As our industry begins to focus on recovering from the COVID‐19 pandemic, travelers and travel companies alike will notice changes few could have imagined just a few short months ago.
Despite occurring during a decade of global economic growth, the virus‐induced downturn will force the travel industry to reflect on the risks taken and mistakes made. Travel company business and payment processing models will need to adapt to better prepare for the next time a downturn occurs.
There are numerous issues in travel payments that must be addressed to not only to restore consumers’ confidence and trust, but also to reduce risk and improve efficiencies for travel agencies, tour operators and other intermediaries.
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Travel companies such as tour operators must discontinue using travelers’ funds for working capital and other expenses. In the United States, there is no regulation around travel agency use of travelers’ funds for operating expenses.
Many travel companies use payments from travelers to run their businesses today, because in certain cases, they are not required to pay suppliers (localized tour operators in other markets, excursions, hotels, etc.) until time of travel. If travel companies don’t voluntarily change this practice, governments are likely to force changes on the industry, through new rules and regulations.
In other countries, including Canada, there are regulations surrounding the use of escrow accounts (i.e., trust accounting), which secures traveler funds to prevent their use for anything other than actual travel purchased.
The status quo is not fair to travelers, and puts their vacation dollars ‐ often a family budget’s biggest expense ‐ at great risk. It’s also worth noting that many tours are not paid with a credit card but are purchased in “cash” such as a wire transfer or ACH.
If the consumer pays the agency with “cash” as the form of payment, and that agency fails (perhaps due to a pandemic or natural disaster) before paying suppliers for the travel purchased – that consumer has lost their money and their vacation. The pandemic has exposed this flawed business model and the industry needs to work proactively to fix it.
- Credit card processors are too comfortable with high‐risk payment models in travel. When a travel company fails, credit card processors incur losses from chargebacks and refunds. This risk should be accounted for in the terms of their contracts with travel companies.
While enjoying a 10‐year economic boom prior to COVID‐19, credit card processors did not appropriately address this risk. In the wake of the pandemic, this risk must become a priority, as we have seen and will continue to see travel companies fail. These failures will inevitably drive credit card processors to make drastic contract changes ‐ such as higher fees, volume restrictions and larger reserve requirements. - Paying suppliers with ACH, wire or check doesn’t provide protection against supplier risk. For travel agencies or tour operators that pay suppliers with ACH, wire or check, there is no way to ensure funds are returned to the travel agency in the event of services not provided or inadequately provided.
If a traveler who paid a travel agency with a credit card files a valid dispute against the travel company who arranged travel on their behalf, the travel company is placed in a weak position to dispute the transaction with their supplier who was paid in cash.
Whereas, a travel company that pays suppliers with virtual cards benefit from chargeback rights through card networks like Visa and Mastercard. This provides assurance that the agency can get its money back when something goes wrong.
Moving forward, we expect to see more travel companies transition towards paying suppliers with virtual cards. Further, virtual card use will become more widespread in the industry, as this is a more secure payment method that protects private information and helps prevent damaging data breaches.
Once the dust settles, the travel industry will return stronger and better managed. Consumers will have pent‐up demand for leisure travel, and corporations will resume in‐person meetings following a lengthy and creative period of social distancing.
While the payment processing and operational models for travel companies may look very different, the coming changes will benefit travelers, travel companies and travel suppliers alike.