Risk management is the way forward in payments, argues Daniel Stanbridge of Paysafe
Acquirers face a challenging financial burden due to the high-risk nature of working with travel when they act as intermediaries between retailers and card payment networks.
But tools which focus on delivering risk-management solutions are set to improve working relationships between merchant acquirers and the travel sector.
The travel industry has been hit hard over the last two years. The net loss for travel and tourism reached almost $4.5 trillion in 2020, according to the World Travel and Tourism Council.
Then in the first half of 2022, the travel industry encountered widespread disruption with thousands of flight cancellations and delays stimulating refund requests.
But there are reasons to be optimistic with the Mastercard Economic Institute reporting business flight bookings already exceed 2019 levels. The question is what lessons have been learned and how can the sector prepare for the future?
One way the payments industry is looking to tackle this issue is by leveraging sophisticated data insights that provide merchant customers with an understanding of their risk level.
The nuances of payment processing
Travel is considered a high-risk sector for card acquirers as most transactions are made well in advance of a trip, creating a lag between when the customer pays and when the merchant delivers.
Historically, the travel sector has experienced challenges in managing the chargeback exposure that occurs when a travel business is unable to provide a refund where the customer does not receive the service purchased.
To counteract this risk and offset the financial burden of chargebacks, acquirers require substantial collateral from merchant customers often in the form of cash, also known as a holdback or reserve.
But this puts merchants at a disadvantage as holdbacks can be inflexible and large sums of money can be withheld for long periods of time.
Use of data and safeguarding measures seek to break this cycle by providing clarity over volume and trip status in real-time. Acquirers gain visibility and assurance which can lead them to take smaller funds from merchants for less time and only when required.
Resetting the relationship between merchants and acquirers
A large number of acquirers have pulled away from the travel sector due to the high-risk nature of travel payments.
Long settlement periods between reservation and service delivery make it difficult to obtain information, leaving acquirers unaware of potential merchant collapses.
In response, major card brands have been working with acquirers to develop a suite of risk-management solutions providing insights around financial exposure.
Mastercard launched its T&E Risk Monitor last year through a partnership with Actuary. It’s a tool that provides acquirers with risk insights by combining booking and payment statuses across travel portfolios, with the aim of increasing acquirer confidence when releasing funds to merchants.
Paysafe has partnered with Mastercard to integrate this service to enhance its current safeguarding model, which has been tailored to support the travel sector and reduce the risk of disruption.
Travel is much more complicated for acquirers than many other sectors. Acquirers which specialise in travel are more likely to offer a consistent risk approach because they have developed solutions tailored to serve this segment.
Working closely with travel merchants to fully understand the associated business model, strengths, weaknesses, and overall risk profile of each business is imperative.
The best acquirers not only understand how to work with clients during the good times, but also when to adapt their offerings to provide support as merchants navigate challenging times.
Daniel Stanbridge is senior vice-president of merchant risk at online payments service Paysafe