The relationship between the travel sector and the payments industry has not always seen eye to eye, as one holds the other at fault for the failings of the other. The pandemic acted as a catalyst in this unstable relationship as global travel and tourism lost almost $4.5trillion in 2020. For context, while worldwide gross domestic product contracted 3.7%, travel’s contribution to the global economy reduced by 49.1%.
It’s time for the travel industry to address its payments issue. Paulette Rowe, CEO, Integrated and Ecommerce Solutions at Paysafe, has over 20 years’ international experience and deep knowledge of the payments eco-system and payments technology, and discusses what could be done.
Rowe explains why the relationship between travel merchants and acquirers needs to be reset, and how covid-19 has magnified the industry’s issues; what the benefits of a safeguarding model are over holdbacks for both travel merchants and acquirers; how safeguarding compares to other forms of acquirer risk management options, and what travel merchants should do next if they are rethinking their acquirer relationships:
Even before covid-19, issues between the travel sector and its acquirers were coming to the fore. With the financial impact of the pandemic taking a huge toll on the sector, tackling these differences is even more critical.
The relationship between the travel sector and the payments industry has never been a simple one. Many of the most high profile travel industry failures, such as the collapse of Thomas Cook and Monarch Airlines, have often resulted in the travel business and their payments partner accusing the other of being at fault for the downfall. This is because the acquirer is withholding funds to cover the cost of the chargebacks it will be liable to repay customers if the operator goes out of business. This position is of course understandable, but the travel operator’s perspective is often that this withholding of cash flow at a critical time creates enormous pressure and actually seems to pull the trigger on the very collapse that the acquirer is seeking to protect itself against.
And of course, the pandemic has brought that standoff into even sharper focus. Global travel and tourism lost almost $4.5trillion in 2020. For context, while worldwide gross domestic product contracted 3.7%, travel’s contribution to the global economy reduced by 49.1%.
And it wasn’t only financial challenges that the travel sector has racked up in the past 18 months; there have been operational challenges as well, as they tried to process many millions of reservation cancellations. To compound the issues, some acquirers reacted to the adverse market conditions by either exiting the sector altogether or resetting the terms of business with their travel clients. This has meant travel operators now have fewer payments partners that will work with them, and this shift has put even more pressure on the relationship between the two parties.
All payments that rely on future delivery are high risk
Much of the tension between the travel industry and acquirers originates from the issue that travel is considered a high risk vertical by the payments industry, and was well before the pandemic. This is true of all sectors where a significant period of time occurs between the consumer’s payment and the date that they receive the goods or services. In the travel industry, this period is typically 60-90 days.
If the goods or services are not delivered for any reason, be it cancellation, unforeseen circumstances such as covid-19, or the business ceasing to trade, it is the acquirer who bears the responsibility to repay the customer. When the high transaction values typically seen in travel are factored into the equation, acquirers can find themselves exposed to tens of millions of pounds worth of risk for a single travel business. Many simply do not have the appetite for that level of risk.
Safeguarding is better for travel operators and acquirers
As previously stated, risk is typically managed by the acquirer through withholding cash as collateral. But there are several reasons this is a problematic solution for the travel sector. The drain on liquidity is an obvious one, but in addition it is often unpredictable how much acquirers will withhold to offset the fluctuating risk, and that makes decision-making and forecasting extremely difficult. Withheld funds also cannot be shown on a company’s balance sheet.
So it is of little surprise that travel companies are looking to redefine their relationships with acquirers as they rebound and grow following the pandemic. And progressive payments companies including Paysafe are also looking for new solutions to work more harmoniously with the sector, specifically replacing cash collateral with a trust-based mechanism called safeguarding.
Under a safeguarding arrangement, the merchant still lodges a cash reserve with a third party. But instead of being irregularly returned to the merchant in large sums at the acquirer’s discretion, the money is released steadily on a planned basis either when or shortly before travel takes place.
This new partnership addresses both the liquidity and transparency issues the travel industry has consistently voiced its concerns about. Funds escrowed can also remain on the company’s balance sheet.
The future of travel
Cash collateral was the go-to solution for managing acquirers’ risk exposure in the travel sector for years. But they are no longer fit for purpose. Safeguarding will soon become the most common mitigation process for travel merchants and acquirers. It will enable airlines and the rest of the travel industry to avoid tying up critical funds that would be better spent on running and expanding great businesses, as well as attracting investment through making balance sheets healthier.