Decoding the Upfront and Hidden Costs of Payment

Corporate payment programs are critical for travel program's data and compliance, but measuring the cost of the programs themselves is not always a simple matter. Rebates and other benefits that offset costs and fees, but those are sometimes described as a "shell game," in which costs of those benefits are shifted to suppliers but not necessarily returned to the buyers. At the same time, some emerging models are arising to reshape the corporate payments model or reduce costs by driving inefficiencies out of the system.

Understanding the Economics

As with any supplier category, the direct cost of a payment program will vary depending on the services provided. Basic card programs, including access to some management software, can come at little or no cost to companies, whereas premium offerings will add such costs as annual cardholder fees or software-as-a-service fees. The payment program also provides a source of income to users, usually in the form of rebates.

"On larger programs, the rebate should be paying for all the costs of the program," said Eric Bailey, owner and managing director of Purposeful Travel Solutions and former global director of travel for Microsoft. "There is a cost, but the rebate offsets the costs."

Those rebates—like rewards programs offered by payment suppliers—are funded by interchange fees, a portion of the transaction that suppliers pay back to the payment provider in order to accept the card. That typically falls within the range of 2 to 3 percent but can be even higher, depending on the type of payment product. For example, merchant fees for many of the new fintech entrants tend to be higher for hotels and airlines than for other categories, Blockskye co-founder and co-CEO Brook Armstrong said.

Armstrong added that the rebate rate that companies negotiate do not tend to be the rate they receive at the end.

"There are always ways it can be cut down," he said. "Late fees can offset the rebate, and there's all kinds of other fine print. In aggregate, we find even if you have 1.2 percent rebate, which is on the high end, the best you're going to get is 0.7 percent. Many accounts are at zero."

In the broadest sense, corporate payment solutions carry higher fees to merchants than consumer products, and virtual payment solutions are more expensive than physical payment solutions.

There are tradeoffs, however, to the higher fees beyond funding rebates or rewards programs.

"It's important to look beyond the fee itself and consider the overall value the payment method brings," said Daniele Caneschi, global director of agency payments for Sabre. "Cost savings is important, but it's not the only piece of the puzzle. The best payment solution helps buyers improve cash flow, reduce fraud risk and provide visibility and control over the spending."

For example, virtual cards are the predominant way that agencies and travel management companies pay their suppliers. Even though they come at a higher cost, they bring benefits to both sides, he said.

"For travel suppliers, they provide guaranteed payment and protection against agency default, much better data and easier reconciliation," Caneschi said. "For buyers, obviously, they offer control, security and automation."

Corporate cards come with additional benefits for buyers beyond rebates, including data, controls and avoiding certain costs—foreign exchange fees, for example—they would incur if they built a program around consumer cards. For suppliers, accommodating agencies and buyers in how they want to pay is important to sustaining demand from those sources, even if it comes at a higher cost.

Even so, suppliers—particularly some airlines—are increasingly taking a harder look at those tradeoffs.

Suppliers Taking Control

The evolution of travel distribution might be instructional as to how airlines are thinking about payments. Back more than a decade ago, when Lufthansa introduced a €16 fee on global distribution system bookings, CEO Carsten Spohr, then fairly new to the position, said it was "the future of the industry." He was right, with such surcharges now commonplace in the industry.

Payment costs on an airline ticket might not be anywhere near what the distribution cost is, but they share something in common: They are among the few costs where airlines have direct control.

"If you're an airline CFO, you can't pay less for gates, you can't pay less for gas, for Boeing or Airbus, for labor or for the salmon and Coca-Cola you're going to put on the plane," Armstrong said. "You can cut expenses on the cost of distribution, and you can cut expenses on the cost of payments."

That is even more pronounced for low-cost carriers, which typically have less cash flow than legacy carriers, Matt Williamson, SVP and industry principle at Endava said at the recent CAPA Airline Leader Summit.

Amid rising costs, the industry is starting to see the "advent of surcharges," with two prices given for payments in credit cards versus lower-cost options for suppliers, such as debit cards, said Ralph Kaiser, president and CEO of UATP. "It's not new, but it's become more prevalent," he said.

On the hotel side, there have been reports over the years of individual properties or franchises adding such a fee as well, though it's certainly not the policy of the big brands.

Should the day ever come where payment surcharges for travel were as commonplace as are distribution charges, that would change the economics of payment programs significantly. "If I knew I had to pay 3 percent, and I got 1.5 percent back, I'd rather look for another alternative," Bailey said.

Surcharge capabilities are bound by regulations. Kaiser noted that it's more "recently become allowable in the U.S. market, and it's been around a long time elsewhere in the world." Europe is a bit more complicated, with surcharges in the European Union banned on purchases made with cards from the Visa and Mastercard networks but allowable on other payment forms.

Interchange regulation, meanwhile, would be another threat to the rebate structure. The EU already has caps on interchange fees for consumer cards that do not apply to corporate cards, and merchants have been seeking to change that. While such caps have been discussed in the U.S., nothing seems imminent—and airlines, in fact, have been among the groups opposing such limits.

That's because airlines benefit from interchange fees much more than what hits their bottom lines from credit card acceptance. The rewards payment programs they have in partnerships with issuing banks, also fed by interchange fees, are extremely lucrative, and feed into their large loyalty programs, which are key to airline profitability.

The fact that those loyalty payment products remain almost exclusively a leisure product is where carriers might truly turn their focus, Armstrong said.

"When you're an airline, you have this great points program, and it has essentially nothing to do with your richest category of spend, the two can't go together."

New Models Emerging

Merging those two was the idea behind Blockskye's B360 offering, built on its BMax direct settlement for air, hotel and car bookings. With B360, travelers can use their personal cards, including branded rewards cards, for bookings, with the company's compliance controls in place as well as the automated reimbursement and reconciliation.

While Armstrong said allowing personal cards is not a fit for all companies, it's particularly being embraced by companies that are already seeing issues with leakage from employees who want to points-max with their bookings.

"There are clients that have software engineers making $750,000 a year, they can't get them into the program—they always go do whatever they want anywhere—and [the buyers] go to their managers, who say, 'I don't have time for this,'" Armstrong said. "Using the loyalty card as a carrot to bring the people back into the program is a powerful tool."

The Blockskye model recently got a boost with a new partnership with FCM—along with Kayak for Business, which partners with Blockskye for its enterprise solution. Part of the drive for the offering was to have a new payment model to offer clients, according to Charlene Leiss, Flight Centre Travel Group president of the Americas.

"Customers are looking to do something innovative with payment that ultimately is going to save on the economics, the whole unit economics of the payment integration but also eliminating some of the administrative work," she said.

Other payment suppliers have introduced solutions aimed at cutting supplier costs. UATP, for example, issues a virtual card that is a "leading cost saving product," Kaiser said. As with corporate cards, virtual cards for agencies tend to have high costs to feed rebates, but UATP's product aims to meet suppliers and agencies in the middle."

Buyers that can adopt payment programs that offer supplier savings should in turn be in a better negotiating position for their overall program, Armstrong said.

"Suppliers have low margins, and when you come to them with a method of payment, especially one that has their logo on it, that's a new thing for them, and they will have a different quality of conversation with you, based on your strategic relationship," he said. "If that wasn't the case, we wouldn't be in business, frankly."

Potential supplier savings is not the only savings buyers can see as payment technology advances. With payments that are automatically reconciled, that can cut down on expense reporting, which comes at a cost both for processing the expense report itself and the labor associated with filing expense reports.

There are other hidden costs associated with inefficient payment processes that suppliers are looking to alleviate. For example, acceptance of virtual cards at hotels remains an issue, with the process often not integrated into the hotel reservation system, leaving a front desk employee unaware how to process the payment.

Gant Travel president and CEO Patrick Linnihan said his company had worked with a client and their hotel partner to have a special procedure for third-party forms of payment, which he said "really solidified the relationship" between the hotel and the buyer. That solves a not only frustrating but potentially costly pain point, as hotel bookings with virtual card numbers on average result in escalation calls about 17 percent of the time, often after hours, he said.

"It could be a traveler flying from North America to the Middle East and standing in front of a hotel to do a check in and finding out that for the lengthy stay they had planned, the third-party form of payment is not being recognized," Linnihan said. "Any time that a traveler has to make a phone call, it's a very expensive call."

The industry has made progress on improving that consolidation in recent years, such as Hilton Worldwide's connection to Conferma VCNs via API and Grasp Technologies' automated virtual payments workflow, pioneered with Marriott International and client The Walt Disney Co.

What to Watch

In the wider travel industry, travel suppliers are broadening their payment acceptance options, which could lead to more opportunities—and headaches—around managing payment programs.

As payments have become more complex, technology known as payment orchestration has arisen that can integrate with multiple payment channels rather than suppliers having to integrate individually with each individual channel. Sabre, for example, lets agencies connect to multiple payment methods via API, which also eases reporting as it comes in a consolidated document, Caneschi said.

"It's not just about replacing one payment method with another," he said. "It's using the strength of each method to get the most efficient outcome for everyone involved."

As AI technology advances, optimization of workflows should help take some of the cost out of the payment side, Kaiser said, but with orchestration, "smart learning and intelligent routing will become the norm." On the supplier side, that could mean more capabilities of pushing customers to certain forms of payment that is less expensive for them or refusal to accept certain forms of payment in certain situations, he said.

On the customer side, AI agents also could direct them to their own best form of payment.

"Maybe a provider will say, I'm using this form of payment, but if my AI agent finds a lower cost or benefit, we're going to flip to that," Kaiser said. "There are hard and fast corporate rules, but they'll have to have the flexibility to book outside that on an exception basis."

Stablecoins—a cryptocurrency that are tied to fiat currency, such as the U.S. dollar, to prevent the wild value swings typical for cryptocurrency—also are a potential source of reducing cost of payment. On the heels of the Genius Act, U.S. legislation that put a regulatory framework around stablecoins, banks are building infrastructure around stablecoins.

Kaiser said the cryptocurrency not only could reduce costs around foreign exchange fees but also offer more transparency, as card agreements from the major networks notoriously difficult to parse when regarding fees.

"Banks may charge for the use of stablecoins in a different ways, because there are issuer fees and merchants fees the banks always unveil at the last minute, but in general, there will be a deflation in cost, even if people try to ramp up different fees," he said. "Overall, the ecosystem will take out more costs than add costs."