How COVID exposed flaws in antiquated hospitality payment systems

The travel industry has always had a complex infrastructure for payment processing – a labyrinth of suppliers, distributors, processors, security systems and payment options, connected in many cases by archaic technology.

When the COVID-19 pandemic caused borders to close and travel to come to a standstill, it also threw a spotlight on the flaws in payment processing.

Travelers have struggled to navigate the confusing web of policies for cancellations and refunds, while suppliers have scrambled to address their customers’ needs and keep their businesses afloat. 

In an October 8 pre-event webinar as part of the Airline and Travel Payment Summit – taking place online this week – XanderPay founder and CEO Mike Carlo spoke on a panel about the payment system weaknesses the COVID pandemic has exposed and how they can be remedied for the future. 

Carlo has 15 years of experience in the field of travel payments, working for companies such as WEX, TransPay and Onyx CenterSource before launching XanderPay in 2018.

Below, Carlo elaborates on the payment issues that have surfaced due to the pandemic and how modernized systems can reduce friction and improve experience for both travel brands and customers.  

Your company, XanderPay, provides payment solutions for hoteliers. Can you start by explaining the main differences between air and hotel payment processes that are important to understand?

There are two main differences between hotels and air. For air, everything is paid at the time you book a plane ticket. It may take a few days to process it or for the airline to get its money, but everything is done at that time.

For hotels, a small percentage of transactions are actually paid at time of booking. In most cases it’s at check-in or checkout, and even with a prepaid booking – to my knowledge all hotel brands don’t process the payments centrally the way an airline does. Instead they send the payment details to the specific hotel and the hotel processes them locally. 

The second difference is, with an airline, they are receiving payments as one airline. A hotel brand receiving payments, a chain like Hilton with 5,500 hotels may have 4,000 different ownership groups. So for air it’s many to one with payments; for hotels it’s many to many - so it becomes infinitely more complicated when you assess the risk component.

Tell us more about the issue of risk and the potential impact on travelers.

For airlines, the big challenge was refunds because they had all these bookings - they refunded a lot and they rebooked a lot and they issued vouchers. For hotels - because they didn’t have the money already since most bookings were to be paid at time of checkout or arrival - they just had cash flow drop off a cliff.

For the airlines, yes it was horrible to do all the refunds, but they were able to manage their cashflow a bit. For most hotels it was cancellations and then nothing.

Given that inertia was the primary impediment, inertia doesn’t exist in survival mode.

Mike Carlo - XanderPay

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Cash flow is still the issue for hotels. If you look at the booking windows now, people are booking very close to travel, not in advance, and prepaid bookings have evaporated. There was an L.A. Times article a few weeks ago that showed almost 17% of hotels are past due in their loan payments. There have been a couple of high-profile U.S. hotels ... that have shut down forever.

For the traveler, you end up with a scenario where, because you don’t know the leverage of a hotel when you book it, you don’t know if that hotel is going to continue exist. And yet if you have a relationship with a brand, you expect that relationship to be consistent across all of your experiences with that brand. You don’t really care about the owners of the hotel.

Your company, XanderPay, is advocating for big hospitality brands to move toward a more centralized payment structure like airlines. Can you explain some of the benefits of that model?

One of these reasons is if a hotel has a centralized payment, and if a particular hotel goes out of business, they could simply then re-accommodate the guest at a different property. Also, you can manage your payment processing costs better if you are the brand. If you ask any hotel brand today they would struggle to tell you things like what is their authorization rate, what is their fraud rate, what is their chargeback rate, because everything is processed at individual hotel properties. 

With centralized payments, the brand could also look at where the guest is coming from and offer payments based on their preferences. The best example of that would be the outbound Chinese guest. If Chinese guests were going to a Hilton in Beijing, they would be shown WeChat Pay or Alipay as they are accustomed to paying. That same guest booking through that same brand.com or brand app, trying to book at a Hilton hotel in London would not be able to use their preferred payment methods because payments are structured based on where the property is located, not where the guest is coming from.

If you centralize payments, the brand can actually operate the way Expedia does where you look at where the guest is coming from and you tailor the payment experience to that. And then the brand interacts with the guest in the same way an OTA does, and then it pays the properties. It would require a mindset change, but if you think about how many OTAs there are in the world and how many of them have set up payment strategies, it’s not as daunting as it might seem.

Along with providing a more personalized experience for the guest, is there also a financial benefit for the hotel brand?

As brands look past the next six months and toward recovery, this is probably the easiest way to improve profitability that they have. If you look at cross-border guests, a hotel processing transactions centrally could probably save 1 to 4% on all of those guests. There is a foreign currency component that we never talk about. Somebody is paying a currency conversion.

In the airline industry, the airlines often benefit from currency conversion - they do pricing in multiple currencies so they figure that out. Hotels tend to price in one currency. If you move to centralized payment you can price in the currency of the guest, not the currency of the hotel. And if you manage that correctly, it could become a profit center, which is one that isn’t being implemented by the industry significantly today.

What about any benefits for the property owners?

If you look at the ways to reduce costs, there needs to be a benefit to the hotel owners. Simply by understanding what their costs are and showing them how much they are spending on chargebacks and fraud prevention and all of these losses they have, we think it’s very easy if a hotel brand wanted to be aggressive, they could easily make all of their owners happier by a centralized approach.

And right now there is more of an issue with reduced staff at the hotels [then at the corporate office], and they are the ones processing these things, so if you centralize the process, it offsets that. But it involves communication. There are complexities to it, but there is the cost benefit and a lot of opportunities to make the process far more efficient than it is today. 

As you talk to hotel brands about centralizing payments, what is holding them back?

The big pushback for centralized payments has always been the ownership structure - the hotel brands not wanting to touch the funds. I think we’ve seen that become less of an issue over the past couple of years. It really has been inertia in the industry that has been the biggest problem. Because until three years ago, none of the major global brands had payment people at the corporate level because all the payments were done at the local property.

Around 2017, HEDNA (Hotel Electronic Distribution Network Association) issued a white paper on the future best practices of hospitality payments, which started the focus around this guest-centric approach to payments. And now we’ve seen most of the major brands, prior to the pandemic, had grown their payment teams pretty dramatically at a brand level to look at payments corporate wide. And I think long term, that is the path we are headed down.

I think the proof of concept for the need for centralized payments has been met at most brands we talk to. Now it’s a question of, we’re struggling to survive, but yes this is important, so we need to think when can we do it.

I hope we’ll be able to make some strides as an industry in the first half of 2021. In preparation for what we all hope will be a recovery by Q2, Q3 of next year.

On the one hand, the COVID crisis has caused brands to de-prioritize this, but it also sounds like as we move into recovery, the experiences of this year may cause an accelerated shift to centralized payments?

Given that inertia was the primary impediment, inertia doesn’t exist in survival mode. And I do see that there is a desire to change and change radically. But currently it’s a resource issue. 

What about issues related to B2B payments and booking through third parties like bedbanks, OTAs and TMCs?

There is such hyper risk and growing concern for the next six months. I can’t imagine that if we are having this same discussion in April that we couldn’t point out some very high-profile travel companies that don’t exist. And the current payment infrastructure means that there are going to be risks of loss that different hotels take on that could be mitigated by a centralized approach.

I don’t think individual hotel properties are looking at the financial stability of individual bedbanks or OTAs. And I think there is a false sense of “Well we have a virtual credit card number in the file so we’re fine.” That actually isn’t how it works. I think the industry unfortunately is at risk of learning this lesson the hard way. I personally don’t see travel picking up until next spring. And I think that because of that, we are at risk of companies just going out of business. And if that’s the case, there are going to be some losses that everyone takes.

The key for hoteliers is going to be to know who you are getting a booking from and making sure you have the funds in advance as much as possible. Because what you don’t want is a guest to show up, with a reservation and confirmation, having paid a third party, and then they arrive at your hotel and you haven’t received payment because that third party has gone out of business. That’s a bad experience for everyone. What does the hotel do in that situation? It’s something all hotels need to be aware of and have a policy because it is a more likely occurrence in the future than it has been in the past.

And with technology, we have a great opportunity to change. In the hotel sector, to this day many hotels still receive virtual credit card details from OTAs and bedbanks via fax. So there’s a huge opportunity for efficiency.