Travel has continued to recover this year, with IATA’s data showing airline industry revenues are expected to be 43% higher than 2021. Our own analysis also suggests resilient demand, concluding that consumers were prepared to protect spend on travel ahead of other discretionary areas, like home improvement or fashion.
Travel has continued to recover this year, with IATA’s data showing airline industry revenues are expected to be43% higher than 2021 . Ourown analysis also suggests resilient demand, concluding that consumers were prepared to protect spend on travel ahead of other discretionary areas, like home improvement or fashion.
As we kick off 2023, how might the travel industry benefit from advances in fintech? And conversely, where can the fintech sector find new growth opportunities in the travel industry?
Embedded Finance
Do you remember when opening a bank account meant walking into a high street branch, or when only a small number of banks offered financial services? The world has moved on, with the maturing of digital-first challenger banks and the widespread availability of fintech services. Embedded Finance is the natural continuation of this trend, where financial services like payments, lending and current accounts become embedded in our everyday digital experiences.According to Bain , more than five percent of all financial services transactions in the US can already be classed as ‘embedded finance’ and these transactions will be worth over $7 Trillion by 2026.
With high levels of trust and existing loyalty schemes, the travel industry is a natural contender to embrace Embedded Finance. Will airlines become banks? It really depends on how you define a bank. Whilst we don’t expect travel companies to seek regulatory approval to begin offering lending services, we do expect them to partner with wholesale providers of such products. We also think it is increasingly likely that travelers will be able to purchase and use current accounts, payments services and loans without leaving the travel company’s app or website. Rather than travel companies reselling fintech services and passing travelers on to the service provider, the industry is likely to natively embed these services.
There are already great examples of embedded finance business models. Take Shopify, which provides a full suite of software-as-a-service so companies can quickly launch an online shop.Over half of Shopify’s revenues actually come from payments and loan products provided to e-Commerce sellers, which it embeds in its products.
Currency volatility
2022 has been a year of macroeconomic adjustment. Currencies have fluctuated across the world and there is good reason to believe currency volatility will continue next year.
We think finding novel ways to manage this volatility, or at least to ensure travel companies and their customers are protected, will be a significant focus in 2023. On the B2B side, technology can play a role by helping travel businesses to hold a number of different currencies so they can settle with partners without incurring foreign exchange (FX) losses. Similarly, we expect greater demand from travelers for services to be priced in their native currency and this will present opportunities for travel merchants to improve their customer experience and benefit from FX spreads.
Biometric authentication
Authenticating payments smoothly and securely has been a key focus, with Strong Customer Authentication (SCA) requirements advancing the role of biometric authentication as a ‘second factor’ when proving your identity. It’s already possible to pay for goods and services online using biometric authentication options in services like ApplePay or GooglePay but we think the travel industry can go a step further.
Biometrics are catching on fast for travel use cases. For example, Amadeus is currently working with British Airways to trial biometrics at Heathrow Terminal 5 on selected flights. Passengers that choose to enroll will no longer need to provide their boarding pass or passport at check-in, bag drop or when boarding the aircraft. Instead, facial recognition is used to validate the passenger’s identity as they approach each service point. Similarly, hotel chains are experimenting with biometrics for self-serve check-in.
It's not a great leap to imagine that these travel identity checks could be re-used to authenticate any payments the traveler might make during their journey, for example, when pre-ordering meals or upgrading a seat. For travelers choosing biometrics, making an in-person payment could soon happen invisibly in the background.
CBDCs and stablecoins
Central Bank Digital Currencies (CBDCs) are natively digital forms of currency, typically pegged to the country's fiat currency and issued by the Central Bank, that no longer operates using the traditional banking or card network rails. Instead, they’re enabled using blockchain technology that allows for fast and secure exchange of value across the web. Several authorities across the world are exploring the potential for CBDCs, including the European Central Bank and the Bank of England.Research from the Bank for International Settlements forecasts that central banks covering 20% of the world’s population are likely to launch CBDCs in the next three years.
Fiat-backed stablecoins are privately issued digital currencies backed 1:1 against a fiat, usually a government-issued currency like the US Dollar or the Euro, maintaining a stable price with the underlying currency. They also use blockchain technology.
Quite how CBDCs issued by central banks or stablecoins might improve global payments remains to be seen but it’s worth keeping an eye on how they evolve. At a basic level, we can expect money that is natively digital by design to present opportunities for faster and cheaper payment services. This could be particularly interesting for cross-border payments or industry settlement schemes in travel. If these forms of money gain widespread adoption, then it’s conceivable travelers might soon be paying for travel using these alternative digital currencies, with opportunities for cost effective global payments.
2022 has shown the important role that payments and fintech innovation is having across the travel industry.Our own research suggests that investment in this area is a high priority for the majority of travel companies, with fintech being adopted by OTAs, airlines and corporate travel. We expect adoption to accelerate further in 2023, driven by an increasing number of partnerships in travel and fintech with continued recognition that smooth and connected payments can be an important differentiator for travel brands.
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