Through the turbulence
The airline industry is facing disruption and squeezed margins as new payment methods and business models emerge. But payments innovation is enabling the industry to fight back, ultimately benefitting customers. flow’s Clarissa Dann finds out from IATA’s Javier Orejas how innovations in domestic and cross-border payments are creating new opportunities for both IATA and the airline industry that it serves
Four years ago, Javier Orejas was doing his bit for his office football team in Madrid. In the pre-match warm-up, he jumped for the ball, landed badly and his leg went black. It turned out he had broken his hip, and there followed five months when he was confined to bed while it mended.
For a man dedicated to delivering efficient, secure and transparent payment and collection services on behalf of the International Air Transport Association’s (IATA) 281 members and 75,308 passenger and cargo participants, this enforced leave of absence made him more determined to fight for the full recovery he has now made. Helped by a doctor who recommended daily lane swimming to build up his muscle tone, the association of the pool with recovery and problem-solving has stayed with him – along with an ability to knock out five kilometres in well under two hours.
“I am optimistic about everything and always look for the good in things,” he tells me. “And I like to fight for everything,” he adds with a smile.
We talk in the IATA Madrid offices, where the backdrop of Santiago Bernabéu Stadium (the home of Real Madrid) serves as a reminder that passionate support does not need to be restricted to football teams. Orejas is one of the most outspoken and respected champions and critics of transaction banking in corporate treasury, and is in a unique position to guide the profession as treasurers seek to navigate the next wave of regulatory and market change in payments and cash management.
Orejas joined IATA 11 years ago from the consulting sector, where he had specialised in banking, handling mergers and integration. He holds a Master’s degree in law and business administration from the Complutense University of Madrid, a pre-doctorate in law, an MBA and a further Master’s in finance and banking. “I studied for two degrees at the same time,” he confesses – this is a man who clearly likes to push himself.
After four years in the remittance settlement department, he is now Head of Banking EMEA and the Americas, responsible for banking operations in 129 countries. “When I moved to the banking role, I sought to standardise the way we worked with different banks, implementing SWIFT connectivity with banks in Europe and renegotiating pricing,” he reflects.
Deutsche Bank is one of IATA’s three core relationship transaction banks. The partnership began in 2000 in India, when Deutsche Bank was mandated as the clearing bank for IATA’s Billing and Settlement Plan (BSP) for passengers and Cargo Accounts Settlement Systems (CASS) for cargo. This then extended to other APAC and EMEA countries, most recently Portugal.
Part of Orejas’ remit is to design and implement new cash management solutions that support the efficient flow of cash across industry participants and deliver the best possible service to members and accredited agents. By doing so, Orejas and the banking team play an instrumental role in maintaining trust and stability in the industry and protecting both retail and commercial customers. Innovation and harmonisation in the payments industry are key to achieving these objectives.
- Founded in 1945 in Havana, Cuba to represent, lead and service the airline industry
- Membership: 281 member airlines
- Providing financial services in 180 countries
- Global delivery centres in Madrid, Singapore, Beijing and Montreal
- Represents 85% of total global air traffic
- Deals with 75,308 passenger and cargo participants
- In 2016, IATA Financial Services processed US$401.4bn, US$219bn of which was through the Billing and Settlement Plan (BSP)
- BSP and CASS (for cargo) support airlines with collection of remittances from agents, and onward settlement with member airlines. They also provide reporting and follow-up services
Source: IATA facts and figures and 2017 Annual Report (published June 2017)1
From regulation to opportunity
Orejas’ most immediate task was to implement SEPA (Single Euro Payments Area) credit transfers (SCT) and direct debits (SDD), replacing existing domestic schemes. This was particularly challenging for IATA due to the payment volumes involved: it was collecting payments from 5,000 to 6,000 travel agents using a variety of collection methods, including direct debits, and remitting them to the airlines. While SEPA offered some benefits, not least the ability to harmonise payment methods across the Eurozone and reduce cross-border payment costs, the migration process created significant challenges. New SDD mandates needed to be obtained for each travel agent, and as both processes and legal terms often differed from existing arrangements, the migration was very complex, with multiple stakeholders.
“It was a major project with a lot of moving pieces. We had to collect new mandates from the travel agents and move them over,” says Orejas. The body operates very strict rules of accreditation and governance because, as a chamber house, it carries systemic risk. These rules include defined payment terms and penalties for non-compliance, so it was imperative that the migration to SEPA took place without interruption or delay to avoid rule breach and both financial and reputational damage.
However, while many organisations treated SEPA as a regulatory initiative, IATA was keen to work with Deutsche Bank to leverage the benefits of a harmonised payments landscape in Europe, most notably implementing a daily direct debit scheme. “Everyone thinks innovation is all about creating something completely new, but I love innovation when you use something that already exists, and then transform and improve it to generate new benefits,” says Orejas.
“US$3trn – Aviation industry underpins US$3trn in value-added output around the world”
Agents that want IATA accreditation have to provide bank guarantees, which was a major obstacle in some countries. However, by implementing a daily payment process via direct debit, the amount of the guarantee is drastically reduced, opening up the opportunity for IATA accreditation to a larger number of businesses. In 2015, IATA set up a daily direct debit process with Deutsche Bank in Frankfurt. Within 18 months, around 65% of volumes from agents located in Germany were being collected on a daily basis. Riccardo Balsamo, Cash Management Sales Manager at Deutsche Bank, worked at the project with Orejas. “The most interesting element of the project was that it leveraged an existing regulatory framework but created value to both IATA and the airline industry as a whole by re-engineering payment processes to reduce the settlement cycle.”
- US$754bn in revenues (up 6.3% on 2016), US$532bn from passengers, US$54.5bn from cargo
- Nearly 4.1 billion passenger journey segments were flown, an increase of 7.5% on 2016
- 59.9 million freight tonnes transported, a cargo growth of 9.3% on 2016
- Asia dominated the ranks of the fastest-growing origin-destination passenger markets in 2017 and the industry’s centre of gravity continues to shift eastwards
- Operating profit fell from US$65.2bn in 2016 to US$62.6bn in 2017, a margin drop from 9.2% to 8.3% over the period
- “Improving the industry’s highly leveraged balance sheets will in most cases require a prolonged period of better profits. As a result, only a handful of airlines are rated investment grade by ratings agencies.”
Source: IATA facts and figures published December 2017 [See note 1]
In the pilot’s seat
The opportunities for payments innovation did not stop with SEPA, however. As an advocate of banking innovations targeted at corporate clients, it was no surprise that Orejas saw the opportunity that SWIFT’s global payment innovation (gpi) initiative offered to transform cross-border payments across its footprint of 180 countries. SWIFT gpi aims to enhance the corporate experience of cross-border payments with same-day cross-border payments that are fully traceable, transparent fees and complete remittance data. The programme leverages existing bank and market infrastructure but introduces a new service level agreement with banks that can then build payment-tracking tools for their customers.
The ability to make and receive same-day, transparent cross-border payments represents a step change from the existing situation where the settlement date was often unpredictable, fees were opaque, and remittance data was often lost or truncated, making it difficult to identify and reconcile payments. SWIFT gpi will, says Orejas, be “a game changer in the banking industry”. Why? “Once you have transparency and visibility of your transaction, this brings more benefits.”
“Do you want to be there as a marginal player sucking up cost, or do you want to front change?”
However, as the success of SWIFT gpi relies on bank adoption, Orejas was an outspoken advocate at Sibos 2017 in Toronto because “SWIFT needs as many banks as possible on board”. In an interview with The Banker,2 he explained that payment delays from travel agents could put their IATA accreditation in jeopardy, to the detriment of their customers as well as their own business. However, with payments processed via SWIFT gpi, faster payment and full payment tracking capability eliminates these risks. Consequently, IATA quickly volunteered as a pilot customer with Deutsche Bank, alongside four other corporates.
“I love innovation when you use something that already exists and give it a new flavour”
It is not only cross-border payments that are getting faster: real-time domestic schemes are proliferating globally. As Orejas emphasises, “the trend is clear” and “all governments are trying to implement real-time payment schemes that will allow transaction banking services to compete with other payment alternatives”. In addition, he notes that there is considerable pressure from regulators to make payments cheap or free. While real-time payments bring both opportunities and potential challenges, in Europe, these are exacerbated by the impact of PSD2, which took effect in January 2018. In Orejas’ view, PSD2 was created to do two things, “to open the financial ecosystem and to foster competition in the payments landscape”. Third party providers (TPPs) are now able to compete with traditional banks and credit card companies to provide payment services and account visibility to customers. To achieve this, financial institutions provide TPPs and other third parties with access to customer data through application programming interfaces (APIs) from which corporates can also directly benefit. This system is frequently referred to as ‘open banking'.3
Opening up the payments ecosystem is transformational, particularly in consumer payments. Propelled by the PSD2 offering and the emergence of instant payment schemes, the scene is set for a proliferation of digital payment offerings that are fast, secure and cost-effective. There are both threats and opportunities associated with these developments. As Orejas suggests, “The new payments participants – platform providers [Google, Amazon, Facebook, AliPay] and fintechs – are targeting the intermediary space between banks and their customers. If all a bank ends up providing is a bank account, while it takes all the compliance and operational costs, leaving new market entrants to enjoy the relationship with the customer and the opportunity to provide value-added services, then this is a huge risk to not only the banking sector – but also the airline industry.”
He cites the hotel industry as a warning. Hotels bear the employment and facilities costs, but lose the customer interaction to online platforms that serve up commoditised options in search results. Margins have suffered. “Do you want to be there as a marginal player sucking up cost, or do you want to front change?” asks Orejas. The challenge extends to banks, but also ‘traditional’ players in the travel and logistics industries in which IATA plays such a key role.
The answer, he continues, is to seize the opportunities brought about by PSD2, rather than leaving industry disruptors to do so, and create added value to protect customer relationships. In addition, he urges the banking and corporate sectors to get behind SWIFT gpi and push on with full adoption to make cross-border payments “faster, cheaper and safer” and facilitate international trade.
Given that the airline industry is, according to IATA, incurring more than US$8bn in card merchant fees and fraud costs each year, payment options for airlines and passengers that give them more control of their distribution costs are very attractive. This resonates particularly when the airline industry earned a return on invested capital of 9.6% and a margin of US$8.5 per departing passenger in 2017.4
Experience of uncertainty
Digitisation and democratisation of payments bring challenge and complexity, and this is where the experiences of SEPA migration come into play, both in terms of embracing and implementing innovation, and also of dealing with market and regulatory uncertainty. “While the governments covered by the regulations implemented to the required timelines, there were uncertainties on some key points. And with PSD2 there are also uncertainties about consent provision and API standardisation. My hope is that, at the end of the day, the eventual solution to these uncertainties will be aligned with the spirit of the regulations, which is to open the payment ecosystem to new players.”
With the balance of airline revenues from indirect sales channels steadily moving towards direct sales, IATA is keen to protect revenue streams and boost trust and stability in a disrupted sector. One way of achieving this is to seek more active participation in the new payment alternatives which the new technology and regulation bring. As a result, IATA is now working with Deutsche Bank on a potential solution for the euro area.
“Not only will airlines be able to determine the fastest and cheapest way of transferring money within Europe, but these trials will ultimately provide travellers with more options for buying their tickets, to the benefit of all parties involved in the process,” explains Orejas.
Surviving the storm
Banks are juggling with numerous priorities right now as they unlock their systems for the open banking world and implement SWIFT gpi. At the same time, observes Orejas, the compliance burden associated with ‘know your customer’ (KYC) and anti-money laundering obligations continues to grow. “For banks, this is the perfect storm and many things need a lot of investment at the same time. But they will survive, and those that cannot digest the changes will disappear.” The same applies to the customers that they serve, and embracing innovation will be essential to survival. “After this revolution, those that emerge from all of this will be transformed,” he concludes.
Now all the industry has to do is get on with it…