Optimising payments can offer game-changing improvement to margins, says Ixaris chief executive Aran Brown
Given the industry’s ever-tightening margins and the uncertain economic picture more widely, most travel sector executives will be approaching 2020 with a degree of trepidation. The recent collapse of UK tour operator Thomas Cook, which folded under a weight of debt in September, drew national attention to many of the issues OTAs face, from diminishing rates of return and intense sector competition to macro changes in the wider economy.
The bad news is that the root causes of low margins in the industry are not going away. OTAs will continue to be squeezed by airlines and hotels investing in their direct channels on one side, and price comparison and metasearch sites on the other. At the same time, executives will continue to feel limited in how they can further reduce costs and overheads – including a heavy and necessary marketing burden – to combat these pressures.
Look outside the industry and the next 12 months appear full of uncertainty, from the political unknowns of Brexit and the US presidential election to the very real prospect of recessions in various parts of the world. As if to underline the mood, September’s OECD interim economic outlook forecasts this year’s global GDP downwards to 2.9%, and its growth view for 2020 was down 0.4 percentage points to 3%. The 2020 projections show a general slowing from 2018’s 3.6% global growth and would represent the weakest annual growth rates since the financial crisis.
Despite all this gloom, OTAs shouldn’t just throw their hands up and accept a role as passive players in the face of difficult sector and macro factors. There are process efficiencies that can be unlocked across the supply chain for businesses of all sizes and from all sectors, and optimising supplier payments stands out as one particular area where OTAs can increase control, rather than drift at the mercy of events. Through digitisation, automation and optimisation, they can alleviate the external pressures they face and grasp some much-needed certainty in an unpredictable world.
By focusing attention on payments performance – an area that’s been overlooked by most of the sector so far – OTAs have a huge opportunity to dramatically improve their margins. This in turn will free up cash that can be invested in marketing or improving price competitiveness, helping companies steal a vital march on the competition. According to a recent Ixaris survey, 85% of travel industry executives think payments has a strategic role to play in their business, but only 36% are actively measuring their payments performance, let alone doing anything about optimising it.
Addressing payments performance can have a positive impact on payment fees, FX costs, reconciliation costs and rewards from card spend. Roll all these improvements together and a business can transform payments from a pressure on profit to a much-needed boost.
This isn’t tinkering around the edges for small gains – this is transforming payments in a way that means the function can make a huge positive impact on an OTA’s margins. For low-margin/high-volume OTAs in particular, payments performance can have such a profound effect that payments strategy needs to be a board matter and a board-level KPI.
For a typical OTA, revenue comes from a small percentage of its booking value. Even though the net cost of a payment is relatively low – often around 1.4% of the value of the payment itself – when the payment is optimised this cost can be transformed into revenue. This revenue could equate to, for example, 0.1% of the value of the payment – and the resultant impact on margins adds up to a game-changing 26% improvement.
After making the decision to focus on payments optimisation, the business needs to understand what success looks like for them. OTAs stand to benefit from working with partners that can get under the skin of their business model, develop a deep understanding of their payments landscape and, taking a consultative approach, determine a solution unique to the requirements of the OTA.
If there is a gap between where the OTA currently stands and what its best-practice payments picture looks like (and it’s likely there will be), it will need to build a comprehensive payments strategy to achieve the necessary optimisation. This strategy will require the board’s buy-in to secure the investment to make it happen, as well as the drive that will ensure implementation is carried through to the end.
We’re now deep into the 2020 planning season – boards are setting their goals for the year ahead, allocating budgets and finalising KPIs. Now is therefore the time to be securing budget for payments optimisation, making the case for investment and outlining its ability to help travel companies strike back against uncertainty. Doing this will help make sure that the business is in the best possible shape for 2020 and has the security and confidence to both weather external storms and achieve lasting growth.