Travel has continued to recover this year, with IATA data showing that airline industry revenue is expected to be 43% higher than in 2021. Our own analysis also suggests robust demand, concluding that consumers were prepared to protect travel costs ahead of other discretionary areas , like for example. renovation or fashion.
As we enter 2023, how can the travel industry benefit from advances in fintech? And conversely, where can the fintech sector find new growth opportunities in the travel industry?
Built-in economy
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 maturation of digital-first challenger banks and the widespread availability of fintech services.
Embedded Finance is the natural continuation of this trend, where financial services such as payments, loans and current accounts are integrated into our everyday digital experiences. According to Bainmore than 5% of all financial services transactions in the United States can already be classified 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. Are the airlines going bankrupt? It really depends on how you define a bank.
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While we do not expect travel companies to seek regulatory approval to begin offering lending services, we do expect them to work with wholesale suppliers of such products. We also believe that it is increasingly likely that travelers will be able to buy and use current accounts, payment services and loans without leaving the travel company’s app or website. Instead of travel companies reselling fintech services and passing travelers on to the service provider, the industry is likely to embed these services.
There are already good examples of business models for embedded finance. Take Shopify, which offers a complete suite of software-as-a-service so businesses can quickly launch an online store. Over half of Shopify’s revenue
actually comes from payments and loan products delivered to e-commerce sellers, which it integrates into its products.
Currency volatility
2022 has been a year of macroeconomic adjustment. Currencies have fluctuated around the world, and there is good reason to believe that currency volatility will continue next year.
We believe finding new ways to manage this volatility, or at least secure travel companies and their customers, will be a significant focus in 2023.
On the B2B side, technology can play a role in helping travel businesses hold a range 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 provide opportunities for travel merchants to improve the customer experience and take advantage of currency spreads.
Biometric authentication
Authenticating payments smoothly and securely has been a key focus, with Strong Customer Authentication (SCA) requirements promoting the role of biometric authentication as a “second factor” when proving your identity. It is already possible to pay for goods and services online using biometric authentication options in services such as Apple Pay or Google Pay, but we believe the travel industry can go a step further.
Biometrics are rapidly catching on for travel use. For example, Amadeus is currently working with British Airways to trial biometrics at Heathrow Terminal 5 on selected flights. Passengers who choose to sign up no longer need to provide their boarding passes or passports at check-in, baggage or when boarding the plane. 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-service check-in.
It’s not a big leap to imagine that these travel identity checks could be reused to authenticate any payment the traveler might make during the trip, such as when pre-ordering meals or upgrading a seat. For travelers who opt for biometrics, a personal payment may soon happen invisibly in the background.
CBDCs and stablecoins
Central Bank Digital Currency (CBDCs) are native digital forms of currency, typically linked to the country’s fiat currency and issued by the central bank, which no longer operate using the traditional bank or card network rails. Instead, they are enabled using blockchain technology that enables fast and secure exchange of value over the web.
Several authorities around the world are exploring the potential of 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 within the next three years.
Fiat-backed stablecoins are privately issued digital currencies backed 1:1 against a fiat, usually a government-issued currency such as the US dollar or euro, which maintains a stable price with the underlying currency. They also use blockchain technology.
How central bank-issued CBDCs or stablecoins can improve global payments remains to be seen, but it’s worth keeping an eye on how they develop.
At a basic level, we can expect money that is inherently digital by design to provide opportunities for faster and cheaper payment services. This can be particularly interesting for cross-border payments or industry settlement arrangements within travel. If these forms of money gain widespread use, it is conceivable that travelers may soon be able to pay for travel using these alternative digital currencies, with the potential for cost-effective global payments.
2022 has shown the important role that payments and fintech innovation play in the travel industry. Our own research suggests that investment in this area is a high priority for most travel companies, and fintech is being adopted by OTAs, airlines and corporate travel.
We expect adoption to accelerate further in 2023, driven by an increasing number of travel and fintech partnerships with continued recognition that seamless and connected payments can be a key differentiator for travel brands.
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