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The payments legacy squeezing hospitality’s profitability

By Blog-Guest Authors

A guest article by Mike Carlo, an authority on payments in the hospitality sector.

At travel and hospitality events, including the recent Airline & Travel B2B Payments Summit in London, experts get together to discuss the latest industry trends and innovations. In this blog post, I’ll discuss a key pain point for the hospitality industry: B2B payments and how they can be improved for all.

Did you know that if you book a hotel room for a fortnight and simply don’t show up, you could only be charged a one-night penalty rather than the full cost of the period you’d booked for? Pretty incredible, right? But while that might be good news for the customer, it’s pretty awful for the hotel that’s now losing out on 13 days of anticipated revenue.

It’s one of many quirks you can find in the hospitality industry that stem from complex ownership structures, legacy tech and a lack of historical focus on the payments process.

Curious as it may seem, as recently as three years ago, many hotel brands had no real sense of either their payment processes or the extent to which they were eating into profit margins – because everything has been done at the actual hotel property. The number of full-time payment professionals working in the industry was tiny. The systems had always been run a certain way, and nobody was complaining about it.

Photo by Kevin Angelsø on Unsplash

The breakthrough moment

But back in 2017 a conversation between several members of the Hotel Electronic Distribution Network Association (HEDNA) threw a new and telling light on the extent of the problem bubbling away beneath the surface of B2B hospitality payment practices.

The issue centered on the fact people in China booking a hotel in, say, London wanted to be able to pay for their room through a locally available payment method like WeChat, Alipay or UnionPay. They could pay with their locally preferred payment method in China but not when they left the country.

But the payment system run by the London hotel wasn’t equipped to accept these services. How did the hotel brands address this? They directed those customers to book the room through a third party, online travel agent (OTA) like ctrip or Alitrip. Having literally sent paying customers from their own website or app to that of another company, the hotel’s profit margin was reduced. They now needed to pay a 15-20% commission to the OTA, money they would have retained if they could have processed consumer preferred payments at all hotels through their own channels.

Up until that point, some of us were very aware of these issues but the challenge faced then as it still is today, is that not enough people were complaining about it for it to be addressed as a priority.

And that’s despite some pretty archaic processes being followed.

While the lack of support for mobile wallets is a frustration for customers, the legacy processes and tech have a massive impact on B2B payments too. In some cases, the OTA you’ve booked your stay on is not directly involved in the payment processing. Instead, the details are sent by the OTA to the specific property – not even to a centralized point for a hotel group – where the information is manually entered and processed into its point-of-sale terminal. In many cases, the processing of these ‘card not present’ transactions still rely on the use of a fax machine!

Cultural headaches

There’s an absence of centralized payment systems and processes within hotel groups, let alone across different groups and chains, a legacy of the way in which ownership has shaped business operations for many years. But it’s not just these technologies and ways of working that stand in the way of more efficient, effective and profitable payments.

Let’s take a look at the close sibling of the hospitality industry: Airlines.

Imagine, if you will, booking a flight but not paying for it until after you’ve returned from your round trip. While you secure your seat in advance, you’re not out of pocket just yet. You might upgrade your ticket at the last minute, buy drinks and a meal onboard – possibly treat yourself to a new watch through mid-flight, duty free shopping on the way back. But you don’t pay until you land on your return.

It would never happen, would it? Everything about payments for the airline industry works on the basis of pre-payment.

Yet, if we switch our attention to the hospitality industry, it’s the complete opposite. You pay for your hotel stay and any incidentals only when you check out. This is a cultural decision that’s been ingrained in the industry for years, but it exposes payments to a degree of risk that airlines simply don’t face.

Photo by Suhyeon Choi on Unsplash

Addressing the issues

The problem is part tech, part process but the reality is that tight margins are continuing to be squeezed further still while it remains unchecked. The good news is we’re already on a course to tackle it from all angles.

HEDNA is leading the charge to address the former through initiatives like the Open Payments Alliance, and working with HTNG and Open Travel Alliance to set industry agreed standards to be published in the very near future. These are designed to make it easier for the industry to manage and process payments through centralized systems and technical processes. This will put the hotels in control of their payments infrastructure and help stop the tail from wagging the dog.

The consumer is going to have a key influence on things too. The rise of the mobile wallet and alternate forms of payment is set to continue, for example, but precious few hotels can accept payments from services like Apple Pay. That will have to change and only the centralization of processes and standards can enable that.

Encouragingly, there are now more payments professionals in the hospitality industry than ever before. The issues I’ve highlighted here are also appreciated by more and more of the C-Suite in hospitality groups and chains. They understand how important payments can be to their profitability, and they need the kind of holistic view of the cost and structure to help manage the bottom line.

These indicators – customer demand and business benefit derived - give me great confidence that we will see the focus on the efficiency of payments continue to gain momentum and drive the adoption of centralized, standardized technological solutions to make it a reality within the next three years.

But, in my personal opinion, the most significant thing that could be done right now to help improve the cashflow and profitability of the hospitality industry is to switch from a post to a pre-paid model, following the example of the airline industry.

It may take just one brave global brand to do it to set the entire hospitality industry off in the same direction, but it would help remove so much of the complexity and uncertainty the industry continues to face.

One things for sure, there’s change afoot in hospitality payments, and it’s long overdue!

Mike Carlo is a recognized authority on payments in travel and tourism. He is a board member for the Hotel Electronic Distribution Network Association (HEDNA) and founder of XanderPay. He has also previously held senior roles at WEX, Transpay and Onyx CenterSource.

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