The travel sector was undoubtedly one of the hardest hit industries during the course of the COVID-19 pandemic. As the world effectively shut down, and travel was available only under the most stringent of conditions, accommodation providers, online travel agencies (OTAs) and airlines all suffered greatly.
The travel industry is now, at least, on the road to recovery. Skift Research’s Global Travel Index charts the relative health of the industry against 2019 levels. From a low of just 20% in April 2020, the industry as a whole is now at 85% — only 15 percentage points behind 2019. Some sectors — including vacation rentals — have capitalised on this generational shift in buyer behaviour and actually find themselves in an even stronger position than before.
But even with a steady and robust recovery, there are still challenges, largely because of changing traveller expectations. One area particularly impacted by customer demand is the payment experience, and 90% of customers now see payments as important to their overall travel experience.
For too long, both providers and customers have had to put up with payments that aren’t fit for purpose, and the pandemic simply highlighted these shortcomings. We’re at a crossroads of customer demand, industry imperative and technological capability. 2023 is the perfect time to stop seeing payments as a back-end function and start looking at them as a lever for growth.
In this article, we look at the five biggest payment challenges facing the travel industry, as well as the potential way forward for travel providers:
1. Balancing payment choice
It’s not exactly revolutionary to suggest consumers want choice. If anything, the idea of choice — which airline to fly with, what destination to visit, where to stay — is at the very heart of the travel industry.
When it comes to offering a choice of payment methods to your customers, there’s a fine balance to strike. One one hand, research shows that if the right payment options are available online, shoppers are more likely to buy from an online brand and less likely to abandon their basket. Almost half of online shoppers in the UK and Ireland (48%) say they’re more likely to buy from a business that provides multiple payment options.
But offering endless options can also be stifling. The paradox of choice, where one experiences the lack of ability to decide from an abundance of choices out of fear of making the wrong decision, can turn customers away. As Airbnb Product Manager Colleen Graneto recently described it, “The array of [payment method] choices can make it seem more complicated because there are sometimes too many options to choose from. It actually creates more friction.”
So how should a travel provider tackle this dilemma? The simplest way is to understand what your customers want from a payment method and match the payment methods to those expectations.
If your customers place security high on their list, for example, then instant bank transfers (powered by open banking) should be part of your checkout, as baked-in strong customer authentication (SCA) will minimise payment fraud without sacrificing user experience. Alternatively, If your travellers want the most recognisable method, then card payments — which accounted for 41% of all European ecommerce payments in 2022 — are worth including.
2. Tackling the billion-pound failed payments problem
Failed payments are both a guaranteed way to erode customer trust and a financial drain on operators. This makes it all the more worrying that recent research suggested UK travel operators stand to lose £5.45 billion in 2022 because of failed payments alone, with an average of 13.4% of consumer payments failing.
Failed payments cause several problems. Customers become frustrated. They don’t like inconvenience and won’t necessarily attempt to make the payment again. Worse, they may head to a competitor’s site to get what they need. And the lost sale is not the only consequence. Identifying and retrying failed payments takes extra resources that could be better spent elsewhere.
The failed payments problem has only been exacerbated by inconsistent implementation of card-base SCA, which has been gradually rolling out across Europe since 2018. While multi-factor authentication is an effective way to reduce fraud, the drop in conversion — partially caused by false declines — can outweigh the positives.
For providers to effectively tackle payment failures, they need an end-to-end payment experience that increases the likelihood of a successful payment. While failed payments will happen no matter the payment methods, digitally native payment methods like instant bank transfers can reduce the likelihood of declines, by including a seamless SCA process that reduces the impact on conversion.
Combine this with a quick and effective process for identifying failed payments and communicating follow-up steps with frustrated customers.
3. Customers demand instant refunds
COVID-19 taught travellers and businesses alike to be more flexible. Travellers were accepting out-of-the-blue booking cancellations beyond the travel provider’s control. But at the same time, the increase in cancellations brought refunds into the spotlight, with 82% of travellers more likely to look closely at refund policies. We collectively realised just how manual and slow existing refund processes were.
To put it bluntly, long refund times will no longer cut it with passengers. A YouGov study found 81% of online shoppers expect refunds in a week or less. Going even further than that, instant refunds can be a differentiator for providers. That same YouGov survey found 85% of online merchants say that offering instant refunds would make their shoppers more likely to shop with them again.
But the problem for a lot of travel providers is that commonplace payment methods don’t have instant refund capability, or even an automated way to provide refunds when needed. Refunds on online card payments can take up to five days, and for digital wallets, often longer. Emerging payment methods, like open banking payments, may be an option, with instant refunds available through providers like TrueLayer.
4. Finding solutions to chargeback fraud
One challenge for OTAs and other providers that well predates COVID-19 is payments fraud. There are several types of payment fraud that providers need to be alert to, but there’s one in particular that needs addressing in the travel industry: chargeback fraud.
Chargebacks were introduced as a means of providing extra protection for debit and credit card users, allowing them to get their money back in case of an issue with the merchant or purchase. But chargebacks regularly get exploited. A customer might also make a false chargeback claim which is considered chargeback fraud. For instance, a clear case of chargeback fraud is a customer claiming not to recognise a payment on their credit card statement and pursuing a chargeback with their bank, despite in actuality knowing that they did indeed make that purchase. It’s estimated that up to 86% of total chargebacks could be cases of intentional or unintentional friendly fraud.
Travel agencies are a frequent target of chargeback fraud as they act as an intermediary between the customer and the airline, which creates ambiguity and confusion over who is responsible for the payment — confusion that a fraudster can take advantage of.
To tackle this, travel providers need both a payment option that eliminates the chargeback mechanism entirely, such as instant bank transfer, as well as a solid process for reversing illegitimate chargebacks when they do occur.
5. Operators with high average transaction values (ATV) are feeling the pain even more keenly
While operators across the travel industry will likely recognise most or all of the challenges listed above, those with high average transaction values (ATV) face the biggest challenges. With package deals and other common bundling tactics, payments in the travel industry regularly hit over £500, placing them in the high ATV category that causes so much pain.
Businesses with a high average transaction value were more likely to report that high fraud and high chargebacks are their top payment pains. A quarter of businesses with a high ATV said chargebacks and fraud were their top pain (26%) compared to 10% for merchants with low ATV. Those same businesses with a high ATV spend an average of £235,000 each year on managing chargebacks.
If you’re a travel operator with a high ATV, your tactics for dealing with the first four challenges are largely the same, but it does increase the imperative for you to tackle them as soon as possible. Any growth opportunities you find in the year ahead will only be slowed down — or worse, negated — by a poor online payment experience.
Can open banking payments offer a solution for the travel industry?
Throughout this article I’ve mentioned that we’re shifting away from payments being a box to tick, and moving towards a way to drive growth. To do that, you need payment methods built for online payments, where most travel operators will carry out a large share of their transactions.
Open banking payments — often called ‘instant bank transfers’ at checkout — offer the kind of payment experience your customers expect to see. Instant, automated refunds mean you can maintain customer trust if the need for cancellation arises. Plus, as strong customer authentication (SCA) is baked in, you can minimise payment fraud while still maintaining a seamless user experience. There’s also no chargeback mechanism, meaning no fraudulent chargebacks to deal with.
In October 2022, there were over 7 million payments made in the UK using open banking; it’s fast becoming a strong alternative to established payment methods. 77% of shoppers would feel comfortable buying flight tickets using open banking, while 66% would feel comfortable paying for their hotel room.
If you’re considering adding instant bank transfers to your payment experience, read our buyer’s guide to open banking payments. It breaks down every stage of the buyer journey, from integration options to global coverage.