The relationship between the travel sector and its acquirers has reached breaking point, but there is a solution, argues Paysafe Group chief executive of integrated and e-commerce solutions Paulette Rowe
The travel sector’s relationship with the payments industry has always been complicated. Industry failures, such as the collapse of Thomas Cook and Monarch Airlines amongst others, have often concluded with the operator and their payments acquirer pointing fingers at each other, as the acquirer withholds funds to cover the cost of the chargebacks it will be liable to repay customers if the operator goes out of business.
For players in the travel industry, this withholding of cashflow at a critical time can create enormous pressure and often seems to pull the trigger on the very collapse that the acquirer is seeking to protect itself against.
And of course, the pandemic has held a magnifying glass to the issues that already existed. Global travel and tourism lost almost $4.5 trillion in 2020. For context, while worldwide gross domestic product contracted 3.7 percent, travel’s contribution to the global economy reduced by 49.1 percent.
And airlines experienced major operational as well as financial challenges with their acquirers during 2020, as they tried to process many millions of reservation cancellations. To compound the issues, some acquirers reacted by either exiting the sector altogether or resetting the terms of business with their travel clients. This shift has put even more pressure on the relationship between the two parties particularly as travel operators now have fewer payments partners that will work with them.
Future delivery is high risk for acquirers
Much of the tension between the travel industry and acquirers stems from the fact that travel is considered a high-risk vertical by the payments industry, even in non-pandemic times. This is true of all sectors where there is a significant gap between the consumer’s payment and the date that they receive the goods or services. In the travel industry this period is typically 60-90 days.
If the goods or services are not delivered for any reason, be it cancellation, unforeseen circumstances such as Covid-19, or the business ceasing to trade, it is the acquirer who bears the responsibility to repay the customer. When the high transaction values typically seen in travel are factored into the equation, acquirers can find themselves exposed to tens of millions of pounds worth of risk for a single travel business. Many simply do not have the appetite for that level of risk.
Replacing holdback with safeguarding
As previously mentioned, this is typically managed by the acquirer through withholding cash as collateral to offset the risk. But there are a number of reasons this has a negative impact on the travel sector. The drain on liquidity is an obvious one, but additionally there is an unpredictability as to how much acquirers will withhold to offset the fluctuating risk that makes decision-making and forecasting extremely difficult. Withheld funds also cannot be shown on a company’s balance sheet.
So it is not surprising that travel companies are looking to reset their relationships with acquirers as they rebound and grow following the pandemic. And progressive payments companies including Paysafe are doing the same, specifically replacing cash collateral with a trust-based mechanism called safeguarding.
Under a safeguarding arrangement, the merchant still lodges a cash reserve with a third party. But instead of being returned to the merchant in large tranches when the acquirer wishes, the money is released steadily on a planned basis either when or shortly before travel takes place.
This new arrangement addresses both the liquidity and transparency issues the travel industry has consistently voiced its concerns about. Funds escrowed can also remain on the company’s balance sheet.
Looking ahead
Holdbacks were the go-to mitigation for acquirers’ risk exposure in the travel sector for years. But they are no longer fit for purpose. Safeguarding will soon become the most common mitigation process for travel merchants and acquirers. It will enable airlines and the rest of the travel industry to avoid tying up critical funds that would be better spent on running and expanding great businesses, and also help attract investment through making balance sheets healthier.
Paysafe’s latest whitepaper Safeguarding the future of travel: Why it’s time to rethink payments and liquidity in the travel industry is available to download now.