The Mews Blog > The hidden rising costs of OTAs
Hotels are paying the price for inadequate security, and largely further enriching the OTAs in the process. We would like to expose one of their latest endeavours which has raised commission costs by 2% for hotels accepting Virtual Credit Cards.
Hotels function with very clearly separated departments. The Sales department who signs sales contacts and agrees to the OTA commissions. Secondly you have the accounting department who are the ones who receive (and pay for) that hefty Booking.com bill that comes every month without fail. Often there is a disconnect between these 2 departments, and this is causing a lack of understanding why credit card commissions are rising faster than ever. We would like to explain why some OTA’s have suddenly started using Virtual Credit Cards, and how this is eating into the hotel’s profit margins even further.
What do we know?
We began our journey of creating a 21st Century Property Management Solution with the idea that we were creating our system for a world which does not distinguish between an offline world, and an online one. At the heart of a PMS is the ability to take payments, which in hotels are mostly by credit cards. In 95% of hotels today, payments are still taken manually on the traditional credit card terminals, making the process slow and definitely not risk free.
As we started thinking out our future-proof solution, I remember us sitting with the regional director of one of the largest payment facilitators in the world and reaching an impasse as they couldn’t understand that we wanted our online payment gateway to be the same as our offline gateway (they had just bought an online gateway, but couldn’t understand why we would ever want to merge the two worlds). More shockingly, they couldn’t understand why we wanted assurances that there would be no price differences (surely the online world is more risky, right???). We left the meeting thoroughly depressed as we couldn’t quite understand why anyone would still want to offer anything other than an omnichannel solution in 2013.
Fast forward to now, we have found perfect partners for our payment vision, but we still find the thinking still permeates the industry. In the PMS world, we find it shocking that there are still PMSs that come without an online payment gateway integration, considering how most of the business in the hospitality industry solidly comes from online channels. But because of this, hotels are still footing the bill as they are then forced to accept halfway measures which come with a lot of hype and not much by way of added security: the Virtual Card.
What makes the Virtual Credit Card so great?
Hoteliers who work with Booking.com have always had challenges with bookings that came with credit cards and the card simply is not chargeable. So if a guest does not show up, you have lost this revenue, and you cannot claim it from the OTA, as it was the responsibility of the hotel to check the card prior to arrival and report it. Logic or not, this is the reality, and Booking.com will still charge you commission on bookings if you forget to tell them about the dysfunctional card.
This problem was solved by Expedia long ago, because they take payment from guests directly… hold on to the money (sometimes for several months), and at the time of check-out they pay the hotel. This ensures hotels get paid, but it ruins the hotel cashflow.
Booking.com has now introduced the Virtual Credit Card, a sure way for a hotel to get its money, and no longer have to deal with unpaid no-show bookings. A foolproof solution, and hotels are jumping on the bandwagon as they no longer have to worry as they are guaranteed to get payment.
Where are the hidden costs?
Having studied the phenomenon close at hand, we can see that the virtual card offering by the OTAs especially is really nothing but a commission by another name, and a further means through which the OTAs claim an extra stranglehold over the customer.
Virtual Card = Corporate Credit Card
Last year the EU has started to regulate the payment card industry quite substantially, and fees on regular Visa & MasterCard are now capped. Sounds great, right? Well… the reaction of the payment providers has been to increase interchange fees for transactions on all cards not covered by EU regulation (such as corporate credit cards and non-EU cards), and these have an impact on the effective fee you pay per transaction:
For example if you have a hotel in Europe, and a customer from the EU books on your favourite OTA with his debit card, and the total reservation cost comes to €1.000.
With usual interchange (the guests personal card), you may pay an interchange fee of 0.2% for the transaction (interchange + bank fee) = €2
However through the use of the virtual card, you actually end up paying up to 4% (!) = €40 – as the Virtual Card (considered a corporate card) usually carries with it an interchange cost of (usually) 2% – €20 (In fact, we’ve seen some card fees for these customers being even higher in total – and can reach up to 8%!)
Who pays for this? The Hotel, and of course, because this is a Virtual Card provided by the OTA, consider this as if you are paying another 2% commission to the OTAs.
Your Hotel’s Cashflow
Usually the Virtual Card becomes active only on the day of arrival. So these OTAs now hold all of your money from the time of booking (on all non-refundable rates) until the date of arrival. They are holding your cashflow captive. Considering these are non-refundable bookings, you have the right to this money and there is no interest being paid to you for the holding of this deposit.
Short lifetime of a Virtual Card
For repeat customers, there is nothing easier than re-using the same card at check-out to speed up the process (think how easy it is to get out of an Uber without needing to rummage through your wallet). However, with the virtual card, you have no control over the actual card of the customer, as it is not stored within your own gateway and has a short lifetime for use. There are added reasons for why it’s good to drive your customers to an online portal, whether on your property’s app or online check in area where they have their payment credentials stored (this will be the basis of a forthcoming post, but check out the data emanating from this use in the Restaurant POS space).
Ownership of data
As we’ve seen with email addresses, OTAs are using security as a reason for why they do not release card information to you, under the guise of protecting the customer. The truth is that no-one is completely free from scandal, whether it is the OTAs or even large chains, but that should not put you off implementing your own security measures and demanding that your technology supplier provides this as part of their offering.
At the end of the day, hotels need to remember that the relationship is between them and the customer, and not outsource all of their responsibilities to their OTA partner.
So what should you do?
So while the Virtual Card may be a good solution to a problem that was caused by the OTA in the first place, we feel the additional cost is something to take into account. Are you happy to pay an additional 2% commission, in order to be ensured payment by an OTA on bookings, for which you already pay anywhere between 15 – 25%?
Make a calculation:
1. What is the cost of unpaid no-shows yearly to the hotel from this specific channel, usually a relatively small amount.
2. What is the cost of your credit card fees if you count 2% over the total revenue from that OTA
Get your accounting and sales teams in one room, and discuss both upsides and downsides, and make an informed decision. You can always ask your OTA to stop the Virtual Cards (several of our hotels have already done this, and effectively so).
Richard Valtr & Matthijs Welle
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