Insight | New EU regulation facilitates onboard spending

Share

New EU regulation facilitates onboard spending

Aviation

How compliance with the new Payment Services Directive (or PSD2) could benefit airlines looking to build ancillary revenue using inflight connectivity.

The revised Payment Services Directive (or PSD2) came into place as a new EU regulation towards the end of last year, with the goal of further modernising Europe's online payment services for the benefit of both consumers and businesses.

Although the new regulation has been designed to promote the development of innovative online and mobile payments, providing more security and better consumer protection, ensuring compliance could be perceived as an arduous task for airlines.

Having only just climbed the mountain of GDPR compliance, many airlines have been left wondering what actual benefits the new directive will offer them and what they need to do to comply. And in light of the effect the COVID-19 crisis is having on the whole industry, it’s even more important that any new regulations offer opportunities for airlines.

Let’s get into PSD2

The directive was created for a number of reasons, largely focused on the protection of consumer rights. The regulation’s main priority was protecting consumers against fraud through online payments, but businesses are protected too. PSD2 tackles fraud by introducing strong security requirements for all electronic payments, which is where strong customer authentication (SCA) comes in.

SCA is an authentication process that validates the identity of the user of an electronic payment service or transaction. Once SCA is in place, customers will have to provide two or more elements of knowledge, possession or inherence when making payments.

An element of knowledge constitutes something only the user knows (e.g. a password or PIN code), an element of possession qualifies as something only the user possesses (e.g. a mobile phone), and element of inherence requires biometrics (e.g. the use of a fingerprint or voice recognition).

Another aim of PSD2 is to open up the EU payment market to competition. It does this by applying new rules equally to traditional banks and to innovative payment services and new providers, such as FinTechs, also known as third party payment service providers (TPPs). The idea is that these providers will now all be regulated under EU rules. This will introduce a new level of competition that will provide TPPs with the opportunity to engage directly with and offer added value to customers, through innovative services and collaboration with an ecosystem of partners.

On top of that, PSD2 also prohibits surcharging for payments with credit or debit cards and offers an improved complaints procedure.

For in-store card payments, the new SCA rules won’t pose any big challenges. By entering your PIN after your card has been read by the terminal, you will have verified your identity with two factors (possession of the card and knowledge of the PIN).

There is also an exemption under PSD2, which will allow customers to continue making contactless payments without a PIN. However, this exemption will be limited to purchases for up to 50€, and if the customer makes five such transactions in a row, or reaches a combined value of 150€, the PIN will be required.

Authorisation only upon landing

Most airlines are in fact already SCA compliant, due to the world’s adoption of EMV (which originally stood for Europay, Mastercard and Visa) standards, ensuring that all devices at point of sale (POS) require a Chip and PIN or Chip and Signature payment authorisation. Many airlines have gone beyond this, offering payments via swipe, dip and contactless, as well as mobile forms of payment, like Googlepay or Applepay.

When these POS transactions are moved onboard to an aircraft inflight, the two-point authentication process remains in place, however, the devices are required to work in offline mode.

“You can still use chip and pin or contactless to enable payments but it’s a two-step process,” explains Paul Van Alfen, Travel Payment Consultant from specialist consultancy, Up In The Air. “The authentication takes place offline inflight, and then the authorisation to release the funds takes place once the plane has landed, and the device has connected to the base or payment gateway. It will then attempt the authorisation online again but there’s always a risk that although the card is owned by the person inflight, it does not have sufficient funds because there is no real time check on the funds in the account.”

When authorisation fails on the ground, it’s referred to as a soft decline, which typically means there are insufficient funds in the account. This requires the airline’s system to automatically retry to retrieve the funds every day for 30 days, in the hope that the block on the funds will be released, when the account is topped up with more money. Even if this process is successful, it could take up to 30 days before the money is captured.

A year of EAN marked by significant increase in throughput to the aircraft

EAN just keeps on improving delivering a unique experience over the skies of Europe.

Connectivity equals opportunity

If, however, airlines provide inflight broadband, it’s business as usual. Using either a POS device or a payment gateway via the aircraft’s onboard system, the transactions can be authorised online in real time. In fact, when connectivity is in place, customers can use their own devices to both authenticate and authorise payments over Wi-Fi via an airline’s online payment gateway.

This opens the door for airlines to collaborate with innovative TPPs, who can offer new technology that makes payments via mobile devices easy and offers advanced features to customers. Not only does this encourage online spending by customers, it can also provide interesting ways to customise the payment service. And airlines can capture customer data to understand behavior and tailor future offerings and communications.

For airlines that plan to invest in full digital strategies onboard, PSD2 compliance means that online transactions over 30€ are not limited. If an aircraft offers full access to the internet, authentication and authorisation of payments are possible, and there is unlimited revenue earning potential from sales onboard.

“Ultimately, if airlines have installed inflight connectivity and can enable payment gateways either on passengers’ personal devices or their own payment devices, they are basically on a level par with other channels in terms of sales potential,” explains Jerome Theret, Inmarsat Aviation’s Key Account Manager, in Telecommunication and Digital Services. “Connectivity, whether it’s offered to passengers free or via a chargeable package, makes the proposition of inflight purchases so much more powerful and the process more automatic, which can make a big difference to airlines looking to boost ancillary sales with smart digital strategies.”

Foregone conclusion

As more and more passengers bring their own devices onboard, the demand for Wi-Fi is growing and an increasing number of airlines already have or are in the process of implementing inflight Wi-Fi.

The investment feels like a no-brainer when Inmarsat Aviation’s most recent passenger survey of over 9,300 passengers from 32 countries across the globe, found that more than three quarters of respondents (78%) believed Wi-Fi is fundamental to daily life.

Of those who believe inflight Wi-Fi is fundamental to daily life, 66% said it is an absolute necessity, which rose to 78% in premium economy, 81% in business class and 91% in first class. And unsurprisingly, digitally native Millennials and Generation Zers recognised the value of staying connected even more, with 91% of 18-30 year-olds saying they would use inflight Wi-Fi if it was available on their next flight.

Sky High Economics Chapter 3

Trust in high quality connectivity will mean that passengers will delay purchases until their onboard, giving airlines a new revenue stream.

Last minute spenders

To provide an understanding of the potential spend that this group of travelers will represent onboard in the future, the recently released third chapter of the London School of Economics (LSE)’s Sky High Economics report estimates that by 2028, Generation Z will form the largest group of global flyers at 1.2 billon.

The report also found that Generation Z passengers delay purchasing holiday items and services worth an average $26 each, choosing to buy while in the air instead. If airlines can shift even a portion of this spend onboard, the potential of ancillary revenue earnings is significant. And as passengers become more aware of the variety of possibilities to buy onboard, the total value of these purchases is likely to rise.

Ultimately, the case for investing in connectivity is only strengthened by the introduction of PSD2. The European regulations may have been introduced to protect both passengers and airlines against fraud but combined with connectivity, they could open up exciting new revenue opportunities for airlines as they develop their digital strategies.