In recent years, there has been a lot of focus on travel suppliers and their direct distribution strategies. The fallout from COVID-19, however, has been a sharp reminder for travel suppliers of the growing importance of indirect distribution. At the same time, it has reinforced for travel agencies of all sizes, but particularly among the largest global players, how important it is for them to adopt a “merchant model” to enable the travel retailing experience that travelers expect.
This rise in adoption of the merchant model around the globe is explained in a new whitepaper from WEX, Travel Retailing: The shift to the merchant model that is redefining B2B payments and distribution strategies. The report found that the adoption of the merchant model by travel agencies can also bring benefits to the whole travel value chain, but only if paired with an effective B2B payments strategy.
“There is a win-win collaboration between the three players in this ecosystem,” says Jason Hancock, Senior Director, Strategy, WEX Travel and a lead author of the research report. “Travelers are looking for flexibility, peace of mind, security, and protection. Travel agencies are positioning themselves as trusted brands by delivering better customer experiences while travel suppliers (airlines and hotels) are looking for ways to fill spare capacity. All three parties are looking for payments that are convenient, fast, safe, and secure; and agencies and suppliers need streamlined processes.”
The biggest success stories in travel distribution today involve travel agencies who operate the merchant model and pay travel suppliers that accept WEX virtual cards, Jason says. “During the pandemic, the travelers in these cases have been fully protected from the financial impacts and have experienced less friction in managing their travel changes. Travel agencies and travel suppliers have benefited from guaranteed payments and efficient payments processing.”
What is the Merchant Model?
The merchant model means that the travel agency collects the inbound payment from the end traveler and makes separate payments to each travel supplier as needed. This makes the travel agency the ‘merchant of record’ for the payment from the traveler and means that the travel agency can accept any locally used form of payment in any currency from the traveler. Payment from the travel agency to the travel supplier is then made with an agreed method of payment and currency. Importantly, travel agencies using the merchant model are still agents of the travel supplier.
Travel agencies already take care of all aspects of the booking across multiple suppliers including upgrades, changes in hotel arrival/departure dates, ticket changes, and more. By accepting responsibility for payments in the merchant model, the travel agency also takes on the investments related to the traveler payment, such as fraud prevention, offering a variety of payment methods, currencies, and refunds. With 200+ local forms of payment available globally and 170 currencies, these investments can be significant, especially when local fraud risks are taken into account.
The alternative to the merchant model is the agency model, where the travel agency may collect the payment details (such as credit card numbers) from the end traveler, but the travel agency doesn’t process any transactions using those details. Instead, the travel agency passes the details to the hotels, airlines, or other suppliers involved in delivering the service, and they each process the relevant payments. In the agency model, the individual hotels, airlines, and other suppliers are the merchants of record for the end traveler payment.
The agency model carries a number of challenges and restrictions, including the increased risk of fraud and related investments required by travel suppliers, and the need for end travelers to make payments in a way that the travel supplier can accept rather than what the traveler may prefer.
Travel agencies are valued partners to travel suppliers
Our research revealed that the full value travel agencies bring to their supplier partnerships is not always recognized or well understood. There is an opportunity for airlines and hotels to re-evaluate their distribution strategy, especially in the wake of COVID, and many have already done so.
Suppliers benefit from the retailing approach of their travel agency partners because they can meet the needs of a broader consumer base without having to manage the complexities that come with it, such as the investment and costs associated with building brand awareness and offering local services.
The role of the travel agency as a trusted brand is good for suppliers, too, Jason says. “Especially for airline and hotel suppliers who want to book international travelers, the local brand and reach of the travel agency is a powerful addition to their distribution strategy.”
Travel agencies using the merchant model take on risks from both the traveler as well as from the travel supplier, and that can bring additional cost and complexity that doesn’t exist under the agent model. This also means that travel agencies adopting the merchant model need to ensure their business is complemented by a robust B2B payments strategy.
"While the benefits to travel suppliers of indirect distribution are not new, the pandemic has certainly highlighted the importance and need for travel suppliers to think more holistically about their distribution and payment strategies. Suppliers want to cater to their end traveler customers regardless of whether those customers decide to book directly or via a travel agency,” says Livia Vité, Head of Supplier Partnerships for WEX.
Livia advises travel suppliers and travel agencies to work together on a payments strategy that works for both, balancing the risks they each hold and the value each brings to the partnership. “The choice of the B2B payments approach is a key factor in setting up the partnership to enable the best end-to-end traveler experience especially during complex times,” she says.
The merchant model enables travel retailing that delivers more choice, less friction, more protection, and a better customer experience to travelers
The evolution of e-commerce and online retailing has shifted traveler expectations over the past decade, our research found. As a result, many travel agencies have had to move toward a retailing business approach to align with these new expectations. That, in turn, has sparked a move toward greater use of the merchant model which can help facilitate this shift in strategy for travel agencies.
“Through our research and within our client base, we see a global trend away from pure travel agents and more of a travel retailer or e-commerce travel agency,” Jason says. “The travel industry is catching up to the retailing model that has been popularized by Amazon and other large online retailers. Travelers expect the same kind of connected service and buying experience from travel as they get in online retail, particularly with the uncertainty that COVID has brought to travel planning.”
“Travel agencies are aiming to become both trusted brands to consumers and valued partners to suppliers,” adds Scott Duane, Commercial Director, APAC, for WEX Travel. “With the ongoing border restrictions and closures that APAC continues to encounter, the time has never been so crucial to have a payments strategy in place. A strategic payments policy will allow for global growth and scale, whilst de-risking your business and customers from any unforeseen financial implications.”
Supporting a retailing approach to distribution with the merchant model for payments, along with a sophisticated and secure travel payments solution, like those provided by WEX, makes this customer experience possible, explains our white paper.
“Travel agencies are focused on the connected customer, offering choice, and removing friction,” says Marcelo Velloso, Vice President, EMEA for WEX Travel. “It’s the way the industry is going, and all travel agencies must focus on their B2B payments strategy as much as their B2C payments strategy. WEX’s capabilities enable agencies and suppliers to come together and agree on a better way to manage these payments and create a better traveler experience.”
Use of the merchant model has increased globally in recent years
Today, the merchant model is most common in Europe, according to our research. The agency model remains popular in North America, particularly for airline payments, but this is changing. The key reason for its continued popularity is the cost of accepting inbound payments from travelers, for example via credit cards, which is relatively high in North America compared to Europe and Asia. Travel agencies in North America generally prefer to avoid these costs altogether by passing on the end traveler’s card details directly to the travel supplier. However, despite the costs, a growing number of large travel agencies in North America have pivoted toward greater use of the merchant model to differentiate themselves by delivering a better customer experience and increasing revenue through additional market share.
“The pandemic has accelerated the move to the merchant model in this region by dramatically increasing the need for travel agencies to control and deliver higher levels of customer service related to the travel payment such as reliable and secure refunds due to changes in travel itineraries,” says Heather Andrews, VP Strategic Markets & Partners, Corporate Payments and Travel for WEX.
WEX technology ensures the safety and security of funds, with reduced risk of fraud and protecting customer identities, Heather says. In 2020, during the height of the pandemic, WEX recovered more than $1B for travel agencies through effective chargeback and refund processing.
Travel retailing and enhanced customer experience driven by the merchant model with WEX Virtual Cards
Our research outlines six key learnings which provide the foundation for the road to sustained recovery. “We show that the benefits of indirect distribution have existed for a long time, but travel agencies have needed to adapt to changing customer preferences (principally influenced by the evolution of e-commerce), driving agencies towards a greater adoption of the merchant model,” says Anthony (Anth) Hynes, Executive Advisor and former President of Global Travel at WEX. “Recent world events have emphasized the benefits and challenges of the merchant model. When coupled with an effective B2B payments strategy, the benefits are amplified for travel agencies, suppliers, and other stakeholders in the travel value chain.”
The key learnings outlined in our research are:
- How indirect distribution is a key part of the travel landscape
- How customer experience is driving the B2B payment and distribution strategies of travel agencies and travel suppliers
- Current merchant model usage and how it has been growing
- How the merchant model delivers benefits across the travel value chain when paired with an effective B2B payment strategy
- Why WEX Virtual Card Numbers (VCNs) are a critical enabler in maximizing the benefits and adoption of the merchant model
- How COVID and the subsequent recovery have forced a re-evaluation of distribution and payments strategies
WEX research partner KAE conducted primary research via interviews with senior executives of large travel agencies and intermediaries, as well as large airlines and global hotel chains. WEX team insights round out the research report. To learn more, download the executive summary and the full report, and sign up for our Travel Payments blog to read all our expert insights.
WEX Travel payment solutions help you go further and grow your travel agency business. Learn more about the choice, expertise, and world-class technology of WEX travel payment solutions. Download the 2022 trends report, Travel Retailing: The shift to the merchant model that is redefining B2B payments and distribution strategies