The future of privately-owned retailers is in the hands of ‘merchant clearers’, says Steve Endacott
The Covid-19 outbreak revealed the fundamental flaws in consumer financial protection within the travel industry.
Consumers wrongly believe Abta is a major regulator of the sector but, in reality, it’s just a convenient and reasonably-priced badge that boosts conversions by providing customer reassurance.
As demonstrated by On the Beach, as soon as any members disagree with Abta’s regulations, such as its stance on refunds, they either ignore Abta or leave.
Before 2006, Abta protected ‘pipeline’ monies between Abta agents and tour operators, protecting customers if either party failed. They later deemed this had become too risky and pulled out, leaving operator protection to the CAA.
Abta still provides pipeline protection for tour operators, but few pay it as they do not regard it as cost-effective – and most travel retail turnover is for third party Atol-bonded operators or Atol-protected dynamic package sales.
Officially, the Civil Aviation Authority (CAA) is the travel industry regulator – and to be fair it has tightened-up dramatically on the use of customers’ money by travel companies, replacing the flawed ‘bonding’ options with trust fund structures.
Historically, the CAA has acted as a combination of industry tax man, charging a flat £2.50 Atol fee, financial regulator and insurer of last resort. But clearly the regulation of large players like XL Airways, Monarch and Thomas Cook did not work well as their failures have cost the industry more than £400 million leaving the Atol fund virtually bankrupt.
The CAA has tried to tighten things up by introducing new ‘golden trust’ funds where travel companies cannot take any commission before customer departure and only use 30% of customers’ money to pay for flights. This clearly gives customers greater protection against travel company collapses – but it does not deal with the elephant in the room.
This is the freedom of airlines to use customer monies as they see fit, with the CAA openly admitting it doesn’t have the power to do anything about it.
When Covid-19 hit, none of the major UK airlines had enough funds to refund customers as their models rely on customers paying in full on booking and the use of these advance payments to fund operations.
Travel agents creating dynamically-packaged holidays must release money from trust funds to pay for airline flights on booking. Historically, agents could protect these funds against airline failure, using ‘virtual credit card’ payments and/or financial failure insurance. However, most insurers are now running scared of the airlines’ debt mountains and there is very little capacity available, severely limiting dynamic packaging activity.
These protections do not cover situations such as Covid, when airlines have not gone bust but are delaying refunds – or, in the case of Ryanair, blatantly discriminating against OTAs like On the Beach, claiming OTAs’ bookings are illegal and should not be refunded.
The lack of CAA control of airlines blows a hole in the effectiveness of trust funds, as money is not available to refund customers. Aside from a few exceptions, like Trailfinders, trust funds only work in the case of airline failure.
This has created a situation where the ‘merchant clearers’ of credit and debit cards have become the real regulators of the travel sector.
Under clause 75 of the Consumer Protection Act, purchases between £100 and £30,000 are protected if the goods or services customers pay for are not delivered.
Both Abta and Atol insist customers claim via this route before paying out themselves, which obviously reduces their risk and increases that of the failed travel company’s credit or debit card clearer.
Not surprisingly, this has always made merchant clearers weary of travel companies’ business, but the Covid-19 shut down and debt mountains created in travel has led to the sector being categorised alongside crypto currencies, gambling, and porn as high-risk products.
I discovered recently – when looking for clearance for my foreign exchange business CannyApp, which is only loosely associated with travel companies that it uses to market its services – how this travel ‘tarnish’ makes it hard to secure good rates and prompt payment.
The ‘merchant clearers’ are really squeezing travel businesses, insisting on trust fund protection and the use of virtual cards just to qualify for a quote.
CannyApp was lucky to find a high-tech partner able to provide a panel of clearers, thus spreading the risk across multiple providers on a booking-by-booking basis. This reduces the cost of clearing and provides a robust solution, with alternate clearers servicing the account if anyone provider decides they no longer like the travel sector.
It’s clear from the financial accounts of several major travel retailers that they are using customer monies, have negative net assets and auditors’ questioning their going concern status.
However, these same retailers don’t currently operate trust funds and are unlikely to be brought to task by either Abta or Atol. Given their positive cash holding positions, it’s only the merchant clearers who are likely to care – as they are the ones carrying the biggest risk.
To be fair, this is no different a situation to Tui or any of the low-cost airlines. But they owe so much that it’s highly unlikely their lenders would pull the plug, since if trading picks up as expected these businesses will be able to do ‘rights share issues’ to pay down their debts.
The shares in privately-owned travel businesses, however, are a lot less fluid – hence their survival remains in the hands of the new travel regulators, the credit and debit card merchant clearers.
Who is really regulating this industry?