A surge in online fraud has become a pressing issue for the airline industry, resulting in substantial financial losses for carriers worldwide.
Here Tom Randklev, global head of product at payment orchestration company CellPoint Digital, explores strategies for airlines to safeguard their revenue and combat fraud amid increasing travel demand.
Since 2019, online fraud has spiked by more than 52 per cent, with one report indicating that €80billion was lost to online fraud across physical and digital goods and e-ticketing in 2021. Airlines have not been immune from this trend; in fact, air travel has been hit hard.
As airline transaction volumes continue to surge through the current multi-year travel boom, the impact of fraud on the industry has risen commensurately. In 2021, airlines lost over €6.5billion to fraud, amounting to 1.5 per cent of total global airline revenue – and accounting for 46 per cent of all online fraudulent transactions.
Airlines are susceptible to many of the same fraud tactics that plague all ecommerce enterprises: hacked customer accounts, employee misuse, phishing attacks, and customer service scams. Due to the nature of their operations, they’re also somewhat more at risk from fraud schemes involving pilfered loyalty programs and mileage balances, fake booking sites and post-travel chargebacks.
The bad news is that increased travel demand will only create more opportunities for fraudsters. But the good news is that airlines are far from defenceless in the face of this growing problem.
By utilising payment platforms that incorporate robust fraud prevention tools, embracing holistic strategies like Payment Orchestration, and leveraging technology that streamlines the complexity of existing payment systems and eliminates loopholes and blind spots, airlines can effectively combat fraud and protect their margins.
More travel demand, more transactions, more fraud
As the volume of transactions in any industry increases, incidences of fraud also increase… it’s just a fact of business. Now that the UN World Tourism Organisation pegs the current global number of travellers at nearly 90 per cent of pre-pandemic levels (up from 66 per cent in 2022), the industry can expect a similar surge in fraudulent transactions.
The International Air Transport Association (IATA) estimates that card payment fraud alone amounts to over $1billion annually in the airline industry. Rising transaction volumes also at least partially contribute to increases in other kinds of fraud, like account takeover attacks of frequent flier accounts (up 307 per cent from 2019 to 2021) and loyalty fraud rates, which increased by another 30 per cent from 2021 to 2022.
Chargebacks are also endemic to the commercial aviation industry and can be particularly damaging because of the extra costs associated with absorbing the chargeback. The total chargeback cost to a merchant like an airline is 2.9-times the value of chargebacks. This is why, in 2017, 60 per cent of global airlines said reducing chargebacks was their top priority for combatting payment fraud.
Limitations and opportunities for airlines fighting fraud
If airlines are already prioritising combatting payment fraud, why is the industry still so vulnerable to it?
This is partially because many airlines have complex legacy systems within their booking and payment processes, and any legacy system is ripe for exploitation. Airlines also tend to have many compartmentalised systems that don’t effectively communicate with one another nor flow through a unified checkpoint. Fortunately, there are payment technologies that can help airlines overcome these challenges and, in the process, directly improve their profitability.
According to IATA, about 10 -15 per cent of attempted air travel purchases fail for various reasons, which is considered high relative to other industries. Not all these failures are fraud-related; most airlines (and most merchants) will have a fraud reject rate between two per cent and three per cent of all their transactions.
The opportunity for airlines and other merchants is to recover some of those flagged transactions through advanced fraud protection tools. Of the three per cent, 60 per cent would be ‘suspect’ or transactions that trip a particularly sensitive fraud trigger but aren’t actually fraudulent.
And of the 60 per cent that are suspect, a merchant can recover about 60 per cent with authentication tools like 3D Secure or Cybersource, meaning that 1.08 per cent of all transactions can be recovered in this way. Another 30 per cent of the remaining 1.92 per cent can be recovered with an effective chargeback solution like Riskified or Chargebacks911, which lowers the net write-off to 1.26 per cent.
Getting it right
That means that with the right technology, airlines can more than halve their fraud-related exposure – a significant savings that accrues directly to their bottom line.
However, implementing these tools at every potential entry point for fraud across airlines’ complex network of payment systems can be daunting. By adopting a more comprehensive, holistic approach to payments like payment orchestration, airlines can quickly identify suspicious activity and centralise their payment flows to allow fraud mitigation tools to work efficiently.
A good payment orchestration platform will also optimally route transactions to boost acceptance and create a more streamlined payment system overall.
Some level of fraud is unavoidable for all merchants, airlines included, and the potential for fraud will always rise as transaction volumes do. But with the right technology and approaches, including payment orchestration with integrated fraud control tools, incidents of fraud can be minimised and managed. And in the process, airlines can boost their bottom lines and enjoy the full benefit of the ongoing surge in travel demand.