What travel companies can do to keep banks’ trust

It may seem like the collapse of Silicon Valley Bank (SVB) and Credit Suisse earlier this year will have little direct effect on the travel and tourism industry, but they are going to start conversations in the banking and regulatory world that are going to affect all banks, and the travel industry will be disproportionately affected.

Companies across all sectors are increasingly worried that the banks that should provide a solid foundation for their business may either be structurally flawed or not working in their best interests. This concern is particularly acute in companies and industries that banks typically view as “high risk.” They know that if their bank has problems, then they will be the first to suffer from higher fees or restrictions.

This is also true of the various payment processing companies that a given merchant may work with, from small fintechs to major players like Visa and Mastercard. In an economic downturn, which is typically when fraud increases, many players in the payments industry may decide that perceived high-risk companies are either more trouble than they’re worth — or that they need to compensate the financial services provider for the trouble.

The truth is, although there are undercapitalized banks like SVB, the majority of banks, big and small, are conservative by nature. The likelihood of any bank, especially the older and more established banks, disappearing with their clients’ money is low, and we have seen both recently and in 2008 that governments are willing to pay staggering amounts of money to bail out banks.

However, when there is unrest in the economy, banks become even more conservative in order to limit risk and thereby avert a scenario in which they are undercapitalized. The companies that bear the brunt of that conservatism are those that banks, card schemes, payment processors and other financial institutions term “high risk,” and that unfortunately includes much of the travel industry, from the biggest airline down to vacation home rental companies and travel agencies. So what can companies in the sector do to protect themselves from banks turning against them during uncertain times?

“High risk” sectors

There are many sectors that pay a premium for banking and card processing because they are either in legal gray areas or subject to higher-than-normal levels of fraud and chargebacks. However, high-risk designation isn’t restricted to what is broadly referred to as "vice,” and our own clients who deal with being deemed risky are from more mundane sectors. The travel and tourism industry is also subject to high fees and stricter limits on chargebacks for reasons that airlines, travel agencies, tour operators and ticket comparison sites largely can’t control.

Airline tickets and hotel reservations are high value, and since they are digital, they are easy to transfer anonymously. A fraud network can use stolen or synthetic identities to purchase tickets and sell them for very high profits, which will in turn cause a chargeback when the person whose identity was stolen discovers the unwanted charge on their card.

Travel fraud is big business: one fraud network alone made $1.2 million in illegal sales in the first nine months of 2021, and fraudulent websites cost the industry $1 billion per year. The airline industry reportedly saw a 530% rise in cybercrime incidents during the COVID-19 pandemic, and this has yet to abate. 

Chargebacks are also a major problem for the travel industry. Flights are much more likely to be delayed or canceled than in previous years, and anywhere from 2% to 8% of passengers miss their flights. This causes a percentage of passengers to skip the airline’s own refund process and go straight to their card to get their money back. Some even dispute transactions because they didn’t enjoy their trip.

Card companies will tolerate chargebacks only to a point – if a merchant’s ratio of payments to chargebacks becomes too high, then they will pay a financial penalty by way of increased transaction costs. This can stack with the penalty for being “high risk” that the industry already pays to further erode merchants’ profits.

The travel industry is also subject to what is termed “future delivery risk,” the risk that one party might not fulfill their side of an agreement once they have been paid. While in most industries a customer deals directly with the company that supplies the product they are buying, the travel industry has more “middlemen,” such as travel agencies, tour operators and flight comparison sites.

This means that if you were to buy a flight through an online travel agency and the flight was canceled, the travel agency would have to issue a refund. Because these intermediary companies don’t have any control over events like flight cancellations, financial institutions are wary about them, leading to increased fees that they pass on to the merchant.

Also, it’s no secret that banks have the power to shut a client off in a split second — or prevent them from issuing payments at all — as I’ve seen happen many times over the years. For example, just recently I know of a company in the ticket broker space that was processing hundreds of millions of dollars per year in through their bank. However, this company’s former bank recently shut them off from issuing virtual cards because this broker was functioning as a payments intermediary and not fulfilling the product or service directly. It pains me to see companies like this being treated so harshly by their banks.

What can be done?

Businesses working in sectors perceived as high risk by banks have to walk the line between accepting that they will always pay more than other merchants and doing what they can to ensure that they don’t incur any further penalties. They need to show their banks and card companies that they can be trusted and are not truly high risk.

By using a payments solution that handles both incoming and outgoing transactions, plus a fraud prevention solution for further protection — all inside a single platform — businesses can fundamentally de-risk the payment process that banks face with perceived “high risk” clients. After removing risk from the transaction scenario for these companies, they can then enjoy lower merchant processing fees, saving businesses money and improving their cash flow.