5 reasons OTAs are becoming merchants of record

Online travel agencies work hard to earn their customers’ business. They spend money, time and energy to draw visitors to their website and app, entice them with offers and remarket to them until they buy.

The purchase itself — and accepting the payment — is a critical component of the relationship with that customer and cultivating loyalty. How OTAs choose to accept payments can have a significant impact on each customer’s experience with them.

The two payment models in the OTA world, the pass-through model and the merchant of record (MoR) model, have their own sets of pros and cons. However, a large number of OTAs are shifting away from the pass-through model and adopting the MoR model. Yet, some OTAs are still fearful of the move to MoR despite the obvious plusses. This article unpacks the reasons why many OTAs are embracing this shift, and why others should be exploring it. 

Defining pass-through model and merchant of record (MoR) models 

In the pass-through model, the OTA essentially acts as the middleman for payment to the airline or hotel. When a customer makes a booking through an OTA, the OTA passes the customer’s card information directly to the supplier, who processes the payment. In this case, the supplier (such as the airline or hotel) acts as MoR and has control over when payments are made, including when the OTA receives commission.  

With the MoR model, the OTA processes the payment for the booking from the customer directly, maintaining control of the entire customer experience. Funds are authorized and taken from the customer immediately, and then suppliers are paid by the OTA rather than the customer directly — allowing the OTA to further control the customer experience. The OTA maintains control of the funds, paying each supplier the agreed cost of the package, while maintaining the OTA’s profit margin in the process. We’ll dive deeper into specific MoR advantages below. 

1. Enhanced customer experience 

Customer satisfaction is at the heart of the travel industry, and the payment experience is a critical component of this satisfaction. As MoR, an OTA can reduce friction points in the checkout process and tailor payment options to meet customer preferences.

For example, as MoR, you can offer flexible installment plans, which many customers demand in today’s market. Also, when you act as MoR, any changes to itinerary, carrier or hotel chain are easily performed without carrier or supplier interaction with the customer. Additionally, managing refunds and cancellations directly allows you to resolve issues more swiftly and provide a more personalized customer experience. This direct interaction with customers helps build trust and foster loyalty. 

2. Improved financial management 

Financial management is crucial for the success of any business, and being MoR allows you to improve control over your financial operations. In fact, according to data captured by Phocuswright and Mastercard, OTAs acting as MoR in the United States posted a 43% compound annual growth rate (CAGR) from 2020-2022, a growth rate more than two times higher than the overall OTA market.

Growth rates in OTAs are all about repeat purchases driven though customer loyalty, so those choosing the MoR path are producing greater returns in large part because their customers are returning. Plus, by processing payments directly, you can consolidate financial activities, leading to more accurate and streamlined accounting practices. This consolidation facilitates effective cash flow management and provides clearer insights into revenue streams. Additionally, with direct access to transaction data, you can use advanced analytics to understand customer behavior and purchasing patterns. These insights enable more strategic financial planning and can help in identifying opportunities for growth or areas needing improvement. 

3. Strengthened brand identity and reputation 

A strong brand identity is essential for success in the competitive online travel market. Being MoR allows you to present a unified, consistent brand experience throughout the payment process. By managing transactions directly, you can ensure that the payment experience reflects your brand's image and values, reinforcing trust and reliability with customers.

In addition, if something goes wrong with a third party’s handling of the payment, that will reflect poorly on your business, even though that issue is completely out of your control. However, when you are MoR, you have control over the payment process, which insulates your customer from any payment challenges from third parties and protects your standards of service.  

4. Direct control over transactions 

Another advantage of being MoR is the direct control it provides over the entire payment process. As MoR, you are responsible for processing payments, managing refunds, and addressing chargebacks. This control allows you to streamline and customize the payment experience according to your needs and those of your customers.

By overseeing these operations internally, you can ensure a more consistent and efficient payment process, ultimately enhancing operational reliability. In addition, acting as MoR allows you to control pricing and margins, with the ability to bundle charges for services and fees. 

5. Cost efficiency 

While there are processing costs on the customer payment that are avoided with the pass-through model, the long-term benefits of the MoR model include cost savings when looking at the process holistically. By handling payments in-house, you can typically reduce fees associated with third-party payment processors.

These savings can be significant, especially for high-volume transactions. Additionally, when acting as MoR, you can earn cash rebates on each virtual card transaction to pay a supplier, and these cash rebates can directly boost your bottom line. In many cases, OTAs moving to MoR actually increase profitability in the overall process, despite taking on the cost of processing customers’ payments.  

Partnering with the right provider 

When making the move to MoR, it’s important to partner with the right payments provider to ensure optimal success. At ConnexPay, we’re committed to working with you every step of the way. Through our proprietary all-in-one payments platform, you have complete visibility into all transactions, from accepting customers’ payments to paying suppliers, all inside the same solution. Plus, you’ll keep your customers’ payments secure with our complimentary built-in fraud prevention tools. And since ConnexPay processes both the pay in and pay out through the same platform, we provide you with immediate access to your customers’ payments, which means no waiting for their card payments to settle and no need for any line of credit.