The good, the bad and the ugly – the truth about payments for tourism businesses
There is an ugly truth that very few travel tech companies seem to talk about when they rush out of the gates to satisfy the curiosity of hungry travellers starved for experiences.
That truth is the support for international payments, especially those for SMEs, is broken.
It is not just a case of payment systems not working or being too expensive for many small businesses, which in many cases they are, but the fact that for the most part, they simply don’t exist in many emerging markets.
Take a look at any of the recent startups in the tour and activity segment and you will see a familiar trend, they are mostly “marketplaces” where the startup takes payment on behalf of an operator and then sends money (less fees of course) to the operator (or guide) once the tour has been taken.
Most of these startups, not surprisingly, are also based in the US where online payments and transferring money via Paypal or an automated clearing house are not an issue.
Why is this payment model so attractive for startups?
Firstly, it is an inflated measurement of revenues. When you are collecting 100% of the funds, it’s easy to say you made X amount of revenue and it’s just as easy not to mention that you only actually keep 10% or 15% of it.
It’s the same measurement that got Groupon into trouble during its IPO. It’s also attractive because it means the startup gets the money, first ensuring they get paid, rather than trying to collect commission from hundreds or even thousands of small operators.
Move outside of the US, however, and the problems become much more significant. You don’t have to go much further south than Panama to find that, although Paypal is accepted, a small operator can only withdraw funds to a US bank account. Not a very practical or cost effective solution for a small local business.
Even relative newcomers like AirBnB use the same payment scheme. It is a proven model and it works. But for anyone other than the occasional room renter or would-be tour guide it is simply not reasonable to wait for cashflow that is delayed by up to 90 days and costs upwards of 20%.
It is partly for this reason that only 8% of total revenues generated by in-destination tour and activity operators are generated through resellers.
Reality for small businesses
That’s the well funded tech startup landscape though, so what about the actual small operators? What kind of issues are they facing around payments?
The biggest problem that many of them see is not having access to the internet, SEO, or even having a booking engine. For many, the fundamental problem is that there is no way to accept credit card payments.
Ecommerce is built on the premise that customers pay something at the time of purchase and receive confirmation in real-time. Even if the payment is only a deposit or even a pre-authorization, the fact that the customer is paying with a credit card means that the business is assured that they will be paid for the booking they have received.
This is especially true for in-destination operators whose average ticket prices are less than $100. Without real-time credit card payments and the guarantee of a confirmed booking, the need to book in advance is all but eliminated.
This lack of access to credit card payment systems for small businesses has driven many to use aggregation services or resellers who can accept credit cards. But even the resellers and aggregation services have a limit on the number and type of tours that they are willing and able to sell.
The resellers have their own brand to protect after all. Supporting every tour and cutting checks for a myriad of suppliers each month is an administrative burden that most would want to avoid. Which leaves the vast majority of operators who want to take advantage of advanced bookings online with no way of doing so.
Recently there has been an increase in the number of alternative payment providers. Companies like Square, Brain Tree, and Stripe are trying to make credit card processing easier for small businesses in the US.
Unfortunately this still leaves those markets that really need a solution out of luck. In order for the in-destination global tour and activity segment to truly embrace the web, solutions to the payment problem must be resolved.
What can be done?
Given the fragmented nature of the tour and activity segment and the relatively small size of the businesses that participate, how can the problem be solved?
There are several ways to tackle the problem and unfortunately none of them are short term. The first is to educate operators on payment best practices and to get them payment ready.
This is best accomplished by regional or local tourism boards or chambers of commerce who have direct access to operators. An example of this is the Australian Tourism Data Warehouse (ATDW) and its tourism e-kit.
Simultaneously, the tourism boards can work with payment providers to streamline the process of providing merchant services to small businesses.
I realize that payment issues are larger than technology and involve the banking infrastructure and government regulation, but In order for the banks and merchant providers to support small business, they must see the business opportunity and economic benefits.
I think that merchant providers somethings take a myopic look at the payment landscape and think that if the locals don’t use credit cards then there is no reason to support it. But inbound tourists and travellers will be using credit cards and if you want to attract more of them, then the systems have to be there to take payments from them.
The larger business opportunity in the tour and activity segment is in understanding the economies of scale with the segment.
As PhoCusWright showed in its 2011 study When They Get There & Why They Go, the US in-destination tour and activity market alone is worth $27 billion and is 80% comprised of businesses that generate less than $1 million per year in revenue. Extrapolate that out to other regions and the global opportunity becomes compelling.
I think the most interesting opportunity in solving the payment problem is for an established or startup company to try and tackle it in earnest.
I am not talking about creating another Stripe, Braintree, or some other service that is only available to U.S. businesses, and I’m certainly not talking about creating more aggregators or resellers.
I’m talking about a serious effort to try and address credit card payments for small tourism businesses in emerging markets in an affordable manner. To date, it looks like Paypal, as loved and reviled as the brand may be, is doing the best job of trying to support regionally diverse merchants.
Surely though, the market is large enough to make it worthwhile for other competitors.
Until the underlying problems around payment are resolved for the vast majority of operators, the in-destination tour and activity market will never truly reach its full economic potential and the majority of local tourism businesses will remain off the radar cash only operations.
Stephen Joyce has been a contributing Node to Tnooz since 2009 and has been working in travel and tourism technology since 1995. Stephen is the CEO of Rezgo.com, a cloud based software as a service reservation and booking platform for tour and activity providers.
Stephen is a graduate of Capilano University, a certified commercial pilot, and holds a certificate in IT Management.