I don’t usually let bitcoin company reps draft guest posts that promote their own announcements, but I’m going to make an exception today in the case of Bitnet’s news of a partnership with the Universal Air Travel Plan, a card network with 260+ airline members. This is a subject I’ve wanted to write about for a while, as “bitcoin for airlines” is perhaps the most compelling B2C merchant use case of bitcoin (outside of black market goods) that I have come up with. Airlines operate on razor-thin margins, while dealing with constant forex management issues, massive fraud and antiquated ticketing; they are one of the few industry’s that actuallyneed bitcoin solutions today.
Akif Khan, a payments veteran and VP of Solutions for Belfast-based Bitnet, breaks down the airline opportunity for us. Enjoy!
"Bitcoin and Airlines" | Akif Khan, VP Solution Strategy, Bitnet
When I joined Bitnet back in May 2014, it was my first foray into the digital currency space, and I immediately began looking into which verticals would be receptive to early conversations about accepting bitcoin. I’d spent the previous ten years working in the payments industry – six years for global payment processing gateway CyberSource, and a further four years for Visa Inc. after the card giant acquired CyberSource in 2010. I’d spent a large portion of that decade managing cross-functional teams that helped to implement card payment and card fraud management systems for airlines globally. As a result, it quickly became apparent to me just how attractive bitcoin acceptance can be for airlines.
First, some context. Most people don’t realize just how painful it is for airlines to accept cards online. Airlines are often the subject of higher fees from acquiring banks for card processing, and due to the delayed delivery model are typically required to lodge reserve funds with their acquirer to mitigate against financial insolvency – no bank wants to be left having to refund customers for flights that have yet to be flown should an airline on their books go bankrupt. Given the international nature of much airline travel, it’s also implicit that most airlines will be taking cross-border transactions, with a consumer in one country booking a flight with an airline based in another country – these cross-border transactions typically attract even higher fees from the card schemes. (There are exceptions to these rules of thumb of course, within Europe in particular card scheme interchange fees have been driven down in recent years, but on a global basis the insights hold true.) But let’s move beyond card fees and onto fraud.
As the former author of the bi-annual CyberSource Online Airline Fraud Report, I could write a whole series of blog posts on the topic of card fraud against airlines, but suffice to say that this is a huge challenge. According to the most recent CyberSource report from 2014, airlines lost 1.1% of their revenue through their websites to card fraud, increasing to 1.7% through their mobile channels. In addition, airlines reject about 3.4% of the bookings on their website purely on suspicion of them being fraudulent. Clearly some of them will be fraudulent and deserve to be rejected, but others are good customers mistakenly rejected who probably aren’t going to be returning to that airline’s website again. Maintaining the apparatus to manage card fraud, both in terms of systems to identify fraud and people to manually check transactions, is a costly headache that all airlines want to wish away as they see it eating into their profits.
Many airlines, particular legacy national carriers as opposed to the newer low-cost carriers, operate on depressingly low margins; just a few seats bought fraudulently can render an entire flight unprofitable. Alongside payment and fraud costs, throw in fluctuating fuel prices and fleet operating overheads, and you’ll find airlines are desperate to shave costs wherever they can.
Enter Bitcoin
Over the last six months I’ve found airlines to be very interested in bitcoin. The lower processing costs raise an eyebrow for sure. The fact that cross-border friction disappears and that all transactions globally are equal also makes people lean forward. However, it’s the mitigation of fraud risk that gets people most excited. The idea of an airline selling a ticket and knowing that they can keep that money without risk of it being taken back by their bank is compelling. Depending on the airline, though, there is more. Much of the world’s population, particularly in emerging markets, don’t have credit cards. For domestic low cost airlines operating in such markets, how do they sell tickets? There is a heavy reliance on travel agents selling face-to-face with the local population, and those agents earn fees that eat into that preciously thin profit margin. Imagine if that local population had access to bitcoin via their ubiquitous smartphones, and purchased those airline tickets online instead……now you start to see why airlines in emerging markets want to know more about bitcoin.
So, given these attractive points, why aren’t more airlines today accepting bitcoin? There are really two reasons.
The first is as expected – whilst the proposition for an airline is strong, the airlines need reassurance that if they invest in implementing bitcoin acceptance then are consumers actually going to pay with it. Whilst data in this area is not easy to find, I point them to the case study presented by CEO of online travel agency CheapAir.com, Jeff Klee, at a recent airline conference describing the experience of offering bitcoin as a payment option during 2014. CheapAir.com found that about 1.5% of their sales volume was in bitcoin. May not sound like much, but with an annual online revenue of $150M, that’s an extra $2.5M resulting from a pretty lightweight and cheap implementation. This was further underlined by the fact that nearly all consumers spending with bitcoin were new customers who had not previously been registered on the CheapAir.com website. This information usually makes the airlines a little more comfortable, but there is admittedly still a leap of faith there at this early stage in bitcoin’s evolution. I encourage the airline to think creatively as well. What can they do to make the consumer want to pay with bitcoin? Could they split the cost saving with the consumer and offer discounts? Could they incentivize the consumer with extra frequent flyer miles? Given the benefits in cost saving and risk mitigation to the airline of the consumer paying in bitcoin, they should be encouraged to help themselves by driving consumer behavior on their payment pages.
The second reason more airlines aren’t accepting bitcoin today is more nuanced. The fact of the matter is that most of the global travel industry runs on legacy infrastructure that was only ever designed to handle card or cash payments. I’m not just talking about the airline’s infrastructure, it’s the whole ecosystem of ticketing distribution systems, billing and settlement plans, and travel agencies that participate in the choreographed dance that is buying and issuing an airline ticket. Adding new payment types is often non-trivial, with an airline having to consider the downstream impact to all these players in the ecosystem of accepting a non-card payment. The cost and headache often outweighs the benefit of adding a new payment type, even more established and prolific ones like PayPal.
Enter Bitnet
At Bitnet, through our experience at CyberSource and Visa, we understand airline payments. As a result, we’ve partnered with Universal Air Travel Plan (UATP) to reduce the complexity for an airline to accept payments in bitcoin. UATP is a card network pre-dating Visa and MasterCard, that allows airlines to issue UATP-branded cards to corporate travel agents. Around 260+ airlines today accept UATP payments. Through our partnership, an airline will be able to integrate with Bitnet to accept consumer payments in bitcoin, and behind the scenes we’ll work seamlessly with UATP to make the transaction look like a normal UATP transaction. We will provide the airline with a one-time use UATP card number that they can use to fool all of their downstream systems into thinking that UATP and not bitcoin was the method of payment just used. In addition, the airline can take advantage of its existing interfaces with UATP for reporting and for requesting refunds.
It all adds up to a simpler and cheaper implementation project for the airline, which will hopefully encourage more airlines to experiment with accepting bitcoin. In many markets, particularly emerging markets, travel represents the lion’s share of ecommerce. In addition, airlines and online travel agencies are often at the forefront of online innovation and brand recognition in such markets. Could this have a knock-on effect for bitcoin acceptance online? Just maybe. Please fasten your seatbelts and get ready for take-off.
For Entrepreneurs
The MIT E-Lab is a well established (20+ year) program that helps startups by matching them with MIT & Harvard business school students for a semester. The E-Lab is now looking for cryptocurrency related startups at various stages, so apply if you think this could help your efforts. (You don’t need to be local, but a c-level exec has to be in Cambridge frequently.) To apply, or for more info on E-Lab visit http://elab.mit.edu/.
Events
Inside Bitcoins Conference and Expo - Berlin (Mar. 5-6), and New York (Apr. 27-29) Inside Bitcoins is the largest bitcoin and blockchain technology focused event series worldwide. At each event you’ll hear about the latest challenges, trends, and opportunities in the industry from experts including Chris Odom, Co-Founder and CTO, Monetas; Marshall Swatt, Chief Technology Officer and Co-Founder, Coinsetter; Dan Morehead, Founder & CEO, Pantera Capital Management; Gil Luria, Managing Director, Wedbush Securities; and more. Plus, TBI Daily readers get 10% off the Berlin and New York events with code TBIDAILY. See you there!
Jobs, Jobs, Jobs
Bitnet, San Francisco, Belfast, London (VC-backed)
-Leading digital commerce platform & former Visa team.
-Open positions: Engineering (Customer Success, Lead UI, Product, DevOps), Sales Director (EMEA), Sales Engineer (San Francisco)
-Check out Bitnet (https://bitnet.io/careers.html) and email jobs@bitnet.io
Coinbase, San Francisco (VC-backed)
-Largest “universal services” bitcoin company.
-Open positions: Security Engineer, Software Engineer (2-3 years mobile product development), Regulatory Compliance Investigator, (1 year conducting SAR investigations)
-Check out Coinbase (https://www.coinbase.com/careers/)
BitGo, Palo Alto (VC-backed)
-The leading Bitcoin multi-sig security company
-Open positions: Back-end / Front-End / iOS / Security Engineers, UX Designer
-Check out BitGo (www.bitgoinc.com/jobs) and email jobs@bitgo.com
Bolt, San Francisco (VC-backed)
-Stealth startup focused on consumer applications of Bitcoin.
-Open positions: Security Engineer, Ruby Engineer, UI/UX Designer, Executive Assistant.
-Check out Bolt (bolt.com) and email jobs@bolt.com.
Elliptic, London (VC-backed)
-Vault and enterprise digital currency services.
-Open positions: Data Scientists and Front-end developers.
-Learn more and apply at elliptic.workable.com
Today’s Tid Bits
Kenya’s BitPesa Raises $1.1 Million, Expands Operations
http://blogs.wsj.com/moneybeat/2015/02/09/bitbeat-kenyas-bitpesa-raises-1-1-million-expands-operations/
BitPesa, the Kenyan-based bitcoin, global remittance business has announced a $1.1 million second round of funding led by Pantera Capital. BitPesa’s remittance businesses launched last spring, beginning with the only U.K.- Kenya corridor, and is now also operating in Ghana. The firm now also offers a brokerage service, buying and selling bitcoin on behalf of its customers who mostly consist of expats looking to buy bitcoins in their host countries. The company has raised a total of $1.7 million to date.
Hong Kong Issues Warning About Bitcoin
http://www.nytimes.com/2015/02/11/business/international/hong-kong-issues-warning-about-bitcoin.html?_r=0
Following yesterday’s report that MyCoin, a Hong Kong-based exchange, may have run off with $387 million in client funds, Hong Kong’s central bank has warned against in virtual currencies. The Hong Kong Monetary Authority said in a statement last night that the case “may involve fraud or pyramid schemes.” MyCoin claimed to have 3,000 customers, each investing an average of one million dollars.
Bitnet Partnership Opens Up 260 Airlines to Bitcoin Payments
http://www.coindesk.com/bitcoin-bitnet-260-airlines-uatp/
Univerisal Air Travel Plan (UATP), a payment network owned by international airlines such as American Airways, British Airways, Lufthansa, JetBlue, and US Airways has partnered with Bitnet, a bitcoin payment processor. The integration allows UATP’s 260 airlines to accept bitcoin through Bitnet, which processes around $14m in payments annually. Of course, the airlines themselves will have to decide whether to enable bitcoin as a payment method. No airlines will accept bitcoin at the launch of this service.
$25,000 in Bitcoin Seized from Alleged Software Scam Operator
http://www.coindesk.com/25000-bitcoin-seized-alleged-software-scam/
Approximately 105 BTC and 900 LTC has been seized by federal law enforcement officials a part of an investigation into alleged counterfeit software sales and distribution. The digital currency holdings were confiscated from a Seattle-based business operator, Rex Yang, who allegedly sold $1.4m in stolen codes. The investigation is for a group of individuals suspected of selling fraudulent software codes and digital media.
First Bitcoin Retail Store Opens in San Francisco
http://cointelegraph.com/news/113455/first-bitcoin-retail-store-opens-in-san-francisco
A co-working space dedicated to art and technology creators, 20Mission, has announced the launch of Nakamoto’s electronics, the first Bitcoin retail store in San Francisco. Nakamoto’s electronics offers dozens of popular products, including Chromebooks and Amazon Kindles, at a minimum 10% off the Amazon price when paying with Bitcoin. BTCJam, a peer-to-peer lending platform, is financing the store.
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