Special Report: The changing payments...

Regulation, changing consumer demands and fraud concerns mean the sector is undergoing huge change. Lee Hayhurst reports from a Travolution roundtable discussion Continue reading →

Gallery: Travolution Roundtable with EQ Global

The payments industry is a sector undergoing more change than many others due to regulation, changing consumer demands and concerns about fraud. EQ Global and Travolution hosted a roundtable discussion with travel firms how they are adapting to a changing landscape.

The process of taking and receiving payments in travel is never likely to be a headline topic in travel when pitched against high profile areas like artificial intelligence, chatbots and blockchain.

But it is a crucial back office aspect of running a travel company in which, as our roundtable discussion found, is fraught with inefficiencies, changing rules and regulations and poor tech.

However, there are also opportunities for firms to bring in processes and systems that bring in some automation and streamlining that can make a key difference in a highly competitive market.

In a sector that sees historically low margins, no travel firm can afford to lose money in the process of transacting, whether that’s taking money off customers or paying suppliers or agents.

Oliver Ayres, EQ Global head of travel and eCommerce and payments technology provider EQ Global, said:

“For the travel industry we are helping with that complete end-to-end process, both receiving money and sending money out.

“Traditionally in the travel industry these two processes have been looked at being completely separate.

“There are a number of reasons why they might reasonably be considered separate, but something we are looking at doing linking that complete end to end process.

“With that brings a number of benefits both for the business itself but also potentially for your customers.

“It’s all about that happy balance between what is good for you as a business and what is good for your customers.”

Regulation change and credit card fees

One of the big recent changes that is having a huge impact on travel firms is the outlawing of credit card fees in January this year by a European law called the Payment Service Directive 2.

Steve Bacon, chief financial officer at specialist retailer cruise.co.uk, said among its older client base it has seen the proportion of credit card payments fall from 80% to 40%.

“It’s going to be a significant cost to the travel industry who generally work on small margins,” he said.

“You are working on 10%-12% margins typically and you are having to give away the fees. You can increase prices but it’s competitive out there.

“Unless you can package something differently or give a great offer on something you are not unique.

“We sell homogenous product. So you either take a hit on your margin or try to find a way around it.”

Tanith Spinelli, payments manager at online flash sale site Secret Escapes, said the regulation allows firms to incentivise customers to pay in certain ways as long as it isn’t something of monetary value.

So the site has looked at offering to make charitable donations for every transaction using a form of payment that limits its banking costs.

“In our payments page the cheaper option is pre-selected in certain countries and the most expensive is at the bottom,” she said.

“We did get rid of the most expensive payment in most countries, which was Amex.”

Bacon said it had also taken off Amex as a payment option but was considering reinstating it because many customers want to use it because they collect loyalty points.

Ismet Emin, financial controller at tour operator Sunvil, said it was hard to encourage customers not to use credit cards when the likes of consumer champion Which? advise they do.

“We have tried to factor it in to our costing. Established clients will pay by bank transfer, but there’s a reluctance among clients to paying in any other form [to credit cards].

“Because a lot of our business is through travel agents we have actually tried to ease the burden on them as well by increasing commission. The pressure’s on us really.”

Offering new forms of payment

The pressure on firms due to PSD2 has prompted holiday companies to look at other ways that consumers can pay for their travel.

Direct debt schemes have been successfully introduced by the likes of Thomas Cook, which now offers a zero per cent deposit on such sales.

Other third party schemes have been introduced that allow customers to pay monthly over a 12 month period even after they have travelled.

Cruise.co.uk has been using Trustly to encourage more cost-effective bank transfer payments, said Bacon, but consumers and financial organisations remain wary.

“The Problem is our average transaction is about £4,000 to £5,000, so as soon as that goes through a Trustly payment process the banks are so hot on fraud they think it’s a fraudulent transaction and block it, and even the consumers are a bit wary of using another intermediary.”

Bacon said cruise.co.uk has just introduced a direct debit scheme with GoCardless, and Sunvil’s Emin said it was also looking at doing the same.

He said cruise.co.uk is generally taking bookings 300 days out from day of departure, so a direct debit scheme is good for cashflow as it is taking money in regularly throughout the process.

Cruise.co.uk is working on bringing in online payments for full balances but Bacon said its model is highly relational in that customers will deal with a particular consultant.

They may talk to them six or seven times in the course of making a booking and expect to pay over the phone, so encouraging them to do it online is a challenge.

“Seventy seven per cent of our business is repeat. We have a model where the consumer has a relationship with the consultant.

“They want to speak to Michelle or Paul who’s put the order through. We want that because we it means cheaper marketing, however, on payments side we want to direct them online, so we have a dichotomy there.”

Secret Escapes has considered PayPal, particularly after the digital payments giant started offering credit with four months interest free.

However, despite believing their customers would like to use PayPal, she said costs have ruled it out for now because it requires the company taking the payment to get a UK credit licence.

Secret Escapes does offer direct debit through RatePay in Germany because it guarantees everything and is looking to work with Swedish firm Klarna that supports payments over monthly instalments.

“For us Nordics market is interesting because we struggle there because we haven’t got the right payment types,” she said.

“Klarna is trying to break into UK and is currently being used by the [Top Shop and Dorothy Perkins parent] Arcadia Group.

“They claim it increases overall basket value so it will be interesting to see how it works in travel because that is a very different sector.”

Sunvil said it looking for easier payments methods for its customers after credit card fees were outlawed, particularly as people are moving to tablet and mobile.

Emin said it has generational differences to take account of and still has people who want to pay by cheque. It has also considered PayPal but found it to be an expensive option.

Paying suppliers

Much of the inefficiency in travel comes is B2B payments, whether that’s paying suppliers who supplies paying their agents commission.

Legacy technology, offline processes and complicated agreements mean invoicing and reconciliation can take months and involve large teams chasing up and querying payments.

Secret Escapes says it has a large team working purely on this, particularly as its model means it is paying suppliers more quickly and across multiple geographies.

Spinelli said even large multi-national hotel groups do not have a single system for payments and it has to pay each individual hotel, each of which will have their own way of doing things.

“Coming from a technology background I can see that travel industry is the most cumbersome, outdated sector.

“It’s like banking because it has big players who have had the ability to just not change because why do they have to? Why should they have to when what’s in place now works for them.

“They might have to employ twice the amount of people to send invoices because they constantly have to correct them, but they are still making millions and millions and the cost of fixing it outweighs the current cost of employing people.

“Airlines are the worst. You kind of get it because their systems are not just sorting out whether you’ve been paid, they’re also sorting out the number of seats and whether or not that plane is going to leave and how many flights there are. So they are a lot more cumbersome.”

Bacon agreed: “It’s because you are dealing with these big business and they haven’t changed the way they deal with things for years and years.

“To change their systems is so complex, so they aren’t going to change them, we have to sort it out ourselves.”

Bacon said as a result cruise.co.uk tries to keep things simple buying flights and beds through third party aggregators.

He said the firm is looking at bringing in a virtual payment card system. “You have to find ways, on our thin margins, to make that process more efficient,” Bacon said.

Emin said whatever firms do to make B2B payments more efficient there will always need some human input.

“I don’t think you can automate it all and I think everything we are doing at the moment is as efficient as we can,” he said. “When you are dealing with suppliers in different parts of the world it’s very efficient. But within that it’s always 20% that take up 80% of your time.”

Foreign exchange fluctuations

Last year’s Brexit referendum vote was just the latest example of how unexpected interest rates fluctuations can hit the travel industry hard.

The pound’s crash against the dollar was blamed by many companies for poor financial results and led, in part, to the demise of Monarch Airlines, the UK’s fifth largest carrier.

Bacon said cruise.co.uk saw a 15% swing in prices as a result because cruise are all priced in dollars and converted to pounds.

He said this had an impact on trading because customers started to favour ‘retail’ product instead of more tailor-made packages on which the firms makes a higher margin.

Bacon said hedging currency when done right can be a revenue stream for a holiday company or at least ensure it is not hit by dramatic downturns in the value of sterling.

For Affordable Car Hire, ensuring its payments systems are optimised for foreign exchange is essential as a small fluctuation one way or another can have a huge impact on profits.

“We have to be really savvy on that, said Stephen Joyner, head of sales, Affordable Car Hire . “A lot of our business is in the US and we deal with a lot of currencies the biggest being dollars and euros.

“So our biggest risk is not customer risk, it’s our risk in terms of currency buying, hedging your bets with things like Brexit and because of really small margins it can either make or break you.”

Joyner said the average booking value for car rental is £250 so it is looking to diversify its product range to grow in higher margin areas like luxury vehicles.

Sunvil has two distinct parts to the business, the traditional tour operator with committed stock and the more tailor-made side.

Emin said in the former foreign exchange is not such an issue as it knows who it is paying what, but the latter is more of a challenge because buying currency upfront to hedge is a risk.

The Future

However the future pans out it seems certain that the consumer will continue to drive more automated, digital and cashless payments types.

And this is likely to have an impact on the entire payments processing system, so travel firms will have to balance customer demands with business fundamentals.

Ayres said: “If you start to change things in the payments processing whether it be currency or the amount of time for settlement that can be beneficial for you customers but it might have a detrimental effect on you as a business. So it’s trying to find that happy medium.

“People wanting flexibility of payment, not just in type of payment but timeline of payment. It’s not just necessarily that they are using a specific card but maybe on a £4,000 or £5,000 deal they don’t necessarily want to pay all that upfront.

“Offering that to customers, allowing them to pay over a longer time has an impact on the businesses, especially if you are paying your supplier in a different currency. It’s excellent f for the customer, but it’s a cost to the business.

“The impact of what you do on the outbound payments side can change your upfront costs to the consumer as well.”

Ayres said EQ Global is developing a virtual cards offering to provide flexibility and options, particularly as some suppliers like hotels will only work with agents using virtual payments.

He said: “In processing payments there’s always some way to get it a bit more streamlined, and having multiple payments methods in the same location is certainly a step towards doing that.

“In the processes of receiving money on and paying money out and associated foreign exchange issues, that’s something that’s still quite antiquated.

“I can see the travel industry moving to automating that entire process from start to finish and linking that money coming in to that money going out to prevent losses.

“Streamlining and automation across the payments industry and certainly in travel will happen as it evolves and more people want to pay at the click of a button.

“Open APIs will be very important and will move people away from payment cards.”

Ayres said he expects to see more transparent banking, a move to biometric authentication to combat fraud, instant transactions, eradicating intermediary fees, and live payment tacking.

“I really think automation in the way you collect money with authentication is really going to drive down some of your costs,” he said.