What's In Your Wallet?

The Future Of Alternative Forms of Payment In Travel

Many businesses, including some airlines and other travel-related companies, are introducing new forms of payment to make customer purchases easier and more secure than the current use of credit cards. These new methods may lower distribution costs while supporting airlines’ e-commerce strategies.

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There has been a dramatic evolution in the way customers purchase airline tickets. No longer is it necessary to call a reservations center or visit a ticket office to purchase a ticket. Savvy, on-the-go customers are demanding new ways to interact with airlines that are faster and more convenient. At the same time, airlines are constantly looking for ways to attract new customers and capture additional passengers in today’s increasingly competitive sales environment.

Worldwide, online sales constitute roughly a third of travel bookings, and this figure is only expected to increase during the next several years. Perhaps even more interesting is the growing mobile sales market within the online channel. Travelers are, by definition, global and mobile. Driven by continued developments in smartphone technology and improved cellular data speeds, more and more travelers are booking flights and hotels from a smartphone or tablet.

Recent data from travel industry research authority PhoCusWright indicates that mobile penetration of online bookings will increase across all regions of the world.

For example, in the United States, mobile bookings comprised an estimated 10 percent of the online travel market in 2013, but projections show that number soaring to 27 percent this year.

Global Online And Total Travel Market
(US$ Billions) By Region
Online Booking Growth

According to research from PhoCusWright, roughly one-third of worldwide travel is booked online. This is expected to grow to 37 percent this year. Furthermore, the United States and Europe account for more than two-thirds of the world’s online travel volume, even though they represent just over half of total travel sales.

Easy-to-navigate mobile websites and cutting-edge smartphone apps are a crucial piece in targeting this emerging segment. However, they are not the only piece. An airline’s payment strategy can actually determine whether a passenger merely searches for flight times and prices or actually purchases a ticket. In an ever-changing technology environment, many airlines still view a payment strategy as simply a means to get paid. Frequently, a true payment strategy does not exist.

However, payment processing is no longer just another step in the booking path. A proper payment strategy can strategically attract new customers and enhance the customer experience, while driving incremental revenue and cutting costs.

Yet, a payment strategy presents many challenges an airline must address: dealing with dozens of currencies, appealing to both a global market and local payment preferences, combatting fraud, controlling costs and managing technology requirements, to name a few. WorldPay, a payment processing company, conducted a survey and found that 83 percent of airlines believe that payment technology should be a major business priority, with 71 percent of carriers responding that the future of airline payments lies in mobile, including downloadable apps and mobile browsers.

While credit cards clearly remain the dominant method of payment for airline ticket purchases, there are some drawbacks for both the airline and the customer. In 2012, credit-card processing cost airlines nearly US$6.2 billion globally, according to PhoCusWright, making it the highest cost per transaction of all payment methods.

Costs aside, credit-card fraud remains a relevant problem for travel companies around the world. From the consumer perspective, particularly in emerging markets, many customers have a broad distrust of credit-card payments and are hesitant to share account information online.

Mobile Bookings As A Percentage of Online Bookings
Mobile Bookings To Jump 17 Percent

Mobile bookings are expected to gain prominence as more travelers become comfortable booking trips on smartphones and tablets. According to research from PhoCusWright, mobile bookings as a percentage of online bookings in the United States are expected to grow from 10 percent in 2013 to 27 percent this year.

To combat some of these issues and accommodate a growing online and mobile market, airlines have turned to alternative forms of payment. While use of some forms of alternative payment are still relatively new and somewhat obscure, interest is growing as carriers explore new options that attract new customers, increase conversion rates and lower costs.

According to research done by WorldPay, the growth rate of alternative payments will surpass credit-card growth rates this year. The increase is particularly strong in developing economies such as Brazil and India. The results of a WorldPay survey of global airlines show that 61 percent of carriers believe acceptance of alternative payments can be a differentiator among airlines. Respondents cited meeting customer demand and reducing costs as the top reasons for adding alternatives to their payment strategy.

One recent innovation in payment strategies is virtual currencies. In 2014, the European Banking Authority defined a virtual currency as a “digital representation of value” that can be accepted “as a means of payment and can be transferred, stored or traded electronically.”

There are no coins or paper bills; these virtual currencies only exist in cyberspace.

Virtual currencies have a number of advantages for customers: they are often instant, easy and reliable, as well as sometimes anonymous. They are tougher to forge than traditional currencies and use cryptography for securing and tracking transactions. But perhaps most relevant, virtual currencies are easily scalable to meet the high demands of the booming mobile consumer market. They frequently only require an app or a mobile wallet, allowing them to conveniently send and receive currency at will.

Virtual currencies offer benefits for businesses as well. They transcend international boundaries, enabling transactions anywhere in the world. They deal in a single currency, eliminating complications from foreign exchange. In addition, they do not require intermediaries like banks or payment processors or charge the fees typically associated with them.

Unfortunately, several virtual currencies initially gained international notoriety for their use in nefarious activities, as the associated anonymity helped facilitate crimes. However, both regulators and law enforcement officials from around the world are recognizing virtual currencies as a legitimate form of payment. Former U.S. Federal Reserve Chairman Ben Bernanke said that virtual currencies “may hold long-term promise, particularly if the innovations promote a faster, more secure, more efficient payment system.”

Airline Online Alternative Payment Method Use And Intent
Alternative Payment Methods

Online alternative payment solutions have the potential to reduce costs associated with credit cards and increase e-commerce sales in markets with lower credit-card adoption. Though current support for these solutions is low, the intent to implement them is relatively high.

Bitcoin is the most well-known and widely used virtual currency. The Bitcoin payment system was first revealed in 2008 and went live in 2009. Bitcoin describes itself as a “network that enables a new payment system and completely digital money.” Simply put, it is a decentralized currency with payments exchanged peer-to-peer. Bitcoins use digital signatures to protect transactions. Furthermore, a public ledger contains every transaction ever processed, which helps minimize fraud.

“From a user perspective, Bitcoin is pretty much like cash for the Internet,” according to the Bitcoin website. Dell, Dish Network, WordPress.com and Overstock.com have made headlines as some of the first major companies to accept Bitcoins.

However, Bitcoin is gaining steam in the travel space as well. airBaltic recently became the first airline in the world to accept Bitcoin as a form of payment. Ticket prices on its website are initially displayed in euros, and when customers pay for their flights, their Bitcoins are converted into euros at the current exchange rate.

“Introducing the Bitcoin payment option is a part of our innovative approach to service with a central focus on our customer,” said airBaltic CEO Martin Gauss.

And airBaltic is not alone. CheapAir.com became the first online travel agency (OTA) to accept Bitcoins for flights in November 2013, and later expanded the option to include hotels as well. Expedia joined the ranks in the summer of 2014, accepting Bitcoins as payment for hotel bookings.

“We’re continually looking at ways consumers want to pay for their travel,” said Michael Gulmann, vice president of Expedia Global Product, noting that this “gives Expedia customers and partners more choice in the ways they interact.”

While Bitcoin may not be the right move for all airlines, a proactive and innovative payment strategy can help airlines emerge as forward-thinking leaders in this new space. Airlines can use alternative forms of payment not only as a way to meet customer demands, but as a creative approach to attract new customers, grow revenue and cut costs.