On 1 March 1971, the first Billing and Settlement Plan (BSP) came into operation in Japan. More than a technical advance in money handling, it was an imaginative leap for the entire industry. From this point onwards, airlines and accredited travel agencies had a standard way of settling accounts.

Even in an era when airlines sell a significant portion of tickets off their own websites, the BSP remains a key part of airline distribution strategies. It operates in some 180 countries with close to 400 participating airlines. In 2019, the last pre-COVID year, sales through the BSP totaled $237 billion, representing close to 40% of total industry ticket sales of $612 billion. Overall, IATA financial settlement systems handle about 70% of indirect sales.

 

Flexibility in the system

There have been numerous improvements to the efficiency of these financial systems over the years. This was amply demonstrated in the response to the coronavirus pandemic.

Cash became the lifeblood of the industry and keeping it flowing was critical to survival. Unfortunately for airlines it was often flowing in the wrong direction as customers were refunded for flights cancelled due to the multitude of global travel restrictions. Within a matter of weeks, a Reverse Settlement process was implemented in the BSP to handle the vast sums being refunded. In the second quarter 2020 alone, IATA estimates that airlines had a $35 billion refund liability in the BSP.

At the same time, greater flexibility was introduced for travel agents. Previously, the BSP was effectively a one-size-fits-all model. Agents would pay in according to a fixed schedule and payments out would similarly follow set dates. During 2020, a package of measures included extending grace periods for payments and financial reviews, and a re-assessment of bank guarantee calculation formulas to adapt to the lower level of sales.

Communication throughout the value chain was enhanced at the same time to foster greater transparency. Daily bulletins were issued to the industry on the performance of key settlement systems and a treasury dashboard was created for airline CFOs and their representatives to keep them updated in real time.

All changes were implemented faster than ever before. Governance and decision-making were expedited, taking just 3–4 months from proposal to implementation.

Perhaps most importantly, some $22 million was taken out of operational expenses to keep airline costs as low as possible.

 

Platform of choice

The next test of IATA’s financial settlement systems will be their ability to evolve further and lay the foundations for another 50 years of efficient money management.

Juan Antonio Rodriguez, IATA’s Director Financial Settlement Operations Delivery, says the aim is to be nothing less than “the settlement platform of choice for the airline industry.” For that to happen, moving into direct sales is a must. The association is developing IATA Pay for just that purpose.

IATA Pay is a solution leveraging trends in part made possible by the European Union’s Payment Services Directive 2 (PSD2), such as open banking, request-to-pay, and real time payments. The change in banking regulations means it has become possible for IATA to offer the industry a product that adds value in bank-to-bank transfer payments.

With IATA Pay, airlines will be able to offer their customers a direct payment solution that is cost-competitive compared with existing payment options. That means substantial savings to airlines on the $8 billion spent on these transactions in pre-COVID years. A go live announcement is expected in the coming months.

The move is expected to be welcomed by consumers as bank-to-bank transfers are growing quickly and have already become the main form of online payment in some countries. India uses its Unified Payments Interface (UPI), for example. The simplicity and security associated with bank-to-bank transfers could result in more sales conversions.

“IATA Pay isn’t just a cheaper option,” says Rodriguez. “It is zero risk because the money changes hands instantly within secure platforms. We are always looking to improve risk management and cost controls. IATA Pay is the perfect solution.”

 

Further developments

Aside from the move into direct sales, there will be a focus on recovery rates and on-time performance. NewGen ISS improved these elements and near-perfection is now within reach.

Every year, for a multitude of reasons, some monies never reach airline coffers. The amount varies but can be upwards of $40 million annually. A variety of settlement strengthening measures, including early detection systems for possible bankruptcies and fraudulent activity, will bring this down to near zero. To all intents and purposes, the settlement process will become risk-free for any individual airline.

“Importantly, these strengthening measures will also give agents much greater flexibility too,” informs Rodriguez. “We don’t want them to lose the ability to engage with the system as they see fit. So, they can put down a guarantee if they so choose or they can use pay-as-you-go. There are a variety of modules to fit their needs. Selecting the right option will reduce the risk for airlines.”

Improving on the 99.9% on-time settlement performance, meanwhile, will build on the flexibility generated by the pandemic, and use this internal efficiency to become as near-perfect as possible in the swift resolution of transactions.

 

50 years more

The next 50 years will surely bring as-yet-unimagined changes, but more advanced options are already being considered. Many other payment forms are on the horizon, for example, and the aim is to incorporate all viable possibilities. Blockchain, in addition to the bank-to-bank payments, could play a part in making these payments secure.

Whether cryptocurrencies will be part of payment options is unknown. The likelihood is they will be just one more option, assuming they are legitimized. “Technically, cryptocurrency has been around for a while now, but it is still very small market and it isn’t growing particularly quickly,” says Rodriguez. “In contrast, bank-to-bank has grown enormously and is the dominant form of payment in many countries already. That is why we have focused efforts on direct sales.”

Artificial intelligence (AI) will continue to be evaluated and incorporated wherever and whenever is appropriate. The great advantage of AI is the ability to monitor data and identify trends. In theory, it could predict a bankruptcy before it occurs and safeguard monies. Certainly, it will improve the quality of service offered and reduce errors attributed to human input.

Airlines will benefit from the data AI accrues too. Settlement parameters will become transparent, allowing airlines to make informed decisions about risk potential.

And systems generally will benefit from ever greater automation. With advances in application programming interfaces real-time interaction becomes the norm, bringing all the efficiencies this implies.

“IATA has been professionally handling the industry’s money for 50 years and we need to continue adding value for the next 50 years,” says Rodriguez. “We want to be the obvious choice when the industry needs to move a dollar from point A to point B. We will achieve the next level of excellence.”

 

Credit | iStock
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