The State of Hotel Payments 2021

by Wouter Geerts + Skift Team - Sep 2021

Skift Research Take

Most hoteliers would rather not think about their payment tech, as long as it works. But payment habits are changing, and so is payment tech. Hoteliers - and hotel tech vendors and investors - will want to be on top of these changes, especially now that revenues are suppressed.

Report Overview

Many hoteliers would have seen payment processors and gateways simply as an enabler of doing business, without spending too much time on how the whole system works or what they are paying for. This has drastically changed, as the shift to more digital and alternative forms of payment have been accelerated by the pandemic and new legislation.

This report sets out how consumer payment habits are changing, and provides an overview of the payment ecosystem in the hotel industry. It discusses a number of trends that will shape the space over the coming years, touching on topics like the boom in fintech, hotel tech vendors moving into payment services, fraud prevention and tokenization, and the b2b payment space.

Hoteliers, tech vendors, and hotel investors need to understand the changes in payment habits, as well as movements in the fintech space, to create more revenue as we come out of the pandemic.

What You'll Learn From This Report

  • How consumer payment habits are changing due to digitization, sped up by the pandemic
  • The payment landscape in the hotel industry, with the most important players
  • What the boom in fintech means for the hotel industry
  • How hotel tech vendors are looking to benefit from an increased focus on payments
  • How the latest concerns around fraud and security are addressed, and what shortcomings the current technology has
  • How the b2b payments space struggles to benefit from the progress made in the b2c space
  • Where opportunities for growth lie within the payment ecosystem

Executives Interviewed

  • Michael Balzer - Vice President Shiji Payment Solutions at Shiji
  • Fleur Besteman – Program Manager Hospitality at Adyen
  • Jim Casale - Vice President Product Management, Global Payments at Onyx CenterSource
  • Jeff Edwards - Senior Vice President Property, Owner and Enterprise Products and Platforms, IHG Hotels & Resorts
  • Simon Eve - Head of Travel at Trustly
  • Pierre-Charles Grob - CEO at D-Edge
  • Jirka Helmich - Chief Product Officer at Mews
  • Eric Liebman - Former Global Head of Travel and Airlines at Ingenico (Worldline)
  • Tracy McGrath- Lead Global Payment Strategist at Oracle Hospitality
  • Mark Rademaker – VP Hospitality APAC at Adyen
  • Jos Schaap - CEO and Co-founder at Roomdex
  • Erik Tengen – Co-Founder at Oaky

Executive Summary

Payment habits are in flux. Broadly speaking, cash is on the decline, while digital payments are on the ascent. Mobile wallets offer big tech opportunities to enter the payment space, and major travel companies like Booking Holdings are also increasingly interested in offering payment solutions to its customers to reduce friction and add revenue streams. Alternative payments options like buy-now-pay-later and account-to-account payments offer consumers with alternatives to credit cards, and can be a way for hoteliers to increase transaction volumes and values.   

To be able to benefit from these changes, hoteliers need to understand the payments ecosystem, and need to work with payment processors that can accommodate for these changes while integrating with the hotel tech stack.

In this report we discuss seven major trends which will shape the payment space in the hotel industry over the coming years. 

  1. Financialization of travel: There is a growing interest from travel players and hotel tech vendors to provide payment solutions and services to their customers. Companies like PMS Mews have built their business model on transaction fees, integrating directly with payment processors to offer an end-to-end payment solution for hoteliers. 
  2. Consolidation in fintech: The fintech space has been booming, and we are seeing a lot of consolidation and blurring of lines between different players in the fintech space, which will likely provide hoteliers with more end-to-end products on the one hand, but is also resulting in fewer competition to choose from. 
  3. Fraud prevention: Chargebacks have always been high in the hotel industry, and there are many stories of fraud and chargebacks increasing further during the pandemic. PSD2 regulations greatly improve security around online bookings and authentication. This is a major step change for many hoteliers, so likely something that will take a number of years to gain critical mass. Major opportunities are available to payment processors to better assist hoteliers in detecting, reducing, and mitigating fraud. 
  1. Tokenization: There are some drawbacks to tokenization, especially when working with a number of different channels or payment processors, but the alternative of having credit card details on hotel servers is far worse. The drive towards tokenization can offer opportunities for PMS vendors to offer this as an additional service if they don’t do so yet. 
  2. Think global: With digitization of payments, opportunities to think truly global in payment acceptance becomes key for hoteliers, who too often only offer the payment forms which are popular in their destination, rather than the source markets where their guests come from.
  3. B2B needs to catch up: While the consumer-facing payments landscape is modernizing rapidly, the business-to-business payment space is stale and still works with batch processing and long transaction delays. This needs to change.
  4. Seamless journeys are within reach: All of the above trends work towards one common goal, which really feels within reach now: a completely seamless end-to-end customer journey for hotel payments. The biggest barrier might no longer be tech, but old habits.    

Payment Habits in Flux

The pandemic resulted in many changes to consumer behavior. The travel industry was heavily impacted as people stopped traveling. Contrastingly, sectors like e-commerce actually benefited, with players like Amazon registering record years. 

According to the U.S. Census Bureau of the Department of Commerce, e-commerce sales increased from $154 billion in Q1 2020, to $215 billion in Q1 2021, an increase of 39.1%. E-commerce sales as a share of total retail sales increased from 11.4% at the beginning of 2020, to 13.6% at the beginning of 2021. 

The shift to online commerce has provided a permanent shift in the way people pay for goods and services. This started before the pandemic, but has seen a major acceleration. Hoteliers, tech vendors, and hotel investors need to understand the changes in payment habits, as well as movements in the fintech space, to create more revenue as we come out of the pandemic.   

The Rise of Digital Payments

Payments are big business. According to McKinsey & Company, global payment revenues totaled $2 trillion in 2019. Covid has likely had an impact on revenues, especially as the more profitable cross-border payments (which generated $224 billion in revenues in 2019) will have declined sharply. Nevertheless, it is widely accepted that the payment landscape will see strong growth in 2021 and beyond, especially as digital payments rise while cash payments decline, offering more opportunities to increase revenues. Alternative payment methods and cryptocurrencies also allow for more and more unbanked consumers to start making digital purchases.  

Digital payments, which are those payments that happen over the internet or through mobile channels, have become increasingly popular, both online and in-store, with especially mobile wallets seeing a rapid rise in adoption. According to data from Worldpay, digital payments are taking share from cash payments, while plastic credit and debit cards have also seen growth stall. 

Digital payments accounted for 36% of the total volume of online transactions in 2018, but rose to 45% in 2020. Credit and debit cards together accounted for 35% of total transaction volumes in 2018, and this remained unchanged in 2020. It should of course be noted that most digital payments come in the form of mobile wallets or alternative payment methods like PayPal, which generally still use the credit card company payment networks, referred to as the ‘rails’, therefore not necessarily moving away from the dominance of credit card companies in the payment landscape.   

In-store transactions also moved to digital payments and mobile wallets, where they rose from 16% to 26% between 2018 and 2020. ‘Plastic’ accounted for 49% in 2018, declining to 44% in 2020, as debit cards saw a sharp drop, while credit cards increased share slightly (2 percentage points). 

Mobile Wallets Drive Growth

Pre-pandemic data from Skift Research shows that mobile payments are immensely popular in especially China, with two-thirds of Millennial and Gen Z travelers there predominantly making payments through a mobile wallet. This is far more than in Western countries like the U.S. and UK, but here also mobile payments are increasing. 

Worldpay data for the U.S. shows that in-person payment using mobile wallets have increased from 3% of total transactions in 2018, to 10% in 2020. Mobile wallets account for 30% of all online transactions, the same as credit cards, and up 10 percentage points from two years before (while credit cards dropped 2 percentage points in the same time period). 

Mobile payments became mainstream first in China, with alternative payment methods like Alipay and WeChat Pay, but in the West companies like PayPal have had great success, and other major tech players like Apple and Google have now also moved into the mobile wallet space. This is an interesting space for these players to increase their revenues and as a way into the fintech space. 

By focusing on mobile wallets, companies like Apple, Google, and Amazon place themselves at the start of the payment chain, allowing for further integration into the payment process which can be extremely lucrative. Apple, for one, has already taken this next step.

These companies want greater control over the payment process, as it allows them to take friction out of the shopping experience, it makes people’s choice of mobile device even ‘stickier’, and in the case of Apple (moving from its mobile wallet Apple Pay to becoming a card issuer with Apple Card), it significantly increases the take rate per transaction. 

Mobile wallets will generally take about 0.15% of the transaction value in the U.S., and less in Europe, for the additional security they offer, but a card issuer takes between 1.5% and 2.5% of the transaction value. Apple CEO Tim Cook has also said that Apple Pay’s transaction volume and revenue more than doubled since the launch of Apple Card. 

The Buy-Now-Pay-Later and Account-to-Account Trends

Beyond mobile wallets, two areas that are seeing considerable innovation and strong uptake are buy-now-pay-later (BNPL) and account-to-account (A2A) payments. 

BNPL companies play on the disdain that many consumers have of credit card companies, offering transactional credit — or ‘checkout lending’ — at generally more favorable terms than credit card fees, with merchants being charged a fee rather than the consumer, who can pay off the loan in interest-free installments. Regulation around this new payment form is still sparse. 

Major BNPL companies like Klarna and Afterpay have received major investment in 2020, raising $650 million and $500 million respectively. Bank of America expects BNPL to grow 10 to 15 fold in the next few years, with transaction values totaling $650 billion to $1 trillion by 2025. 

BNPL offers opportunities for the travel industry, as it will allow consumers to make purchases they might otherwise not have. A survey by The Motley Fool amongst U.S. consumers found that they used BNPL predominantly to avoid credit card charges, and to make purchases they would otherwise not be able to afford. 

Account-to-account payments are also gaining popularity in online payments, but so far this has been highly country specific. A2A payments are bank transfers, moving money directly from the consumers’ bank to the merchant’s bank without the need of a card association to mediate the transaction. The Netherlands (through a product called Ideal) and Sweden (with Swish and Trustly) are frontrunners in this field. In the Netherlands, for example, 60% of all online transactions are done through A2A, according to Worldpay.  

Companies like Trustly are benefiting from a push towards open banking, whereby banks are forced to offer public APIs to securely share its customers’ financial data with third parties. The company has received considerable investment, including from BlackRock, and was set for a $9 billion flotation before Swedish regulators raised concerns about the company’s lack of reported due diligence on its end consumers. The case is ongoing, and could affect all A2A providers.

Especially in the airline vertical, A2A payments are increasingly offered. IATA recently launched its IATA Pay product which offers airlines a white label product which can process direct bank transfers. Emirates Airlines is an early adopter. 

Plastic Remains King

Despite all these alternative ways of paying, none of these payment types are as internationally recognized as credit and debit cards. The concept of a card to allow for the transfer of funds is universally accepted, and the card systems have grown and evolved around the intricacies of particular regions and countries over many decades.  

Visa and Mastercard are the two largest payment companies, having established themselves as a trusted form of payment amongst customers and merchants alike. Other major credit card companies include American Express, Discover, JCB, and UnionPay. 

Travel is an important vertical for these players, as they see a disproportionate amount of their revenues coming from cross-border commerce, for which they can charge 5 to 15 times as much as domestic processing. Despite the Covid-induced contraction of cross-border payments, Visa and Mastercard still managed to grow total transaction volumes in 2020, although revenues were slightly down. 

The total value of transactions processed through these two major card companies is many multiples of any alternative payment player, but Paypal is certainly showing the potential of integrating more deeply into the payment process and offering a larger range of services than the two card companies have done historically. Net revenues of Paypal were similar to those of Visa in 2020, despite Visa’s total payment value being almost 10x that of Paypal. 

Visa and Mastercard are mainly network processors, making sure the rails are there to connect the banks of a merchant and consumer to each other, both for domestic and cross-border transactions. Doing this, they take a comparatively modest network fee, while PayPal does the payment processing and acts as a payment service provider (more on this later), although like most alternative payment providers still uses Visa’s payment rails. 

To further integrate themselves into the payment process, credit card companies are aggressively pushing into the fintech space, with Visa acquiring YellowPepper in November 2020, but seeing a deal with financial API developer Plaid fall through due to an antitrust lawsuit filed by the U.S. Department of Justice. Mastercard has made a move into the A2A space with the acquisition of Nets.   

The Card Payment Process

With plastic remaining so important, but mobile wallets also gaining rapid popularity, it is important to understand how these different payments are processed, and which parties are involved in making a card or mobile payment. 

A standard card payment would see a consumer making a credit card payment at a merchant via a payment processor. This is normally done using a point of sale (POS) terminal, which is provided by the payment processor. ALternative payments can also work without a POS terminal, with for example QR codes used for payments with WeChat Pay and Alipay.

The processor will send an authorization request to the merchant’s bank (the acquiring bank). The request is forwarded to the bank of the consumer (the issuer bank) using the network of the major credit card companies like Visa or Mastercard. Once approved, the data stream reverses through the same players to approve the payment. 

The issuing bank will charge the consumer the full amount, but every player will take a share of the payment amount which is received by the merchant. The issuing bank takes an interchange fee, on average between 1.5% and 2.5% of the payment amount. The network provider takes a network or assessment fee, and the acquiring bank takes an acquiring fee or markup. 

Additional parties that could take a cut are payment processors, which provide the infrastructure to connect acquiring banks to issuing banks and payment networks, and mobile wallets like Apple Pay or Google Pay, which provide convenience and additional security through ID verification.

In total, the different parties take around 2.75% of the total payment value according to research by Bloomberg. Alternative payment systems like Alipay and WeChat Pay can work in this existing infrastructure in the role of the mobile wallet, but also have the ability to bypass issuing and acquiring banks and the credit card networks, using the popular prepaid function where Chinese consumers load money on their app and use this to pay merchants, making it a closed loop process that requires no outside banks.   

The Payments Landscape in the Hospitality Industry

The Pandemic Pushes Modernization of Payments Infrastructure

Fast changes in the payment landscape spare no industry, and the current COVID pandemic has provided an added boost to hoteliers’ willingness to change their operations and systems. 

The understanding and acceptance (or even expectation) from consumers for new technologies in the hotel industry has grown considerably over the past year. In 2020 and 2021, Skift and Oracle Hospitality undertook two surveys which measured consumers’ expectation of technologies present in hotels. All tech had a higher rate of expectation from consumers in 2021 than in 2020, including self-service check-in, mobile keys, and contactless payment options, with the latter up 15 percentage points. 

Hoteliers are listening. In the above mentioned Skift and Oracle Hospitality survey, 67% of hotel executives agreed that the pandemic had accelerated their adoption of new technologies. 

As Jeff Edwards, Senior Vice President Property, Owner and Enterprise Products and Platforms at InterContinental Hotels Group (IHG) told us: “Guests expect contactless as an option now – it’s no longer a question. … One of the ways we addressed this was introducing digital check-in and checkout, which allowed guests to streamline their experience, making it easier for them to pay for their stay and spend less time at the front desk.”

This is a true step change for an industry which in large parts has held onto the idea of the ‘human touch’, and has seen the front desk and other face-to-face interactions as an extension of that. But as Mark Rademaker, Global Head of Hospitality at Adyen noted: “Especially luxury properties are now inclined to agree that it’s okay to offer both a high touch and a low touch experience within the same walls. Where hotels used to always bifurcate that, and separate those experiences based on brand, they’re recognizing that there is guest demand for both within the same property.” 

We have spilled considerable ink on the plethora of legacy systems that characterize the hotel tech landscape (in reports like the Property Management Systems Landscape 2020). The industry is highly fragmented, both in terms of the types of accommodation providers and geographical idiosyncrasies, which has resulted in disparate tech offerings, with many hotels working with anywhere from 30 to 70 tech vendors to manage all aspects of the hotel operations. Payments impact, straddle, and interact with many of these vendors, but the tech setup is different for each hotel. 

The hotel industry also stands apart from many other industries in its customer journey, and how payments fit within this. As Eric Liebman, former Head of Travel and Airlines at Ingenico (which was acquired by Wordline in 2020) said: “In it’s most sublime form, you have a pre-authorization prior to arrival, another authorization at time of check-in, incremental authorizations throughout the stay, settlement shortly after check-out and even post-stay settlements. So, you have five distinct junctures within the journey from reservation to check-out that have to be managed.” 

With such a fragmented industry, with disparate tech stacks, it is almost impossible that this system would work efficiently from the get go. Payment infrastructure and protocols mainly came into existence over time, using the technology present at particular points in history. 

To make things even more complicated, the hospitality industry tends to deal with high volumes of international customers. While cross-border trade is becoming ever more seamless, the hospitality industry has always had to deal with cross-border payments, and credit card networks were by far the best to manage this. 

Over the timespan of many decades, credit card companies have been extremely successful in making themselves the best option for cross-border payments, by offering near-universal acceptance and added protection which is appreciated by travelers spending large amounts of money on their hotel bookings. However, the importance of a payment infrastructure that allows for a diversified acceptance of payment types, and a seamless integration with hotel systems has become more evident during the pandemic. 

Contactless tech has not only been pushed to the fore, hoteliers also had to fight for every dollar they could get. With average daily room rates (ADR) levels considerably down for most of 2020, revenues from ancillary services became more important, as also highlighted by the Skift and Oracle study. Whether it is upselling before or during the stay, a seamless payment system is important to make this as attractive to hotel guests as possible.

Up to 2020, payments were far from the number one priority for hoteliers, they were simply an enabler of doing business. As Eric Liebman put it: “I think payment processors were more of a necessary function of the whole reservation ecosystem.” But the convergence of the pandemic and growth of alternative payment types, the BNPL and A2A trends, and increased regulations have pushed payments to the top of many hoteliers’ agenda. 

Integrating the Payments Ecosystem into Hotel Tech

Hotels need to be where the consumers are. Offering digital and alternative payment options is key to benefit from current trends, but this does mean working with fintech players which are able to offer these services by integrating into hotel tech systems.

The card payment process as explained earlier in this report also counts for payments in the hotel industry, with the hotel acting as the merchant. However, the situation is slightly more complicated, as the payment process needs to be integrated into the tech systems used by the hotel industry.  

To be able to operate the hotel efficiently, almost all hotels have a property management system (PMS) in place, which collects all information about bookings made through different channels, as well as other charges incurred as part of upsell efforts from the hotel or through the consumption of room service, restaurant meals, the minibar and the like. 

All charges are collected in the PMS on what is called the folio, and using the guest’s payment card details, the hotel will request payment authorisation. 

Since the hospitality industry works with a large number of disparate tech systems there is also a growing number of connectivity, or middleware vendors. These come in the form of players which sit between the PMS and other hotel systems, providing data flows into the PMS. Vendors like Impala or Hapi provide this service (discussed in depth in our PMS report). There are also connectivity vendors which focus on connecting disparate systems to the payment processor or gateway. These include vendors like Shiji Payment Solutions or SmartCONNECT by SmartHotel.  

The Role of Payment Processors and Gateways

The payment authorization is usually handled by a payment processor and through a payment gateway. Payment processing is never done by the PMS, although some major PMSs like Oracle do have direct integrations with some select acquiring banks. It is, however, impossible for PMS vendors to integrate with hundreds of banks. 

As Pierre-Charles Grob, CEO of D-Edge Hospitality Solutions said: “The payment solution for the hospitality industry will increasingly be managed by international global cross-industry players in the future, such as Stripe, Worldline or Adyen. .. It requires huge investments to develop all the connectivity with all the different payment systems while ensuring the highest level of security. I do not think that anybody within the vertical of hospitality could invest the money necessary in order to address that, and that’s why we have decided to have a partnership with one of these global players.”

Payment processors largely come in two forms: merchant account providers and payment service providers. The main difference between these two is that the former opens a payment account for each individual merchant, while the latter lumps all accounts into one merchant account. Well-known merchant acquirers in the travel space are Adyen, Worldline, Worldpay, Nets, and Fiserv. Prominent payment service providers include Stripe, Square, and Paypal.

Gateways are an interface layer on top of the payment provider, which ensures that the data flow between the consumer’s bank and the merchant bank works seamlessly. When making a payment, the consumer does not interact directly with the merchant account provider, but instead with the interface provided by the payment gateway. Prominent payment gateways in the hospitality industry include Amadeus, 3C (part of Planet), and FreedomPay. 

There is increasing consolidation of these roles, with merchant acquirers also providing the payment gateway and vice versa. Adyen, Worldpay, and Worldline, to take a few, all offer merchant acquirer services and a payment gateway. 

What further blurs the lines between these players is that the terms are used inconsistently in the industry. It is therefore maybe more useful to look at the main business model of different players. 

Michael Balzer, VP Shiji Global Payment Solutions explained the main difference between a payment processor or acquirer and a payment gateway as follows: “A payment gateway is basically there to provide connectivity into as many acquiring banks and processors as possible and is charging for providing this connection service, while [payment processors] are really in the business of signing up a hotel and a restaurant for credit card acceptance, and then charging a recurring fee for this service, for example a percentage of each transaction that is being processed.” 

Another important distinction that can be made is that payment gateways are purely digital players, while payment processors also have a physical presence in the form of POS terminals. This makes payment processors more ‘sticky’ as these payment terminals can require a considerable investment from the hotelier, and therefore effectively locks them into the processor’s ecosystem. 

Merchants will choose which processors fit best with their situation. The main differences between these players are not just the processing functionalities, but also the additional services like financial reporting and business intelligence, fraud management, and point of sale terminals which will result in the differences in price between these players. 

Now we have explained the history and current situation of hotel payments, we will focus on seven trends which will define discussions moving forward.

Financialization of Travel: Growing Interest in Payment Services

We are seeing a move by many travel players to get a slice of the payments pie. Booking Holdings has recently launched its own fintech unit that is looking into serving its customers through a number of payment products, including foreign exchange, buy-now-pay-later, or pay in installments. This is in an effort to reduce payment friction for customers, offering alternative ways to make high-value travel purchases, offering additional revenue streams for the OTA, and reducing reliance on the major credit card companies. More than half of all bookings made through Despegar are on an installment basis, while travel startup Hopper has used the pandemic to grow its fintech offering to now contribute the majority of its revenues. 

Also in hotel tech, adding payment services can offer interesting new revenue streams. In a discussion of the major trends in the payment industry, published by trade media The Paypers, it was noted that: “In U.S. merchant payments, the 2010’s were largely defined by the convergence of software and merchant payments. This trend continues to expand and spread globally, and we expect the convergence of SaaS [Software as a Service] and fintech to be a defining trait of European payments this decade. The potential value creation for SaaS platforms in fintech is massive. Deeply embedded payments improve the value-proposition for SaaS customers and enhance the revenue generating potential of the platform.”

Although there is no sign that hotel tech vendors like PMSs will get directly involved in the processing of payments, offering better integrations with payment processors or finance systems can add considerable value. 

Erik Tengen, co-founder of upsell tool Oaky showed interest in the possibilities of adding payment services, noting he is “interested in a model where you have the SaaS model plus a merchant fee. You can charge a kickback on the revenue that you’re processing, so it becomes a different and extra revenue stream.” 

Jos Schaap, co-founder and CEO of upsell tool Roomdex, and founder and former CEO of PMS StayNTouch, said: “There is a lot of buzz around payments. [Many hotel tech vendors think] ‘I’m going to add a payment gateway, because then I can take more commission.’ Including payment as part of your fee structure can be a lucrative offering, because companies make quite a bit of extra money with that. [The PMS] Mews, for example, has it built into their fee structure; they take a cut of the payment charges. And if hotels can consolidate on one gateway, it eliminates additional administration efforts.”

Mews’ Chief Product Officer Jirka Helmich told us that the company works with Adyen and Stripe as payment processors. It has integrated white label products from these processors into its PMS, in an effort to “make it very easy for hotels to be able to reconcile the payments.” By requiring all hotels to use Mews Payments (its payments platform) and choose one of the two integrated payment processors, hotels have an easy setup, allowing close integration into self-service kiosks and payment terminals in the hotel. 

Mews told Skift Research that “a substantial proportion” of its revenues come from payments, where the company charges a subscription fee (a set fee per room per month to use its software), as well as a transaction-based fee. 

Next to Mews, other PMS vendors like Clock PMS, Agilysys, and Apaleo also provide integrated payment processing services. 

Fleur Besteman, Program Manager Hospitality at Adyen said she is seeing this more and more, especially with PMS vendors that focus on independent hotels or small chains. “This is a very hot topic at the moment. There is a shift going on in the hospitality industry towards platforms, especially for hotels who do not have dedicated teams to work on that technical side. They would prefer to work with a platform that can offer an all-in-one solution with payments. However, some hotel groups still prefer to have a direct relationship with us. So it’s completely up to the hotel and to the platform partner on how they want to integrate and offer payments.”  

Larger hotels with more complex operations, or chained properties, generally want to work directly with a payment processor. The global nature of their business often requires them to work with different processors in different regions. The fragmented nature of payments, due to local consumer preferences and regulations, means that processors tend to have a stronger market position in some regions over others. 

This is a main reason why many PMS vendors that focus on this market segment like Oracle, Protel, Infor and so forth, decide not to white label a specific few payment processors, but instead allow hotel clients to choose which processor and gateway to integrate with. 

“Our existing customer base has that global scale and our payment services need to also scale, and we wouldn’t be able to do that if we white labeled somebody else’s solution today,” explained McGrath.  

Consolidation in Fintech Squeezes Options for Hoteliers

It is not just hotel tech vendors that are looking to offer closer integrations for easier payment processing. There has been a lot of consolidation and convergence in the fintech space too. Major acquirers are growing their fintech services in an increasingly commoditized market, by adding services through acquisitions, with business intelligence, fraud management, fee management, and better integrations and partnership management all popular value added services. Acquirers are also building their own marketplaces with integrated third-party service providers.

McKinsey & Company found that merchants are willing to accept higher fees from payment providers, especially for merchant services such as “improved authorization rates, a more seamless payments experience, or improved cart conversion through point-of-sale financing.” 

All the major credit card companies have been making moves to expand their offering. As already mentioned, Visa acquired YellowPepper and made a move for Plaid. American Express acquired Kabbage, a fintech company focused on cash flow management for small enterprises in the U.S. 

In the point-of-sale (POS) space, POS manufacturer Verifone acquired 2Checkout, a so-called monetization platform that is best known for its subscription management solutions. Merchant acquirer Fiserv strengthened its position in the POS space by acquiring Bypass Mobile.  

Fiserv had already consolidated the merchant acquisition landscape considerably by acquiring First Data in 2019. And other merchant acquirers have also been busy. Worldline’s merger with Ingenico Group was one of the largest deals of 2020, where Worldline’s offer of end-to-end payment solutions is seen as a good fit with Ingenico’s expertise in the e-commerce space. 

Also in 2020, merchant acquirer Nexi merged with digital gateway Nets in an $9.2 billion deal. In a similar deal, merchant acquirer Planet acquired gateway operator 3C for an undisclosed fee. These are interesting acquisitions for merchant acquirers as it provides them with direct connections into many PMS vendors, allowing them to sell their acquisition services to hoteliers.    

Michael Balzer of Shiji Payment Solutions said that the consolidation in the fintech space is resulting in a shrinking market of independent vendors and services to choose from. “You see a lot of these gateways and PSPs in e-commerce disappearing, because they’re all merging with merchant acquirers and processors. There aren’t many independent platforms left that really provide that connectivity in the middle between systems.”

While an all-in-one solution is ideal for smaller hotel operators, larger hotel chains and hotel owners are likely to work directly with a number of merchant acquirers and gateways, based on chain scale, brand, or the geographic location of their hotels. A highly consolidated payment space will result in less choice and the potential inability to work with preferred acquirers and gateways moving forward. 

Fraud Remains at Top of the Agenda

Fraud and chargebacks are major issues in the hotel industry. Especially chargebacks — where guests ask for their money back, claiming they never stayed in the hotel, or the service received was subpar — are an expensive problem for many hoteliers. 

The travel industry sees by far the highest rates of chargebacks of any consumer industry, according to a 2016 research paper by the Federal Reserve Bank of Kansas City. The volume of chargebacks, as well as the average value per claim, are higher than in any other sector. 

The PCI standards implemented by major credit card companies have improved security significantly, setting out rules for the storage and sharing of credit card details. The EU’s Payment Services Directive 2 (PSD2) takes PCI a step further, and needs to be adhered to by any company that engages with European customers. 

PSD2 has additional requirements for the handling of sensitive data, and requires Strong Customer Authentication (SCA) for online transactions. This means consumers need to go through a second form of authentication, beyond simply providing a credit card number. This could be in the form of a PIN code or SMS verification, or in the case of mobile wallets like Apple Pay, it could be through a biometric scan.  

The latter is an important addition to previously existing regulations. According to data from Euromonitor International, fraud has increased as more purchases have moved online, with card-not-present fraud accounting for 69% of total fraud in 2020. 

This is a main reason why most hoteliers will still ask guests to present the payment card at check-in, even when credit card details have already been provided at the time of booking. “We continue to advise hoteliers, where you can, if the guest is standing in front of you, get them to present a card,” said Tracy McGrath of Oracle Hospitality. 

“Typically when you show up at a hotel, they take your credit card and have you sign to validate the transaction. This is primarily done to try and avoid ‘friendly fraud’ where the customer might dispute the charge after receiving their bill from their credit card company. This has been the paradigm for decades, so the industry doesn’t feel a burning need to go out and say ‘we absolutely must get this to a point where all guests prepay online so they don’t have to queue up at the front desk anymore,” said Eric Liebman.

Despite this sentiment, the adoption of contactless technology has forced hoteliers to change their procedures. McGrath of Oracle Hospitality highlighted that the implementation of self-service check-in kiosks or online apps that allow guests to check-in online has made secure customer authentication and tokenization much more important.

Simon Eve, Head of Travel at account-to-account vendor Trustly, notes that the high number of credit card chargebacks during COVID has also impacted how hoteliers look at alternative payments. 

“Prior to COVID, we had a lot of discussions evolving around: ‘We sell all our tickets using card, we don’t really have the time or the priority to bring on A2A payments.’ What we’re hearing now is: ‘We got a lot of chargebacks, we’ve got a lot of fraud, we had a lot of trouble with refunds, we had a lot of trouble with settlement. We understand now we need a balanced infrastructure of payments. We’re not turning our back on cards at all, but what would be good is to have some of our volume coming from a payment method that acts differently. That gives us different parameters to work with,’” said Eve.

Each payment form comes with its own security risks, and regulators are constantly trying to keep up with the changing payment landscape. Fraud prevention will remain a top priority for hoteliers, but regulations like PSD2 greatly improve the security of taking payments in the digital age. 

Shortcomings of Tokenization Need Addressing

Regulations like GDPR in Europe, and similar legislation in for example California, have forced hoteliers and vendors to work differently with consumer data shared with them. Here again, payment security and the reduction of fraud is a key focus area.

Major hotel companies like Marriott, Kimpton, and Omni Hotels, as well as tech vendors like Sabre, have been in the news for credit card data breaches in the past. While the sharing of guest payment details is important, how this is done within regulatory bounds is changing, with tokenization of card details becoming the standard. 

Most payment processors today offer tokenization services, which take credit card details from consumers, tokenize these details into a random string of numbers which is sent to the hotel. This string of numbers is unreadable in the case of a data breach offering greater security, and is generally required by  the main credit card institutions as part of the Payment Card Industry Data Security Standard (PCI DSS). There are also third-party tokenization companies like PCI Proxy, gateways like FreedomPay, or middleware players like Shiji’s Global Payment Solutions that can offer tokenization.

Tokenization works well when a hotel works with a single payment processor, but the nature of the hotel industry means that booking requests tend to come from many channels, which can all have their own processors. The tokenization of card details, especially, remains an issue in an industry where many different channels and tech systems share data. 

Tracy McGrath of Oracle Hospitality called tokenization in light of the diaspora of booking channels “one of the most complex problems Oracle is solving.” She explained: “Hotels use a myriad of direct and indirect distribution channels, and they could come with different payment providers. We are working with our partners and payment providers to move to tokenized card data only. We see a lot of motivation from all stakeholders to reach a level of tokenization – it is good to see everyone working towards this.” 

Different payment providers with their own, or third party, tokenization cannot communicate with each other. Even within a single company this can sometimes lead to issues. In large hotel companies, hotels in different regions often work with payment processors that are best established in their region. If European hotels work with a major European payment processor like Adyen, but U.S. hotels instead work with a major American processor like Fiserv, the token made during a stay in a European hotel cannot be used in a U.S. hotel, as the payment processor will not recognize it. This is when an additional layer of a tokenization provider will be needed to provide one universal token per customer.  

This still does not solve all problems though. Today, many hotel bookings are made on online travel agents (OTAs) and OTAs increasingly process the payment while sending a randomized 16 number string to the hotel that allows the hotelier to charge the OTA after the stay, while protecting the customer’s real credit card details. This randomized number is called a virtual credit card, and Booking.com for example uses virtual credit cards even when the consumer pays with an alternative payment method. 

While this process reduces the liability for hoteliers, it has a few drawbacks. 

Firstly, the virtual card is only valid for the room booking. All other charges accumulated during the stay need to be charged on the traveler’s personal card, which still requires the hotel to ask for card details again. In terms of data, it also means that the hotel needs to ensure it does not overwrite the virtual credit card details in the guest profile, to ensure it can still charge for the room after the stay. It is additional administration, and will not improve the guest’s experience.  

Secondly, virtual cards carry a higher interchange fee than normal credit card transactions, because it requires more work from the issuing bank. According to Mews, these costs could be 5.5 times as much as other credit card transactions. All in all, this will crystalize the need for hoteliers to make the relationship between itself and the guest as direct as possible. 

Tokens will be here to stay, but the system does need to be improved to make the payment process more efficient. The tokenization offered by payment processors will suffice for many hoteliers, but there will also be a growing market for independent tokenization players, and for PMS vendors to build or integrate tokenization services, as frustrations around the inability to share tokens will see more hoteliers look for alternatives.  

Localizing Payments for the Guest, Not the Hotel

Although the hotel industry is inherently an international industry, too many hoteliers still think local. Far too often, hotels offer the payment options most popular in their locations, even when their customers come from all around the world. It is no surprise that direct bookings suffer if a hotel booking engine only allows payment by credit card, when online travel agents (OTAs) have a plethora of payment options.

For alternative payment methods it is hard to compete at a global scale with the major credit card companies like Visa and Mastercard, but at a local level these payment types can be extremely popular. Think Alipay and WeChat Pay in China, but also Paypal in Germany, Paytm in India, GoPay by Gojek in Indonesia, Boleto in Brazil, Klarna in Sweden, or Ideal in the Netherlands.  

“This is my wishful thinking but I hope the industry will get to this at some point: I would love the ability for a French customer who has a local payment method preference, and they go to a resort in, say, the Malaysia, and they can pay in their preferred payment method. That would be like a dream come true,” said Mark Rademaker of Adyen. 

Adyen, of course, is in a good position to offer this to the hotel industry. It is clear that only a few global payment processors can offer this. It is about connecting to a global payment processor which has the integrations with all necessary payment types, but also about the hotelier understanding where its customers come from, so that the preferred payment options can be ‘switched on’.

Offering this service could vastly improve the direct booking experience if hoteliers would allow for this in their booking engines. This is a trend that will need more attention from hoteliers, who presently still fall short on this, compared to tech-first OTAs.  

Making B2B Payment Processing as Sexy as B2C

The payment industry is rapidly moving towards real-time payments, where payments are instantly sluiced through to the merchant after the consumer has made a payment, rather than taking days to clear the transaction. 

Business-to-business (B2B) payments are falling behind in this regard. B2B payments is a major sector, worth $130 trillion according to Bain & Company. But while COVID has sped up the adoption of digital tools in the consumer-facing sector, financial stress means that B2B payment terms have actually seen many delays, often being as long as 60 to 90 days.  

In the hotel industry, B2B payments come in the form of hotel-to-tech vendor fees, but more importantly for the hotel also in the form of third-party booking sites and travel management companies (TMCs) to the hotel. Especially corporate travel, through TMCs, remains highly offline in its business dealings and is a complicated system with different mark-ups and commissions to be calculated. 

We have seen a host of new tools coming onto the market for corporate travel expense management — including American Express’ Neo1, TripActions Liquid, Ramp, and newly minted unicorn Pleo — but the settlement of payments between hotels and travel management companies and travel agencies is still shockingly often done with fax machines or Excel files.

As Jim Casale, Vice President of Global Payments at Onyx CenterSource, a B2B payments processor for the hospitality industry, said: “Historically clients have preferred to send flat files, batched data if you will. For many clients, especially smaller agencies or boutique hotels, this is really the format they are limited to.”

This has an impact on every subsequent step in the process, and can impact payment speed and payment methods. One of the things a company like Onyx is focusing on is offering low-entry solutions to automate or streamline those payment processes. “This will have benefits across the entire payment cycle, and will enable our clients to move into a future with more automated, real-time payment capabilities at a lower cost than they might incur trying to invest in those capabilities themselves,” explained Casale.

Onyx Centersource, and other B2B payment providers, are working on “bringing the whole consumer experience to B2B payments,” said Casale. This is not an easy progression, because “most innovations arise from the consumer side, because consumers’ expectations have evolved and matured to expect ease of use, and instantaneous results. That innovation has not yet infiltrated to B2B payment providers, as there is risk in changing something like a payment process that has historically been rather static. Dependable, but perhaps slow.”

COVID might be the catalyst needed to prompt change. As Casale explained it: “Paper checks in countries like the U.S. are a prime example. Many businesses across the industry have not been incentivized to evolve beyond receiving check payments, which has been their status quo for some time. They aren’t particularly compelled to incur even a relatively small cost to transition to an electronic payment method. Now, since COVID disrupted these businesses’ ability to receive check payments when we were forced into remote work, a greater percentage of the industry is leveraging payment options such as direct debit and virtual credit card. These businesses are now experiencing the benefits of these more real-time options and how they can significantly improve efficiencies across the payment cycle.”

There are glaring opportunities to improve the tech and service offerings in this space, and a greatly fragmented market. We are likely to see more acquisitions and consolidation in this space. Already, payments service provider WEX made a double acquisition last year, acquiring B2B payment solutions provider eNett and B2B payment optimizer Optal from Travelport, and we expect to see more moves in 2021 and beyond.

The Holy Grail: A Seamless End-to-End Payment Journey

All of the previous six trends are working towards a common goal, namely achieving a completely seamless payment experience for hotel guests, from booking to post-stay settlement.

There is an increasing sense that payment technology can now allow for completely seamless experiences end-to-end. The travel industry, and hotel industry as part of it, has a rich history of technological innovation, but it is widely accepted that the hotel industry now lags other industries like retailing. Consumers disregard sector divisions when forming expectations of innovation and digitalization. Rapid payment changes in other sectors will set the bar high for hoteliers. 

Theoretically, hoteliers can accept an online payment or pre-authorization with authentication at booking, save the tokenized card details, and use these details throughout their stay without any further need for approval from the guest. 

Jirka Hamlich of Mews would like to see this become the standard: “Even if I submitted my card details and I confirmed it by 3-D Secure, and gave my consent, some of them still want to see a physical card. More and more that physical card doesn’t even exist, because you have virtual cards like Revolute that you travel with and some hoteliers just don’t accept it. They want to see another card, want to touch something physical. … We need to reiterate to hoteliers that all they care about is that they have the money, the rest is technical detail that we solve.”

Consider Uber. “For me that is absolutely the sublime version of rethinking the payment process, because the payment process is completely invisible to me,” said Eric Liebman. Jirka Hamlich similarly noted that: “Often you don’t even realize that you’re making a payment, and that’s why you’re more inclined to use that service, because there is no friction and you don’t even think about money.”   

The hotel experience is coming closer to this holy grail, as the payment process is becoming more digitized. While the hotel experience is predominantly an in-person experience, the payment process is becoming an “e-commerce experience, where guests never touch a point of sale terminal,” according to Mark Rademaker of Adyen. At the time of booking, card details and authentication are provided, with no further need for authorization during check-in, in-stay, or at check out. 

In theory this is possible, but it wouldn’t be the hospitality industry if hoteliers didn’t offer the final say in how they want to handle the payment process to the guest. While there might be lean economy-scale hotels which only work with self-service kiosks, online authentication, and authorization of payment details, the majority of hotels want to, and need to, offer alternatives.  

While COVID has moved the total industry towards digitization, hoteliers are now deciding whether to move back to a physical front desk, or continue with self-service kiosks and less support staff. As Jeff Edwards of IHG said: “We want to provide guests with the flexibility to choose the solution that they are most comfortable with. Some guests miss the traditional check-in and greeting, while others are more comfortable with a more hands off, limited contact experience leveraging technology. We not only need to provide guests with the ability to choose, we have to make sure our hotel teams are equipped to support their choices.”

As demand returns, it is pivotal for hoteliers to consider whether the ‘old normal,’ including a fully staffed front desk and requesting physical credit cards for pre-authorization is where they want to go back to. A fully seamless payment experience might not be possible or desired by all, but simply going back to pre-COVID payment processes seems like a missed opportunity for change. 

Conclusions

Many hoteliers would have seen payment processors and gateways simply as an enabler of doing business, without spending too much time on how the whole system works or what they are paying for. This has drastically changed, as the shift to more digital and alternative forms of payment have been accelerated by the pandemic and new legislation. 

This report has set out a number of trends that we will be watching as the industry moves out of the pandemic. We are seeing a lot of consolidation and blurring of lines between different players in the fintech space, which will likely provide hoteliers with more end-to-end products on the one hand, but also resulting in fewer competition to choose from. 

Fraud prevention will remain at the top of the agenda for most hoteliers. Chargebacks have always been high in the hotel industry, and there are many stories of fraud and chargebacks increasing further during the pandemic. PSD2 regulations greatly improve security around online bookings and authentication. This is a major step change for many hoteliers, so likely something that will take a number of years to gain critical mass. Major opportunities are available to payment processors to better assist hoteliers in detecting, reducing, and mitigating fraud. 

There are some drawbacks to tokenization, especially when working with a number of different channels or payment processors, but the alternative of having credit card details on hotel servers is far worse. The drive towards tokenization can offer opportunities for PMS vendors to offer this as an additional service if they don’t do so yet. 

All in all, the digitization of the payments process opens up opportunities to make the customer journey far more seamless. Old habits die hard, but the pandemic has truly sped up a shift towards greater acceptability of alternative payment forms, online authentication, and reducing in-stay payment friction. 

Payment tech needs to be seen as a revenue opportunity for hoteliers. Seamless payments and payment options that match local preferences, mean more bookings, more direct bookings, and higher value bookings. Accepting alternative payment forms like buy-now-pay-later not only diversifies hotels’ payment offering, but also means higher ticket transactions, and less reliance on a single network for all payment processing, fraud prevention, and settlements. To be able to benefit from these trends, hoteliers need to adopt modern fintech systems and integrate with leading processors.