Rerouting Payments Around the Card Networks

First it was retailers, which tried but failed. Now an airline trade group wants to develop a payment system that would bypass the credit card networks, theoretically saving carriers billions in interchange.

The proposal comes from the International Air Transport Association, which says it has 280 members representing 83% of air traffic. The group lists its headquarters as Montreal but has executive offices in Geneva, Switzerland.

The IATA’s payment project, which involves Germany’s Deutsche Bank, was first reported in May by London’s Financial Times. The system is designed for the European market, at least at first. The project is possible because under the new Payment Services Directive 2 regulation taking effect in the European Union, third parties will be able to access certain bank-customer data and be able to initiate payments themselves.

According to the FT, a user would enter his bank-account data, and Deutsche Bank would verify whether sufficient funds were available, then move the funds out of the account to the airline.

A payment transaction would cost the airline “a matter of cents,” an IATA executive quoted by the newspaper said. In contrast, airlines typically pay 1% to 3% of fares for card-acceptance costs, adding up to $8 billion a year, IATA estimated.

An IATA spokesperson tells Digital Transactions by email that the project should be ready for testing by year’s end.

“The purpose of this pilot is to develop and test a payment option on Web sites of airlines participating in the pilot project, using the capabilities of real-time or near real-time direct bank transfer,” the spokesperson says.

“Similar payment methods are already offered by some airlines around the world, but each is a proprietary solution, whereas the IATA-Deutsche Bank pilot will test a solution that is applicable to all airlines’ transactions specifically covered under PSD2,” the spokesperson continues.

The spokesperson adds that for airlines, direct payment could “offer a cost-competitive solution, while avoiding the losses associated with fraudulent credit card transactions. For air travelers, it would represent a fully secure additional payment option.”

The IATA proposal bears some similarities to the now-defunct Merchant Customer Exchange (MCX) established by dozens of U.S. retailers in 2012. MCX’s joint payment system was dubbed CurrentC, was primarily oriented toward mobile devices, and would have bypassed the card networks.

But some MCX members, including Walmart, seemed to put more effort into their own mobile-payment systems and loyalty programs. After years of planning and some limited tests, the retailers abandoned the effort and sold CurrentC’s technology to JPMorgan Chase & Co. in 2017.

But some observers believe the IATA’s plan could succeed. In addition to the groundwork laid for the proposed system by PSD2, the IATA also is benefiting from years of customer-authentication and risk-control techniques developed by the airlines in the Internet age, according to Richard K. Crone of San Carlos, Calif.-based Crone Consulting LLC. A key part of that is the increase in cards on file that the airlines have from customers.

“What makes this possible is a high degree of confidence” in getting a secure payment because “they have a known user,” Crone says.

But another airline group that already operates a payment system, the Washington, D.C.-based UATP, is skeptical of the IATA plan because of Deutsche Bank’s involvement, though a spokesperson says UATP is not yet fully informed about it.

“Since we are the airline industry’s wholly-owned payment network, we expect to be involved in cost-reducing initiatives and would be wary that a commercial bank has the same interest,” the spokesperson says by email.