How poor risk management impacts travel companies
Feb 18, 2020
When trying to navigate through difficult business conditions, one of the most critical supplier relationships for travel companies is with their payments acquirer.
It is not uncommon for both start-ups and established companies to run into financial difficulties, and that is as true for the travel industry as any other. 2019 was particularly unkind to the sector both in the UK and across Europe; the collapse of Thomas Cook being the most notable operator casualty of the past 12 months.
External pressures are often the catalyst for these financial difficulties; being unable to react to changing consumer trends or being impacted by negative public relations would be two examples of this.
When trying to navigate through difficult business conditions, one of the critical supplier relationships for travel companies is with their payments acquirer. If the travel company and its payments acquirer aren’t on the same page, or worse the relationship breaks entirely, the damage to both the carrier and its creditors, including the payments acquirer, is extremely painful. So, for all parties concerned, managing the relationship successfully is imperative. From the payments acquirer’s perspective, the key to this is understanding the specifics of the sector and performing excellent risk management.
Risks to the travel industry in 2020
The financial issues we’ve seen in travel over recent times is likely to continue for the foreseeable future due to a number of ongoing factors.
The airline market, for example, suffers from congestion on many routes and continues to compete with high speed rail alternatives in Europe, meaning that many carriers are offering very low fares and running tight margins. Price sensitivity, global tensions such as the spread of the Coronavirus, the fluctuating price of oil, Boeing’s ongoing issue with its 737 MAX model are just some of the current factors that have the potential to put these airlines into a downward financial spiral.
A second example where risk management skills may be vital in 2020 is the prevention of contagion following a large failure. Smaller operators that resell or repackage flights are at risk of suffering the fallout of a failure by one of their partners if they rely significantly on the partnership.
Risk management best practices in travel for the payments sector
The best payments acquirers in the travel industry not only understand how to work with their clients during the good times, they also adapt their risk management practices to support travel companies when things get difficult.
This is critical because the payments acquirer controls counterpart liquidity, which in a time of financial strain is vital to any merchant. For travel companies, this lever for managing cash flow will be critical for controlling the situation if they encounter any financial headwinds in 2020.
Some payments acquirers adopt the default position of restricting settlement during any financial hardship, because their risk management protocol is to protect their own position first and foremost. On one level this is understandable, as in the short term it minimises the payments acquirer’s exposure to the company defaulting.
But in restricting the flow of funds, the liquidity issues that trigger the payments acquirer’s reaction then become significantly worse. In the worst-case scenario this may even lead to a default; a wretched scenario for both parties.
Conversely, payments acquirers with a proven track record of best practice risk management in the travel sector support their partners through proactive action to maintain cash flow, without taking on any undue risk. By managing cash flow effectively, as well as utilising additional tools such as travel data to enable release of funds, travel companies can mitigate the impact of a turbulent marketplace safe in the knowledge that their payments acquirer is supporting them wholeheartedly, rather than prioritising its own position to the detriment of their partner.
Three reasons travel businesses should partner with Paysafe
- Personalized approach to risk management
- Dynamic tools to support liquidity requirements
- Proactive risk management
Paysafe works closely with our travel merchants during the onboarding process and throughout the subsequent relationship to ensure that we fully understand the associated business model, strengths, weaknesses and overall risk profile of each individual business.
This enables informed risk management decisions to be made, and collateral is not a prerequisite due to the nature of the sector. If the call for collateral is unavoidable, we look to work with our merchants to help create solutions that work for both parties, and importantly have as nominal an impact to the business as possible. These positions are then revisited on a periodic basis to ensure the compatibility of the incumbent set up for both parties.