Blockchain offers a way to process safe and quick digital payments, but it also has much potential for the future
Unless you have occupied a cave in the Sierra Juarez mountains for the past couple of years, the chances are you will have heard the word ‘blockchain’ by now. Unless you are a tech or finance geek, however, the chances also are that you will only have the foggiest notion of what blockchain is, or is likely to mean for you professionally.
That is entirely forgivable, because while blockchain has some simple principles at its core, the technology around it can be ferociously complicated. What is also unclear is just how momentous blockchain will prove to be.
Mooted potential applications relevant to business travel include everything from completely replacing existing payment processes to automated contract fulfilment to eliminating physical passports.
Such predictions explain why one recent headline in Fortune magazine screamed: ‘Here’s why blockchains will change the world’. But some payment professionals want to turn the hyperbole knob well down from its current level of 11.
“Everyone is waiting for some killer app that will change the world,” says Simon Barker, chief executive of Conferma. “I don’t think that is going to happen. Instead there will be lots of small, incremental improvements. Blockchain is great for a lot of unglamorous stuff for which today we are using workarounds.”
Airplus International UK managing director Carrie Haywood agrees. “Blockchain won’t affect travel managers directly, only the systems they use,” she says. “It’s not The Matrix. It’s a design solution for the back end of processes, not what travel managers or travellers will experience.”
Ledger of everything
To help the reader formulate their own opinion, some explanation is needed. Blockchain has been described as the ‘Ledger of Everything’, the ultimate, in- disputable source of record.
“Blockchain is distributed ledger technology,” says Alexandra Fitzpatrick, vice-president of global travel payment solutions at Travelport. “It is like having a digital data ledger sitting in the cloud, with debit on one side and credit on the other, all synchronised.”
Whenever any transaction is made between parties in a network, most simply between a buyer and a seller, the transaction is configured into what is known as a block, and is shared by all parties within the network, containing crucial information such as buyer and seller identities, transaction details, the value of the buyer’s digital wallet from which the payment is taken and the unused balance returned to the buyer.
The transaction is instant and the record of it unchangeable. The block is then added to a chain, which records the entire non-reversible history of transactions in a public ledger.
“When I update my ledger, you update yours and we both trust it,” says Barker. “It’s a low-cost way to keep abreast of what everyone is doing. Each version of the ledger is called a node, and each change to the nodes has to be witnessed as correct. You can’t update until all parties are happy it is correct.”
Broadly speaking, there are two types of application for blockchain. One is payments, the other where there is no transfer of value and, instead, the key benefit is the reliability of an immutable record.
It is the payments part, the reason blockchain technology was originally conceived, where matters get really complicated, especially in blockchain’s role as the enabler of bitcoin and other digital currencies.
Bitcoin was conceived as an international currency, beyond the control of countries or banks, that would allow people to pay each other directly. Bitcoin has had something of a bad press because, as a different article in Fortune put it: “while there is nothing intrinsically evil about bitcoin, its most famous adopters have been a rogue’s gallery of fraudsters, prostitutes, dark web drug lords and Ponzi schemers.”
Early predictions that bitcoin would precipitate abandonment of fiat (real world) currencies have, so far, proved wide of the mark, although a handful of hotels and even airlines do accept bitcoin as payment.
Buyers and sellers do not need to hold digital currency themselves to complete a transaction through blockchain. Instead, the consensus is that, depending on whether it is a private or public blockchain, digital currency acts as a token within the process to ensure secure and instant transmission of the payment through the network.
At its most radical, blockchain could theoretically bypass the complicated and expensive eco-system of issuers, acquirers and so on which constitute today’s global commercial payments process.
“Blockchain brings the buyer and seller together,” says Patricia Partelow, associate partner, digital consulting practice for IBM. “Over time value can stay in the network instead of bank accounts. It eliminates a lot of the cost we have today, including improving cashflow and eliminating fraud.”
Speaking at the Business Travel Show in London in February, SAP Mobile Services senior director of value services Johnny Thorsen outlined his vision for blockchain-enabled travel payment.
“The way billing happens in the travel industry today is still very inefficient,” Thorsen says. “If you go into the blockchain world, you eliminate the need for credit cards. Virtual cards, fine.
It’s a good transition process, but why not go to instant digital payment where you move money to a [hotel] supplier when the hotel room door opens? When you leave on the last day, it knows what else you used and that is paid for [and documented] instantly. It could eliminate the expense report completely.”
As the founder of a virtual card technology company, Conferma’s Barker, unsurprisingly, disagrees that blockchain will replace the card-based payments infrastructure. He focuses on a paradox of blockchains, which is that they are totally transparent to participants within the process but impenetrable through encryption to those excluded from them.
“Payments are centrally controlled by governments to ensure there is no money laundering and people pay taxes,” Barker says. “They won’t want to let those controls go. Virtual card numbers, which are built on card rails, are a good long-term bet.
“The key to payments is global acceptance, which the card rails have spent the last 40 to 50 years establishing. Blockchain could be used to send ledgers bank-to-bank, but virtual cards won’t be replaced by cryptocurrencies.”
Barker believes, instead, that blockchain can verify the sending of virtual card numbers to hotels. Fitzpatrick likewise tips blockchain to support rather than displace virtual cards.
“If someone in the UK wants to pay for a hotel in Switzerland, then today the hotel charges in Swiss francs and a few days later you find out how much it cost in sterling,” she says. “For that reason, you have to add a tolerance of around 10 per cent to the amount on the virtual card. With blockchain, you will know instantly how much it is going to cost you.”
For Thorsen, however, the most exciting potential of blockchain for travel buyers is “self-thinking and self-regulating” smart contracts.
“The smart contract monitors in the background,” he told his audience. “If [a parameter is reached], the transaction will happen instantly and digitally. Imagine if that were for hotel rooms. You know that after 500 nights, the next night will be 10 per cent cheaper. The contract will regulate itself. All it needs is transaction data telling it what to pay and when.”
Thorsen predicted smart contracts will become common practice by 2018.
Partelow similarly imagines blockchain underpinning the triangular transactional relationship between airlines, TMCs and their corporate clients. A single ledger logs and verifies the tickets the airline sells to the client, the fees the client pays to the TMC, and the fares the Travel Management Company: An agency which manages business travel for a company. pays the airline.
Yet another application of block- chain, and one that IBM is actively developing, is creating verified identification of individuals, which could greatly speed passengers’ progress through airports.
“If you know who I am, maybe I don’t even have to carry my passport,” says Partelow. “Once my identity is verified, it can be put on a blockchain, which will store an immutable record of who I am.”
Once again, the idea is to use tokenisation. Any authority accessing the record will not see the passenger’s personal details. Instead they will see confirmation these details have been verified and a match to that confirmation using biometrics, such as facial recognition.
Thorsen says blockchain-based identification could also improve personal security. “You could not check into the airport unless you had a booking that gave you an ID matching a record that you would be at the airport on the day,” he adds. “When the trip ends, the ID is completely gone.”
It is impossible to know which of these ideas will prove sustainable and numerous questions remain unanswered. Commentators observe that blockchain removes the need for middlemen. There are plenty of those in the travel sector, including various payments players, expense management providers and TMCs. Could they be affected? This new technology, and its complex potential implications, need close watching.
Potential applications of blockchain for business travel
• Automated, invisible payment without the need for the traveller to get involved. Greater transparency for payments involving currency conversions.
• Smart contracts where payment is automatically triggered once the terms of the deal have been met.
• A master system for administering loyalty programmes.
• A move to virtual, phone-based passports.
• Control over who can enter an airport.
• Verified identification and payment between hosts and guests of accommodation sites such as Airbnb.
• Monitoring transaction and payment flows between suppliers, travel management companies and corporate clients.
• A clearing system for payments between airlines.
• Lower-cost digital payments could replace corporate and even virtual cards.
Alternative currencies in the travel industry
Blockchain is currently best known as the technology enabling digital currencies such as bitcoin. But other multinational or neutral currencies have been used in the travel industry for decades.
Special Drawing Rights (SDR)
Under the Montreal Convention, compensation paid by airlines for damage to baggage is limited to 1,131 SDRs, and airlines are liable, regardless of culpability, for damages through injury or death of up to 100,000 SDRs.
SDRs are an international reserve asset created by the International Monetary Fund in 1969. Today the value of an SDR is fixed against a basket of five currencies: the US dollar, Chinese renminbi, Japanese yen, euro and sterling. At the time of writing, £1 was worth 1.24 SDRs.
Neutral Units Of Construction (NUC)
A notional currency based on a set of exchange rates issued by the International Air Transport Association (IATA) to record fare calculation information. NUC was launched in 1989, when it superseded the Fare Construction Unit.
The UIC franc was a virtual currency with a similar purpose to NUC used by the International Union of Railways. It was withdrawn in 2013.