9 May 2018, Europe - The International Air Transport Association (IATA) and Deutsche Bank have announced a new direct payment system between airlines and their customers that is set to debut in Europe end-2018. Dubbed a 'game-changing' solution that will offer improved speed, security, transparency, its most attractive proposition lies in reducing the US$8 Billion that IATA members (airlines) incur annually from credit card processing costs. Unfortunately this new Deutsche-IATA initiative much resembles the dead CurrentC, a mobile payment system backed by leading US retailers like Walmart, Target, CVS, Best Buy among others, that collectively accounted for over US$1 Trillion in annual sales. CurrentC failed to make much headway and was officially declared dead in 2017 when JP Morgan Chase purchased it to integrate the underlying tech for incorporation into the Chase Pay app.
Chart: Deutsche Bank & IATA new payment system looks like dead CurrentC
The 1-3% motivating factor behind the Deutsche-IATA direct payment system
As to why IATA is so keen on pursuing this direct payment venture with Deutsche Bank may be best described by an excerpt from the Financial Times on this topic:
“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.
Hard to believe but CurrentC was once seen as an Apple Pay killer
On hindsight, CurrentC was a disaster but the prognosis in 2014-2015 was far more optimistic. After all, it was backed by leading US retailers like Walmart, Target, CVS, Best Buy, RiteAid among others. Collectively, CurrentC’s backers operated 100,000+ outlets and had over US$1 Trillion in annual sales so what chance did Apple Pay have?
Instead Apple Pay went from strength to strength while CurrentC floundered, unable to gain enough traction. Apple Pay was created to bolster the Apple ecosystem so cooperating with the credit card companies was mutually beneficial. CurrentC was created to cut out the middleman (credit card companies) so it came up against the massive challenge of converting customers long accustomed to credit cards and their accompanying benefits.
Deutsche-IATA direct payment system solves US$8 billion problem for airlines but what about the customers?
Customers love their credit cards especially with benefits like loyalty points, free travel insurance, cash rebates and even a 3rd party to help them dispute payments.
So the key issue that needs addressing is how to entice airline customers to switch from credit cards to the Deutsche-IATA direct payment system? If airlines are required to offer the same or better benefits to customers as credit card companies, would airlines get any significant cost savings from the Deutsche-IATA direct payment systems?
Alipay and Tenpay have succeeded so why not the Deutsche-IATA direct payment system? Location, Location and Location!
The details of the Deutsche-IATA direct payment system are being finalised and is only set to launch at year-end in Europe so are we being over-presumptuous with all this negativity? After all, Alipay and Tenpay (includes Wechat Pay) are hugely successful in China and in an earlier article on Transport’s jump onto the Fintech Bonanza, we wrote about the potential of AirAsia’s BigPay, Grab Financial, GO-JEK’s GO-PAY:
Simply put, it’s all about the location. Alipay and Tenpay (includes Wechat Pay) succeeded not only because of their respective Alibaba and Tencent parent ecosystems but because Visa, Mastercard and other foreign credit card companies have no real presence in China.
As for AirAsia’s BigPay, Grab Financial and GO-JEK, their focus is Southeast Asia where as many as 264 million adults are unbanked, i.e. do not use formal banking services according to The World Bank.
By contrast, CurrentC sought to capture the US market where there were an estimated 148.8 Billion non-cash payments in 2016 of which 75% was via card payments (Federal Reserve Bank Study 2017). Similarly, the Deutsche-IATA direct payment system is focused on Europe where there were 122 Billion non-cash payments in 2016 of which, 49% was via card payments (European Central Bank 2017 report).
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