When it comes to supplier payments, travel firms need to be aware of the indirect costs of doing business.
NB: This is a viewpoint by Anthony Hynes, CEO and managing director for eNett International.
Direct costs in the payments arena - such as fees and surcharges - are obvious, but in order to get an idea about the true costs of payments, businesses must start to think about the indirect costs, some of which are easier to quantify than others.
We have identified a number of business processes which can generate indirect costs.
The less automation you have around payments, the more staff you need. Research from Phocuswright shows that two in five travel agencies are using manual processes for tasks such as processing, reconciliation, fraud handling or cash backs. This is costing the industry a whopping US$1.5 billion a year on a global scale.
An agency turning over between US$1 million and $5 million a year is estimated to be incurring resource costs of US$300 a week. For an agency turning over US$100 million a year the cost could be US$5K a week. As the turnover increases, so do the costs.
By automating as many processes as possible, not only will manual costs be slashed but also those staff members can be used for more revenue-generating tasks.
Fraud and default
Travel exists as part of the ecommerce ecosystem and unfortunately fraud cannot be ignored. The airline industry alone is thought to be losing US$1 billion a year to criminals and company credit cards are increasingly the focus of unwanted attention.
And as travel becomes increasingly global, the number of international suppliers increases. Fraud is usually seen in the context of emerging markets where security is less sophisticated but there have been examples in so-called safer markets.
When it comes to defaults, suppliers can go bust in hyper-competitive mature markets as well as new destinations.
The most obvious examples of fraud and defaults can be accounted for under direct costs, but there is also the intangible, indirect costs for a business if it loses goodwill with suppliers or is caught in the middle of a fraud involving suppliers and the traveller.
Foreign exchange charges and risks
A lot of businesses rely on traditional channels such as banks for their foreign exchange, despite the fact there are other lower cost options in the markets.
The exchange rate, fees and mark-up banks charge are often bundled as part of the overall cost so it can be difficult to work out exactly what you’re paying for.
Currency fluctuations between the time of booking and the time of settlement complicates matters further.
Our internal estimates find that using a bank can add up to 3% to forex costs compared with some of the alternative options, a significant sum in an industry where margins can be quite tight.
The cost of credit
Credit remains the default option for payments in the industry - lodge cards for corporates, company credit cards or customers’ personal cards. This default option persists despite some compelling reasons to consider other options.
Firstly, credit is harder to get and payment terms are tighter, reducing the flexibility that was traditionally a soft benefit of credit.
And even in a low interest rate environment, there is still interest to pay and many banks are compensating by adding fees to their credit options.
Discounts for immediate payments are increasing, generating revenues and reducing costs for suppliers, a compelling proposition.
Bonding can tie up cash which could be used to generate revenues, and the revenues that cannot be generated impact the true cost of payments. This is a very real cost when there are pre-funded payment options that reduce the amount required for bonding, due to lower-risk guaranteed payment.
There are now innovative solutions in the market which lower both the direct and indirect costs. Alternative payment methods can automate reconciliation and enable seamless payment within existing agency workflows. The risk of fraud and default is also minimised, while generating rewards on transactions.
Savvy travel businesses need to assess their true cost of payments - not just the obvious entries on the balance sheet but also the indirect and opportunity costs - and look to new solutions to bring them down.
NB1: This is a viewpoint by Anthony Hynes, CEO and managing director for eNett International. It appears here as part of Tnooz's sponsored content initiative.
NB2: It has also launched a dedicated Cost of Payments Hub which features resources including case studies, blogs and a cost of payments calculator. Click here to access the home page
Calculate your "True Cost of Payments", with this handy easy to use cost of payments calculator.
NB3 Image Kentoh/BigStock.com