revenue.
Yet establishing new payment solutions is anything but easy. “We have seen plenty of well-functioning alternative payment systems which did not manage to achieve a breakthrough,” said Christian Meiske, manager strategy and organisation at ZEB, the German financial services consultancy.
Any new solution has to overcome a chicken-and-egg problem, because the acceptance of merchants depends on their customers’ willingness to use it and vice versa.
Iata and Deutsche say they can overcome this hurdle by convincing Europe’s large airlines to adopt the scheme.
“We are currently in talks with large carriers,” Mr Orejas told the Financial Times, adding that there was “a lot of appetite among airlines”.
Passengers can be wooed into using the new payments system by sharing some of the cost benefits with the consumer, for instance by offering additional loyalty miles or a discount in price.
Germany’s flagship carrier Lufthansa said it was supporting all initiatives in the payment sector that drive competition and modernise its function. “We believe that competition in payment and distribution systems is a basic factor for decreasing cost while improving customer experience,” Lufthansa said.