Aran Brown, CEO of travel payments optimisation innovator, Ixaris
It’s been another year where OTAs have had to scrap and focus in order to forge ahead in a difficult sector. Thomas Cook collapsed in September and, while that was a unique set of circumstances, it was a reminder of the cash and margin pressures all businesses in the travel industry face every day. Couple this with growing consumer expectations of value for money and a seamless booking experience, and it’s clear that OTAs will need to look for every opportunity to combat this squeeze and find new ways of unlocking value.
What many don’t yet realise is that payments transformation is often their best untapped opportunity to do this. OTAs have traditionally seen payments as something that just needs to be kept ticking over, with little strategy or expertise placed in the function. However, the more sophisticated OTAs are starting to use payments strategically and – in many cases – it’s becoming as important to a business’s performance as data. As we look ahead to 2020, we’ve identified three trends that OTAs will face – all of which relate directly to payments, and all of which can be mitigated with a strategic approach to payments optimisation.
The cost of credit
OTAs operate in a fiercely competitive space with seemingly no let-up in the race for new customers. In 2020, thanks in part to changing consumer expectations around the provision of credit at point of purchase, OTAs will look to provide more flexible payment options, allowing their customers to pay off purchases in small instalments.
OTAs will pick up an increasing share of the tab for these credit arrangements, which has a commensurate effect on their already-tight margins. Credit will always carry a cost of course, much of which has traditionally been passed on to the consumer. But as the model becomes more widespread, price pressures and market competitiveness will inevitably push OTAs to finance more of that credit themselves.
However, this increases an OTA’s risk burden and outgoings at a time when they’re under pressure from diminishing rates of return and intense sector competition. Given this context, OTAs are under unavoidable pressure to both find ways to reduce risk and keep more money in the business.
Ease of experience
They’ll need these funds given how mobility and the offerings of disruptors like Airbnb have transformed consumer expectations of the travel-booking experience. Metasearch companies and agency-model brands, which previously would’ve sent consumers to the supplier’s website to complete a purchase, are now looking keep the user in their own ecosystem rather than interrupt the experience. This carries a cost burden for OTAs, which are taking on the payments part of this process that would’ve previously sat with the end-supplier.
While there’s no doubt that keeping the user in a single ecosystem has long-term advantages, it certainly increases the complexity and cost of the offering. Payments optimisation offers a way to balance this cost with revenue, putting OTAs in a far stronger position to deliver a user experience that will chime with today’s – and tomorrow’s – consumer.
Play your cards right
Margin pressure is something all parts of the travel ecosystem must deal with, and airlines are becoming more sophisticated in the way they identify and disincentivise the use of certain cards. As airlines sharpen up their approach to payment methods, in 2020 OTAs must respond by having a range of cards at their disposal that are used in specific circumstances or with specific suppliers.
Consider this – OTAs are used to paying airlines with high-interchange virtual cards that have helped increase their margins. For airlines, however, these cards can eat into margins, which has led them to levy charges or decline cards. This payments friction can ultimately result in decreased airline distribution options and difficult relationships.
Airlines and OTAs should be on the same team. OTAs spend billions on marketing that brings demand to airlines, but payments friction is preventing them from working with airlines in a mutually beneficial manner. Even if airlines are willing to support OTAs as distribution partners, card-based rewards alone are ineffective at creating sustainable relationships due to the lack of cost transparency for both parties.
One way for OTAs to ease this tension is to optimise payments and have a range of cards available and match the card with the airline. But there is actually scope to go even further, and re-engineer the entire payments flow to the benefit of airlines and OTAs alike. What if costs could be lowered for airlines, for example, and rewards for agencies were mutually designed to promote distribution? What if unnecessary intermediaries could be removed from transactions and there were no IT barriers to adoption? If this were to become a reality in 2020, how would that change the dynamics of the industry?
These are crucial questions, but OTAs will set themselves up for success long into the future by addressing payments transformation now. Payments optimisation packages can give OTAs the flexibility and security to provide a compelling offer to their customers, while paying their own suppliers in a way that reduces risk. The money that is saved on credit costs can then be redeployed into marketing and other business initiatives, boosting an OTA’s competitiveness and providing a much-needed boost to their margins at a time when the external business picture is also uncertain.
Whatever the coming year brings, though, optimising payments will give OTAs a platform from which to invest smartly and stay ahead of competition. Now is the time to get on board.
‘MOVE FAST BUT DON’T BREAK THINGS’ – WHY FINTECHS WILL COME TO LOVE REGULATION
Alex Johnson, Director of Portfolio Marketing, FICO
The guiding ethos of fintech is move fast and break things. It’s the fundamental advantage that disruptors have over the incumbents they’re disrupting — the ability to move quickly and make mistakes, learn from them and deliver innovative services to customers. Generally, this ethos is presented as a virtue. Banking is ‘broken’ so any investments in improving it are both notable and noble – even if there are bumps along the way.
Conversely, anything that stands in the way of this ‘march of progress’ is generally cast as a villain.
The most prominent villain for fintech companies is regulation. From their perspective, it’s a competitive moat, based on rules written for a different century, that protects banks’ ability to make money without needing to innovate and offer more or improved services to their customers.
So, it’s easy to see why a fintech company — believing fully in the virtue of its mission and faced with a litany of illogical and intractable regulations — might just say ‘we’re doing it anyway.’ That’s what Robinhood co-founder Baiju Bhatt reportedly did when his company tried to roll out a checking and savings product that it claimed was insured without confirming that with regulators first.
The problem is that while we may mythologise the ‘move fast and break things’ ethos in the abstract, consumers don’t love it when their stuff breaks in the real world.
And when fintechs and challenger banks aren’t constrained by regulation (as they mostly are in the U.S and Europe) the harm caused by this ‘move fast and break things’ approach can be much more severe than a service outage or a false claim of deposit insurance.
Stories from overseas
In China, online P2P lending exploded in popularity, with the number of P2P lenders growing from 50 in 2011 to 3,500 in 2015. Then the whole industry imploded when it was revealed that 40% of P2P lending platforms were Ponzi schemes.
In India, online lending companies raised a record $909 million in venture capital last year (the third-biggest market behind the U.S. and China). And those lenders are now using personal data from borrowers’ mobile phones to make lending decisions – which although illegal, is reportedly ignored by Indian regulators.
In the Philippines (another emerging market where venture capital dollars for online lending are pouring in), the National Privacy Commission is investigating hundreds of complaints from consumers about lending apps leveraging their personal data to shame them into making their payments.
A prediction for the decade to come
In the 2020s, I believe fintech companies will come to love – or at least quietly appreciate – regulation for two primary reasons:
Fintechs and challenger banks understand that brand recognition and affinity is key to their long-term success. Building their brands will be a challenge. A recent survey of 2,000 Brits found 40% don’t trust challenger banks at all and 67% said they are more likely to do business with banks that have branches on the high street. As Zach Bruhnke, co-founder and CEO of U.S. challenger bank HMBradley recently said, ‘We’re going to have to grow by word-of-mouth and doing the right things for our customers.’
Fintechs and challenger banks focused on the long-term task of building brand affinity and trust will, over the next decade, come to despise bad actors that skirt the rules and dress up get-rich-quick schemes in the same language they use to describe their own firms. Regulations that constrain and/or shut down these bad actors will be increasingly appreciated by legitimate market participants.
In the 2010s, we saw the beginning of a trend that will strengthen in the 2020s — regulations designed to foster competition between incumbents and new market entrants. To date, such regulatory action has run the gamut, from vague (innovation sandboxes and special-use charters) to hyper-specific (U.S. regulators’ cautiously approving the use of alternative data, or the Bank of England considering giving non-banks access to its 500-billion-pound balance sheet). Perhaps, most promising, has been the work done by the Competition and Markets Authority (CMA), which has been proactively driving the adoption of rules and standards around Open Banking for past couple of years. O
ver the next decade, through careful management of public perception and increased investment in lobbying, fintechs and challenger banks will further reshape the regulatory environment from a competitive moat to a more level playing field.
Reaching fintech maturity
’As a licensed broker-dealer, we’re highly regulated and take clear communication very seriously. We plan to work closely with regulators as we prepare to launch our cash management program’.
This was the statement issued by the chastened co-founders of Robinhood shortly after they backed away from their plan to launch a checking and savings product without government insurance. And here’s the crazy part — that’s exactly what happened! Less than a year later the company announced a new deposit product, this time insured by the Federal Deposit Insurance Corporation (FDIC).
As fintech companies mature in the 2020s and the focus of their strategic objectives shifts from growth to profitability, regulation will play a vital role in transforming the ethos of those companies into something a bit more sustainable. Call it ‘Move fast, but don’t break things’.
HOW TO MERGE YOUR FINANCES AS A COUPLE?
By Nelisiwe Ndlovu, Certified Financial Planner at Alexander Forbes
There is never a good time to discuss finances with your partner, married or unmarried, and one key issue that needs to be discussed is whether you should merge your finances.
Joining all your money matters can seem overwhelming at first, so you don’t have to combine every bank account and credit card from the get-go.
Start by having an honest discussion with regards to your individual money management and financial commitments before deciding to merge or co-manage your household finances while deciding if you want to fully merge all your finances. Detail all individual income, expenses, and all your financial commitments. The best way to achieve this would be to first take your individual budgets and combine them. This will tell you what you can and cannot afford as a couple. If one partner does not usually budget, this is a chance to start doing so as this will ensure that your household finances are under control.
Before you think about merging your finances, be open and honest about:
- How much you earn – what is the income that you will bring home? What is the frequency of your income? Are you permanently employed or a contractor?
- What are your current individual expenses and financial commitments? List your assets and your current debt.
- Your individual financial goals and money management techniques – don’t worry if you might have not figured this out at the time of merging your finances – the important thing to do is to be open and honest so that you both build a stronger money foundation
- Disclose your financial obligations, this becomes very tricky if left until too late and may cause unnecessary tension in the relationship
- What are your goals as a couple – what is the purpose for merging your finances?
Married couples can formally or informally merge their finances as detailed above where household expenses are split between the couple (the split could be 50/50 or any fair split agreed upon by the couple, which could be based percentage-wise depending on one’s income). Some couples tackle finances by adopting the ‘pick a bill’ approach, where one couple pays the water and electricity while the other covers the food.
Being married does not mean necessarily that you need to have one joint account. You may also just want to open one joint account where you each deposit money to pay just your monthly household expenses.
The top five things to remember when merging finances as a couple:
- Have the ability to manage your own finances before expecting another person to merge their finances with you.
- Be mindful of your potential spouse/life partner’s money management behaviour and skills so that there are certain things you can address together before considering merging your finances
- Always keep an open line of communication – honesty is the best policy
- Set a money limit which you can each spend without having to consult each other
- Don’t forget to change your wills and beneficiaries on pension or provident funds as required.
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