Travel payments risk mitigation: building in resilience and transparency

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.