MAG Insights

Announcements from the MAG & Featured Articles

Board Member Corner (MAG Quarterly- Volume Two, Issue Four)

Mobile vs. the Ancient World of E-commerce: What Can We Learn from the 90’s Airlines’ Digital Commerce Revolution?
By Chris Priebe, Southwest Airlines

December 4, 2014

Thank you for taking the time to read the MAG’s Board of Directors Corner. I hope my personal thoughts and perspective will help you advance your company’s mobile commerce strategies as a merchant, issuer, network or supplier. For readers that did not go through the dotcom revolution to the same extent that Southwest did in the late 1990-2000’s, I hope you can glean meaningful insights from the parallelisms between the airline dotcom distribution revolution and what I think is occurring in a similar fashion  [mobile commerce revolution]. went from 0% Internet sales to 83% Internet sales in about a decade. Most, if not all of us, will experience a similar rise from plastic card based transactions to mobile wallet based digital transactions and offers. History has a way of repeating itself absent interventions and constraints. 

Similar Consumer Promise:

The parallelisms between the Airline distribution revolution and the [mobile commerce revolution] are uncanny. Online Travel Agency (OTA’s) business models - created in the late 1990’s airlines distribution revolution - promised, on many levels, similar benefits to the mobile commerce platforms promises - Apple Pay, Google Pay, SoftCard and MCX. Some of the players had technology assets to bring to bear on the new commerce platforms and others brought content, efficiency, and loyalty as their best asset. Many OTA’s were created as a result of the consumer need to simplify the complexity of airline searches and consumer demand for self-service solutions via the Internet [similar to the mobile commerce platforms being introduced today to the marketplace]. Airlines had a choice, either provide consumers with the best experience in the place they wanted to shop (the Internet) at the price they needed or lose relevance [similar to Consumer Demand for mobile commerce platforms and/or merchant apps]. OTA’s were born out of the transformation of brick and mortar and telephone center Travel Agencies [similar to digital wallets promising efficiency, accuracy and safety for payments and offers versus brick and mortar merchants/banks, today].   

Similar Pricing:

OTA’s, like the original travel agencies, were initially funded from percentage fees [similar to payments costs today being ported over at the same percentage rates of the existing cards model]. OTA fees were contractually restricted from being disclosed to the consumer who ultimately paid for them in the form of higher ticket prices.  Airline commissions were 10% of the value of the purchase. [Sound familiar? Of course it does! All merchants are currently precluded from displaying payment fees to the consumer in the US by contractual restriction]. While interchange is not 10% today, mobile commerce search/offers cost added to payments are expected by some to equal or exceed these percents.

Similar Stakeholders:

Travelocity was created by one of the largest airline suppliers called Sabre [similar to Visa Pay, Chase Pay, MC’s MasterPass, AX Serve]. Then came Expedia created by the strongest technology company of the time, Microsoft [similar to Apple Pay, GooglePay and SoftCard who are large technology companies playing in the mobile space]. There was a company created by Airline merchants, Orbitz [similar in nature to MCX] to compete with the other OTA’s and to ultimately influence their underlying business via competition. There were thousands of smaller and medium size plays that promised, and many delivered, compelling consumer value propositions and created great shareholder return. Finally, there were approximately 10 large US airlines [similar to the 9,000,000 merchants today] including Southwest Airlines that had to decide whether or not to invest heavily in a direct relationship with the Customer by putting the best prices, best services, best loyalty offers on their proprietary Internet sites or hand over the search solutions to the new technology companies. Southwest went the direct relationship route and ensured our best content was at [similar to the merchant mobile app explosion of today]. Others used a hybrid approach using key OTA’s or distribution sources and their own direct channel. No single solution was perfect, but all were forced to create the best strategy possible.

The Airline Distribution Outcome:  Who won?

  • Consumers won – all things being equal, airfare price competition increased due to readily available information to consumers via dotcom travel sites which encouraged airlines to compete more vigorously.
  • Airlines won – the 10% commissions were reduced to 0% in a few years as the utility that was once valued at this price had to be re-engineered to compete in a new technology-rich field.  Travel Agents and OTA’s generally changed their model to charge consumers who received the most utility from their service a fee that is transparent and commensurate to the value created for the consumer. 
  • Orbitz won – encouraged competition in the OTA space and later was sold off by the airlines for $B’s.
  • Microsoft won – Expedia was sold and diversified into a multi-national travel company with $4.8B’s in revenues in 2013.
  • Non-evolving Travel Suppliers and Airlines –(none to be named) those that tried to continue to hold on to past distribution practices and pricing methodologies without creating an effective digital commerce strategy either have seen significant market share declines or have gone extinct. 

Possible Mobile Payments Outcomes: Who will win?

It is certainly TBD, but my sense is that competition will be encouraged and suppliers, merchants and consumers who evolve will win, similar to the Airline Distribution revolution. Those who protect old models, without adding value and demanding status quo pricing directly or indirectly, will see their fortunes reduced or eliminated over time by quick upstarts, competitive alternatives, creative merchants and disinterested consumers. An abrupt change in technology form factors has a way of facilitating highly competitive marketplaces in a fraction of the time of more evolutionary market changes. No one entity may prevail, but new developments in commerce could separate the most cost-effective solutions from those that are not. The payments world, much like the airline industry will have two groups…those who add value at a fair price and those who rely on their past success.

My Observations:

  • Protect - Your relationship with the Customer.
  • Competition is good -  Competition=lower cost=higher quality products=happier customers
  • Invest Resources – You never know how this market will shake out, but just as airlines had to be creative, so will you. The only bad investment is not to make a bet or two.   

Regardless of the outcome, and the pace of the transformation, the upcoming technology conversion will keep payments and digital commerce interesting in the coming months and years (revolution), if not decades (evolution). I look forward to seeing you at the MAG Mid-Year Conference in Dallas February 17-19, aptly titled Advancing the Payments System – Evolution or Revolution, where these and many more topics will be thoroughly debated.

Best Regards,