Smart Card
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This article originally appeared in The Technology Issue of APEX Experience.
In the 1930s, the airline industry developed the world’s first credit card. Within 10 years, all major 17 American airlines adopted the Air Travel Card, now known as UATP, which was later adopted worldwide. Nearly 30 years later, the airline industry created the world’s first digital commerce programs with the advent of computerized reservation systems. Today, however, the airline industry is struggling to adapt to the next generation of payment technology advances.
Credit Compliance
Beginning in October 2015, the EMVCo (comprising American Express, Discover, JCB, MasterCard, UnionPay and Visa) is requiring merchants in the United States to accept new, more secure credit cards for payment. Known as “smart cards,” they contain an embedded microchip that enables greater security protocols to reduce the risk of fraudulent purchases when the card is presented for payment. If the merchants don’t comply, the liability for fraudulent transactions with non-compliant cards will shift away from the issuing banks and onto the merchants – in this case, the airlines.
Other countries have been using smart card technology for more than a decade. So why has the US been slow to adopt this more secure technology? The simple answer is cost. There are hundreds of millions of credit card accounts in the US alone. The average cardholder has about four cards. The transitional costs to smart cards have been estimated to run into the billions of dollars for banks and retailers. The recent wide-scale data-security failures of large retailers such as Target, Home Depot and Neiman Marcus makes the investment in new cards begin to make sense.
Changeover Challenges
For the airline industry, these new liability rules and new technologies pose significant challenges for the in-flight environment. While the handheld terminals used by many cabin crews are easily replaceable, airlines still incur substantial charges for back-office development and employee training. The greater concern, however, are the magnetic-stripe readers embedded in seatback in-flight entertainment (IFE) monitors. Those devices are an integral part of the overall IFE system design at both the hardware and software level. Airlines will find replacing those systems a far more complex and costly undertaking.
As the changeover deadline rapidly approaches, it would appear that the airlines are stuck. The majority of vendors providing embedded IFE hardware don’t have new solutions readily available, though some companies have announced new products are in development. While in-flight revenues are a small fraction of the overall ancillary fees generated by airlines today, the lack of a secure payment system will limit the airlines’ ability to offer higher-value goods and services aloft in the future.
Why has the US been slow to adopt this more secure technology?
Wireless Payment
Further complicating the decision process is the fact that multiple competing methods for new payment systems are emerging. The EMVCo specifications for physical smart cards have been well established, but many of the EMVCo’s members are also pushing for the increased use of contactless forms of payment. Contactless systems use near-field communication (NFC) chips to create a secure wireless communications session. These NFC chips may be present in some smart cards and are the basis of smartphone-based payment systems such as Google Wallet and ApplePay.
Vueling, a Barcelona-based budget carrier, was the world’s first airline to introduce NFC and scanning payment system in December 2014. Using Vueling’s mobile app, passengers with Apple iOS and Android OS devices can input their data into secure platforms, enabling them to make a contactless payment with their credit card and the airline’s enabled terminal. This April, JetBlue announced that it would start offering ApplePay on its flights, becoming the first carrier to do so. The option is only currently compatible with iPhone 6 and iPhone 6 Plus devices, and will soon support payments with Apple Watches. Google Wallet will only be supported, “down the road,” Rachel McCarthy, JetBlue vice-president for inflight experience, explains in a company release. Around 3,500 iPad Minis with NFC-enabled cases will replace the airline’s old mobile payment terminals.
InFlight Peripherals has released a certified battery-operated NFC terminal that can supplement other manufacturers’ existing IFE systems or be embedded into a seat on a standalone basis. Panasonic Avionics has also committed to making an EMVCo-compliant NFC option available to airlines in 2015. But neither product will accept the full range of smart cards that will be issued this year.
Personalized Payment
Any delay in accepting smart cards also means that the airlines will not be able to take advantage of the most promising features of the technology: delivering a more personalized experience to their passengers through their airline-branded credit cards. These are some of the most highly valued cards issued by banks, because free travel rewards are a powerful incentive to use the cards more often. With smart cards, the secure communications and on-card memory can enable coupons, upgrades and frequent flyer miles to be redeemed as a part of the purchase or issued as a reward immediately afterwards. Additionally, the transaction data could allow the airline to store customer preferences locally and provide the airline a more detailed understanding of its customers’ behaviors while in flight.
“The younger generation, especially, is focused on mobile devices.”- Ron Freer
So what is an airline to do? For some, the answer is, nothing. The purchases made in flight are of such a low value that accepting the risk of fraudulent charges makes more economic sense than trying to replace hundreds or thousands of monitors.
Option Assessment
Ron Freer, senior manager Cabin Services Strategic Planning and Projects at Southwest Airlines, points out that “We only accept credit cards for purchases of alcoholic beverages onboard, and the risk of fraud is low on a $5 purchase.” Southwest cabin crews use mobile credit card readers provided by Toronto-based GuestLogix, a company that has a new EMVCo-compliant product available today. But that doesn’t mean Southwest will replace its current units immediately. “GuestLogix and other vendors have products we can use now, but choosing and implementing a new device to roll out across the fleet takes a long time,” says Freer.
Southwest would also like to have greater flexibility in choosing the types of payments accepted in-flight. “Ideally, we would have a product that allows our customers to choose how they would like to pay,” says Freer. “The younger generation, especially, is focused on mobile devices, and we want to support their choice of device.”
Working Group
For the other airlines, the APEX Technology Committee has formed a working group to address this topic. The group will provide a forum to discuss ways of mitigating the impending liability shift and educating the APEX membership on the array of new technology soon becoming available.
Experts agree that over the next decade, technology will drive an evolution in merchant payments, rivaling the changes prompted by the introduction of electronic terminals 30 years ago. But the time is right for airlines to embrace the enhanced security, lower fees and greater personalization offered by this new technology and take in-flight services to a new level of innovation.