The travel, hospitality and entertainment industry has long
had some serious issues with its payment ecosystem. As classic Deferred
Delivery Merchant (DDM) players, airlines, booking agents and other industry
players are exposed to potentially long periods between consumer bookings and
actual service delivery, and receipt of funds – often running into many weeks or
even months.
This has made many travel industry merchants a poor credit
risk, even before the pandemic hit. In 2019 alone, 46 carriers became insolvent
because of cashflow issues, and one acquirer failed because of a significant
liability arising from exposure due to the delay between the purchase and
consumption of the travel services.
When the tidal wave of lockdowns and cancellations came
along in early 2020, the industry witnessed an unprecedented “reversal” in its
payment flows. Suddenly more funds, or credits, were flowing back into the
pockets of consumers and other upstream players than was flowing to the
airlines, hotels and resorts.
This was a near-impossible task for the systems used by most airlines and other
travel merchants. Lack of visibility or integration between a
multitude of reservation and payment platforms – both within the travel
merchants and outside – meant identifying liabilities, locating funds and reimbursing
consumers were major headaches.
It was clear that new thinking and new solutions were needed
to make the travel payments ecosystem more resilient and transparent and to reduce
the risk exposure of everyone in the value chain.
Challenges for merchants and acquirers
The travel payments ecosystem has suffered from almost
in-built instability for many years. This has meant only a handful of acquirers
have been willing to serve the industry – reducing choice and raising costs for
travel merchants.
The pandemic and its knock-on effects mean merchants have
been unable to fulfill a large number of transactions, leading to refunds,
recharges and further delays in service delivery.
The extremely fluid and uncertain nature of the travel
market means merchants also have very limited insight into their own risk
exposure. This limits their options when selecting acquirers and negotiating
payment terms, with onboarding involving more rigorous due diligence processes.
For the acquirers, the long settlement period between travel
reservations and actual service delivery has made it difficult to make
realistic risk assessments. This has limited their ability to foresee potential
merchant collapses and increased their liabilities from failures and losses from
things like cancellations, changes, large-scale use of vouchers, and
chargebacks as they still need to comply with consumer protection rules.
Merchants and acquirers both suffer from a lack of clear,
automated communication of data between parties in the payments value chain –
especially when it comes to the financial situation, transaction volume,
customer behavior and operational issues.
End-to-end visibility
We are seeing innovation to address these
challenges. One pioneering initiative has been established by Mastercard and
fintech solution provider Actuary.aero, with Worldline as the key enabling
customer. The companies have developed the T&E Risk Monitor, a data-led
risk assessment tool that combines secure payment, booking and service data to
enable an ecosystem of trust with greater end-to-end visibility into merchant
payments.
This solution is designed to provide a real-time view of
booking status across the booking life cycle through interactive dashboards,
which can be used to run reports and create alerts. This enhanced visibility is
intended to support greater cash flow and liquidity across the travel sector.
Specifically, the tool is aimed at addressing the financial
exposure that acquiring entities experience during the gap between booking and
payment and increasing acquirer confidence when releasing funds to DDMs or
taking on new travel portfolios.
By providing a trusted, transparent source of secure booking
and payment-related data, the interactive platform enables acquirers to make
data-led risk decisions. Travel merchants also benefit from automation and
transparency over reporting and risk levels.
New models for trust and cover
Another way the travel industry is responding to the need to
mitigate risk in the payments ecosystem is through new options for protecting
against financial loss using trust accounts and targeted insurance schemes.
While state-aid and other cash injections greatly improved
the cash position of many airlines and other travel merchants, a longer-term,
sustainable way of protecting cash flow is needed.
Airlines would prefer to spread their risk by working with
multiple acquirers. The problem is – given the poor credit-worthiness of the
travel sector over recent years – many acquirers are imposing less attractive
payment terms and demanding more security in the form of increased collateral
or rolling reserves, for example.
Many airlines are now turning to alternative trust solution
providers as a way of reducing collateral requirements, accelerating
settlement and improving cash flow and margins.
Providers such as Trstpays and Trust My Group use a
financial trust and a database of bookings to release funds to airlines on an
agreed number of days before the customer takes the flight.
The COVID-19 pandemic has shaken up the way the travel
industry deals with risk in its payments ecosystem. New approaches and
solutions that help mitigate risk for all parties involved will stand the
industry in good stead as it faces continued uncertainties.