Analysis: The travel industry’s credit card crisis

Ash clouds, strikes, snow, a World Cup, a general election and a global recession: the travel industry has this year endured a relentless battering from events over which it has no control.

But according to some experts, one issue above all others threatens to destabilise firms more than anything else – the growing reluctance of credit card firms to deal with the travel sector.

While the term ‘credit crunch’ may have given way to ‘recession’ to describe the current financial downturn, travel continues to face its own credit squeeze.

Credit company wariness

Access to overdrafts and loans remains a problem for most businesses, but of greater concern in travel is merchant, or credit card, facilities.

Chris Photi, senior partner at accountants White Hart Associates, has warned that of all the issues facing travel it is firms’ relationships with their credit card companies that he believes is the biggest cause for concern.

Speaking at a recent Grant Thornton travel seminar he told guests: “One hopes they [merchant acquirers] take a commonsense approach.

 “But unfortunately they look at one thing: ‘how am I going to regulate your business and what risk have I if your company fails?’”

Without adequate credit card processing facilities, doing business in the travel industry becomes impossible, but credit card firms have become wary of a sector they view as increasingly risky.

To make matters worse they have had to protect themselves as the sector shifted responsibility for consumer financial protection on to them.

For many travel firms, a healthy balance sheet and years of unblemished trading are no longer deemed enough and they face new demands from credit firms for equity, cash, or other forms of security. This is not necessarily a new phenomenon but the scale and the timing, coming amid fragile consumer demand and confidence, is what is hurting.

When E-Clear, the credit card payments middleman, was heading towards administration earlier this year, its work was described as “intensive care” for the industry. E-Clear had seen a gap in the market for someone to profit by absorbing some of the risk associated with processing travel customers’ payments.

So if it is no longer providing “intensive care”, who is?

Payment protection overhaul

It is thought unlikely the E-Clear gap has been filled, although there are new entrants in this market looking to work with travel companies. They include Ogone in the online sector, and DataCash.

 PayPal, which is owned by auction site eBay, has done a deal to be a payment option on British Airways’ website, and is also available on Barclaycard’s new SmartPay online system.

Ian Oakley-Smith, director at accountancy firm PricewaterhouseCoopers, is due to debate industry financing in a masterclass at this month’s Travel Convention in Malta.

He said: “There are parties interested in coming into travel, but there are many difficulties in people coming in who are not familiar with the industry.

“If you are a small bank it’s probably a tough call, particularly with what’s happened to E-Clear. If you are going to take on that sort of clientele you need some pretty robust processes.”

If credit firms continue to take a dim view of travel, the long-term solution may have to be a radical overhaul of the way travel firms operate and protect client money.

Oakley-Smith supports a solution similar to one advocated by Travel Counsellors chairman David Speakman, who suggested customer money should be kept by a third party ‘travel bank’ until the customer has travelled.

“My hope for the industry is that over time it moves to a more trust-based system just as insurance brokers have had to do,” Oakley-Smith added.

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