Coming soon
Online payments knowledge, travel industry edition.
This site provides analysis of the impact of technology on Online Travel Agencies (OTAs) when it comes to moving money around.
OTAs are increasingly recognizing the advantages of internalizing their fintech needs, and are developing in-house the technology to manage their financial risks, leveraging the improvements in software and cloud computing. In doing so, they are encroaching on the realm of their financial providers, instead of outsourcing their fintech needs to third party providers. Rather than choosing to integrate with open banking solutions, they are doing away with financial institutions and proactively building the tools themselves, including payment acceptance, lending, or fraud prevention.
I call this the financialization of Online Travel Agencies.
No other industry has such a pressing need to absorb payment industry capabilities as OTAs do. They are, like credit card networks, in the business of intermediate between their customers and airlines, taking a fee in the process.
These companies are global by design, because they rely on economies of scale to maximize their profitability; they thus serve a globally diverse customer base, and strategically aim at accepting as many payment methods as they possibly can; and because they operate with such volumes and thin margins, they are forced to be extremely vigilant to fraud risk.
Unsurprisingly, it is absurd for OTAs to adopt open banking. They much rather adapt the patterns of financing high-value sales such as cars or real state, into lower-value purchases like airline tickets and hotel reservations.
This financialization manifests itself in many ways, including:
- Owning the Merchant-of-Record payment chain: OTAs extend their already massive customer support operations to now include refunds, installments and gift cards.
- Agility in Payment Method Acceptance: The question is not "how many?" but how flexibly can I accept more?, as alternative payment methods emerge and the landscape evolves.
- Independent Fraud underwriting: As they mature and grow, they are exposed to a scale of business transactions that make them better equipped to assess fraud risk and create their own internal risk scores, reducing their dependency on card schemes and fraud service providers.
- Internal Currency Exchange Matching: Rather than relying on exchange providers, who match currency buyers and sellers on the global markets, they are beginning to roll out their own matching engines in order to absorb what used to be a highly lucrative branch of banking.
- Virtual Account Number programmes: Streamlining the use of virtual credit cards for a cost effective and highly observable payment reconciliation process, that happens not at the issuing bank, but internally as well.
As a consequence, fintech departments within OTAs are transitioning from being perceived as a cost center to being recognized as strategically important. I believe that the larger the OTA is, the greater the impact on the bottom line will come from owning the payment experience, and if you do too, then you will enjoy my investigation on this topic.