The payments challenges arising from the COVID-19 pandemic – the cost of widespread chargebacks in particular – should prompt travel companies to reassess their payment mix and embrace AFPs powered by open banking principles. The benefits of this approach far outweigh the risks. In fact, risk mitigation is a crucial feature of open banking!
What is open banking?
Open banking is the common term for the liberalisation of access to consumer banking, transaction and financial data for third-party service providers. Essentially, open banking relies on open-source technology to bring greater financial transparency, improve services and increase banking competition to enhance outcomes for users of financial products.
While access to banking data evolved over time, open banking use has reached its current level in part because of a series of European regulatory initiatives, specifically the formation of the Open Banking Implementation Entity (OBIE) in the UK and the European Commission’s PSD2 Directive, both in 2016. These acts established rules for sharing financial data, reducing fraud through advanced authentication processes, and encouraging competition among payment providers – all hallmarks of open banking.
These efforts at standardisation and regulation have paved the way for significant growth in open banking adoption. Open banking payments have increased by triple digits year over year, and as of 2020, there were 12.2 million open banking users in Europe alone. With its soaring growth, open banking is well-paced to challenge debit payments as the preferred form of payment in Europe.
The speed advantage
Airlines and other travel companies have an opportunity to adopt the payment preference of this pool of open banking users. Open banking transactions settle in no more than seconds, sometimes minutes, depending on the market. Merchant-initiated refunds are processed at the same pace. The average API call response time (shorthand for transaction speed) has steadily declined over the past two years – including the pandemic-impacted years – to its current average of 430 milliseconds.
Increased settlement speed impacts airlines and other companies for which cash flow is a perennial priority. More immediate refund processing also relieves many travel companies that found themselves holding significant accounts payable liability in the wake of the pandemic.
Safety and compliance built-in
Speed is just one advantage; reduced possibility of fraud hurting the consumer is another. Open banking uses secure online banking credentials and biometrics to authorise payments. It is required by PSD2, which carves out specific provisions for Secure Customer Authentication (SCA). There is no requirement for airlines or other companies taking travel-related payments to hold a card or card information with a higher risk of being compromised.
Therefore, expanding their payments mix to accept open banking-based AFPs decreases an airline’s or travel brand’s overall fraud exposure.
Cutting card network costs and chargebacks
While fraud reduction and increased settlement speed can indirectly positively affect a travel company’s bottom line, the reduced cost of open banking transaction fees and the absence of chargebacks can have a more direct impact. Because open banking transactions occur outside the traditional card network, they incur no interchange or card scheme fees.
That is not to say that no fees are applicable; payment providers that utilise open banking typically levy a fixed per-transaction rate, especially in the European market. But these costs are a single “bite of the apple” compared to the add-on fees associated with card networks and are often much lower cost overall.
Card network transactions also carry another hidden cost – the risk of chargebacks. COVID-19 highlighted the significant expense chargebacks represent to airlines and travel merchants, as cancellations and disruptions throughout 2020 and 2021 led to a massive spike in disputes and charge reversals initiated through card providers. Perhaps unsurprisingly, chargeback fraud peaked during this period as well. Open banking payments are ‘account-to-account’, providing airlines/merchants with much greater control over the dispute process and any potential charge reversals.
Supporting open banking-based payments is clearly in the best interests of airlines and other travel brands. Not only does it meet the needs of a large and growing segment of travellers who participate in open banking and use alternative forms of payment, but it also increases average transaction and settlement speed, reduces fraud, and controls transaction costs and chargeback exposure. In the future, open banking may also help spur the growth of travel-specific subscription services and recurring transactions for airlines or create other unlooked-for areas of revenue growth.
Airlines and travel merchants wanting to add more open banking-powered AFPs to their payments mix must first identify a payment partner to help them execute that strategy. UATP connects airlines to many AFP partners across the globe, including open banking transaction processors.
Contact us to learn how UATP can help optimise your payment strategy and take advantage of the open banking revolution.
