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How safeguarding in travel can help merchants tackle cash flow challenges
With travel merchants struggling to manage cash flow, here’s how safeguarding can help them overcome this challenge and drive success.
The last few years have been disruptive for the travel industry. And yet, despite the storm clouds that have hovered since 2020, recent research found that global travel and tourism is on the up.
While this is something to celebrate, it shouldn’t mask other pressing challenges facing travel merchants. Cash flow is still a pressing issue, partly due to how merchants work with card acquirers – a complicated arrangement that can prove costly, as outlined in our Travelling Light whitepaper.
Thankfully, there is a solution. Safeguarding in travel can help merchants ensure their cash flow remains healthy, and more broadly support growth in the industry. But what exactly does safeguarding in travel mean, and how does it work?
Travel merchants and card acquirers: a complex relationship
First, it’s important to outline why the relationship between merchants and acquirers – the businesses which accept credit card payments on their behalf – can be so challenging.
When a merchant accepts a card payment, acquirers can demand collateral (otherwise known as “holdback”) to protect themselves in case the merchant is forced to shut down. This collateral could potentially be excessive, but it is an understandable approach from acquirers, who must ensure they’re covered after years of serious travel disruption.
While acquirers don’t want to harm merchants’ liquidity, this approach can still do so. Sometimes, acquirers retain 100 percent of funds from a transaction until the moment travel gets underway. This means merchants may not see the financial benefits of a sale for several months, causing serious cash flow issues and putting businesses at risk.
Here’s how safeguarding in travel can address this challenge.
Safeguarding in travel: a trust-based alternative to holdbacks
Safeguarding is a modern, more flexible financial mechanism that offers an alternative to acquirer holdbacks.
While safeguarding agreements still require merchants to provide a cash reserve, this money isn’t held by the acquirer. This means that the reserve is no longer returned in large tranches at times of the acquirers’ choosing – instead, the money is placed in a trust and released incrementally to the merchant on a planned basis.
By holding funds in trust and returning them to the merchant much sooner than the traditional model, safeguarding can boost liquidity for travel businesses.
The benefits of safeguarding for travel merchants
We’ve already touched upon safeguarding’s most notable benefit for merchants: improved cash flow. With safeguarding, the acquirer and merchant agree a schedule of the funds release, based on factors including the total value of bookings, the merchants’ overall financial health, and the potential chargeback exposure for the acquirer (this can be established using risk assessment tools).
Once a schedule is agreed, liquidity can improve – merchants’ funds can be released sooner, with money available in their account instead of being locked away for months at a time.
Another benefit of safeguarding is improved transparency. While terms may be adjusted if a merchants’ risk profile changes, they will always know how much money will be returned to them and when, allowing them greater insight into their financial health.
Speaking of financial health, safeguarded funds can also be noted on the merchant’s balance sheet. Holdback funds cannot. This can drastically change the financial picture for a merchant.
Safeguarding can help the travel industry recover
For merchants looking to embrace safeguarding, it’s important to be flexible. Not all industry participants are looking for the same terms, and not all payment firms have the same risk appetite. Through open and flexible negotiations with their payment processor, merchants can ensure protection meets the needs of all parties.
With this in mind, safeguarding’s trust-based mechanism can help merchants move away from traditional holdbacks and improve liquidity as a result.
To learn more about how travel companies can cut funds held by card acquirers, check out our Travelling Light whitepaper.