NB: This is a guest post by Ben Colclough, director of Tourdust adventure travel and a former payments industry professional.
With rumblings in the airline world, and the high profile collapse of E-Clear in the UK, payments is fast becoming one of the hot topics in the travel industry.
The problem lies in the nature of travel bookings. Consumers pay in advance, leaving a gaping window for the travel company to go bust and the customer’s money to disappear.
The result? Customers end up paying through the nose in credit card surcharges…
Let me explain:
- Step One: Travel companies collect payment well in advance of travel. Good for their cash flow, but …
- Step Two: As a result, travelco incurs costs of bonding (for UK folk through the Civil Aviation Authority) and higher discount rates (banks usually charge the travel industry high discount rates because they don’t want to be exposed if the travco goes bust).
- Step Three: Travco passes cost on to consumer, either in inflated credit card surcharges or built into the price (if surcharges are prohibited as in many US States).
- Step Four: The customer pays through the nose – all to support the travco’s cash flow.
So big travel companies get round the problem (at the customer’s expense), but it is creating massive barriers to entry to new entrants.
Credit card facilities are increasingly difficult to secure for young startups, for example. The problem is compounded further in developing destination markets.
As customers increasingly look to book direct with smaller local operators in the more exotic destinations they visit, there are no satisfactory payment and bonding mechanisms in place to meet the demand.
Local operators are now taking bookings online from overseas customers at scale, but few can offer any form of bonding or payment options other than Paypal and Western Union.
When asked why, one Inca Trail operator claimed they had been quoted fees as high as 8% for Visa and MasterCard payments.
Even the behemoths of the airline industry are starting to stand up and take notice.
Quoted in a Flightglobal report, Forrester Research vice-president Henry Harteveldt states:
“It’s no secret that airlines are frustrated with the way credit card fees work and their relatively high costs. … Credit card companies have no choice. They had better realise the writing is on the wall.”
He is right to a point, but airlines are the cause of the issue too. Merchants always enjoy bashing the acquirers for their outrageous fees, but in reality airlines expose banks to significant risk.
Ultimately, the industry needs to look long and hard at why it needs to take payment at the time of booking.
Yes, they need to secure access to funds to ensure the customer doesn’t default on payment, but there are other ways to achieve this.
Two alternatives spring to mind:
- Pre-authorisations, where the merchant effectively reserves the payment on the account to call at a later date
- A Paypal-like payment scheme which combines the role of bonding and payment scheme and centrally manages the risk of the merchant (hello Paypal/Tripit/CAA mashup?).
But unfortunately, unless we are all willing to forgo advanced cash flows, then the travel industry simply has to continue to live with the current level of fees irrespective of the payment scheme du jour – be it credit card, mobile payment or Paypal.
NB: This is a guest post by Ben Colclough, director of Tourdust adventure travel and a former payments industry professional.
Related posts:
- Moneydirect offers payment solution for travel providers
- HomeAway hires PayPal exec, works on payment, booking initiatives
- The rules for airline ancillary services — European style
- FlyGlobespan – How airline payment systems work, or not
- Day One of Five: Rough guide to credit card and PCI issues in travel
About Special Nodes
Excellent observations Ben. Working with activity operators (who are primarily small businesses) everyday, I fully understand the obstacles faced by many small businesses. You are correct that the delay between payment and delivery of service is the greatest risk factor for credit card processors. The massive collapses of large operators only makes it harder for smaller businesses to get access to merchant accounts. Many of the tour operator customers on Rezgo who offer large adventure packages (like the ones on Tourdust) are discovering that the best method for both getting approved for a merchant account and for dealing with customer payments is to stagger the payments. They take a non-refundable deposit first, which demonstrates a commitment to book, followed by several regularly spaced payments based on either time frame or delivery of certain services.
For our activity operators who offer in-destination tours that are generally less than $100 and are booked within 7-15 days, we have experienced very few issues with merchant account approval or customer payment issues.
Your suggestion of the pre-authorization would be the best but, unfortunately, there is no standard for how long a preauth will hold funds. In many cases the preauth will hold funds for as much as 30 days and as few as one day. How long the preauth lasts varies between merchant processors.
There is no doubt that payment issues will continue to be an issue for travel and it will only get more complex as more and more suppliers and travel business models come on-line.
@ Stephen. Thanks for the comment. Staggering payments seems like a good practical solution. Unfortunately in the UK at least it is all too common to get hard no’s from acquirers with little opportunity to problem solve with the bank about which changes (such as staggering payments) might work for them. My only concern about putting extra payments into the process is simply the operational cost of handling and chasing each payment and the hassle for the customer.
You are right about the issues with pre-auth, even a 30 day window isn’t long enough for many advanced bookings. Still, there must be an opportunity for a global payment processor specialised on the travel industry with tailored preauth solutions.
Ben -
I was able to follow your interesting post until the end then I got to the mention for TripIt – uh? Lost! Could you elaborate on the role you see here for TripIt and the likes? (to be complete let’s mention TripCase, Worldmate, Kayak…).
Thanks.
@ Daniele. Apologies, let me elaborate. If the payment processor could also hold trip data (travel dates in particular) then for riskier merchants it could hold onto the funds until travel date and then automatically distribute them. In effect acting like a trust account but without the laborious paperwork and associated organisational cost. If it wanted to get really smart it could then transfer net amounts to suppliers and commissions to the merchant in one integrated multi-currency solution. Finally, there is the opportunity to sell the data to credit card issuing banks to improve their fraud controls (see Alex’s third point in his recent tnooz post – three alternatives to creating yet another travel inspiration startup. I guess the reason that would make sense for TripIt et al is their experience in facilitating and collecting travel data from numerous sources.
Ben,
A great article and you are spot on.
Which is why we created http://www.tripinquiry.com.
We consider ourselves to be a tripit / Paypal / Escrow.com mashup.
We have just gone live (today Thursday the 9th) with a beta of the tripit bit. (You forward your responses from holiday lettings.co.uk to plans@tripinquiry.com)
We would be deighted if you would take a test drive and give us some feedback.
Shane
Hi Shane,
tripinquiry.com looks interesting. I’ve definitely felt the pain you are trying to solve. It’s an innovative approach that I am surprised the big home rental sites haven’t done themselves – although I guess they would be hamstrung by having a tool only relevant for their site (which is less than perfect when you have consumers looking at multiple aggregator sites in one search session).
Hi Ben,
Thanks for that
One of the interesting things about TripInquiry is that we facilitate cross website shopping, which undermines the efforts of the big guys to become a monopoly.
S
Ben – hi – as you mention, this is a very hot topic for the industry. Our conference, the Airline and Travel Payment Summit on the subject is now into is 4th event!
The real interesting thing is that there are alternatives. In places like Holland, KLM takes lots of payments via iDeal which is cheap for it, is immediate payment and is convenient for customers. Essentially, it is payment direct from your bank account.
People like UseMyBank have a similar system (they are speaking at the conference in San Francisco) which is subtantially lower cost. It also helps with cash flow/chargebacks.
Also interesting, is in places like Brazil where there are lots of credit cards, but very low credit limits, they get round this with staged payments.
Even in the “traditional” credit card market there is also hope. Companies like Adyen out of Amsterdam have a risk model that works for each airline/travel supplier which helps with holdbacks and as they have built their platform on 21st century technology their costs are lower so they have an interesting pricing model. Combine that with the risk model side and negotiating with the acquiring bank can start to help with those costs.
Adyen and people like Envoy Services also offer “out of the box” links to the AFOP (Alternative Form of Payments) market. In essence, if you want to collect via iDeal in Holland or PayPal in the US then you plug and go with these people. In other words, your ecommerce platform has one link to them and they connect you to all these other AFOP’s across the world.
The market currently isn’t perfect (and there are advantages to consumers of using their plastic online, which, hopefully drives sales as well) but at least people have alternatives.
Hi Michael,
Thanks for the comment. I hadn’t come across UsemyBank or iDeal before. In my experience consumers seem happy to pay by bank transfers (and of course it is a cheaper method for the merchant), so systems like these which simplify the bank payment sound great. I can’t imagine they will prove to the immune to the fraud, chargeback and risk issues of other payment mechanisms?
Well, I’m a realistic as well and every system has a flaw somewhere. However, if you talk to the various people involved in this they say there isn’t fraud/chargeback.
However, best to talk with them directly as, for example, UseMyBank are closer to it. They are a Canadian company and they appeared on the CBC version of the Dragons Den which, if you google it you can find on YouTube.
Let me know if you want me to put you in touch with them directly!