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As the travel industry continues to recover from its COVID-19 downturn, complex payment chains are increasingly being solved by single-use virtual credit cards, also known as VCCs.
In November 2023, the UN World Tourism Organization (UNWTO) published new data showing that international tourist arrivals were on track to recover to almost 90 percent of their pre-pandemic level by year-end.
It has been a remarkable recovery for an industry that experienced its “worst year on record” in 2020, as total arrivals dropped 74 percent year-on-year — a loss of more than 1bn travellers compared with 2019.
2020 was marked by restrictions, cancellations and folding travel companies, causing chaos across the industry, particularly among teams that handle payments.
Travellers demanded refunds en masse, while travel companies struggled to pay out. The disruptions highlighted the complex nature of payment chains within the travel industry and the interdependence of the many stakeholders.
Two payments firms that serve the travel industry say that the case for single-use VCCs has grown stronger in the wake of COVID-19.
Since 2018, Thredd and Nium have together issued more than 86m virtual cards, and their research suggests that between 15 and 20 percent of all travel bookings now use VCCs.
How does it work?
Today’s travel industry is driven by online travel agents (OTAs), which act as intermediaries between consumers and other merchants such as airlines, hotels, car rental and event reservation companies.
Research from Nium suggests that almost half of travellers prefer to book through OTAs, while the remainder prefer to book directly through airlines or through brick-and-mortar travel agents.
Consumers benefit from OTAs through lower prices, increased choice and transparency, and access to trusted payment methods using the traveller’s preferred currency. Meanwhile, merchants benefit from increased visibility and reduced marketing spend when advertising through OTAs such as Expedia and Booking.com.
But OTAs also introduce an additional layer of complexity to the travel payments chain, which Nium describes as the “double-loop” problem.
Source: Nium
“The double-loop creates significant challenges for OTAs due to high payment volumes for a range of stakeholders; foreign exchange fees for international trips; flight cancellations and supplier risk; card disputes; and complex refund processes,” Nium wrote in a report on air travel payments.
“The complexities in managing the second loop are further magnified, because three or more vendors may take part in each transaction, increasing the amount of reconciliation and administration work required for OTAs and reducing visibility and control.”
Nium’s answer to the double-loop problem is the single-use virtual credit card, a B2B product that is used only once per booking and then retired.
Anupam Pahuja, general manager for APAC, Middle East and Africa at Nium, explained the benefits of VCCs to Vixio at Money 20/20 Asia last month.
“As an example, let’s say you go to Agoda and you book a trip to Thailand. You buy your flight ticket from Lufthansa and you book a Marriott hotel,” he said.
“Now Agoda needs to pay Lufthansa and they need to pay Marriott, right? When that leg of the payment is made using a virtual credit card, reconciliation becomes easier and there is no risk of chargebacks for Lufthansa or Marriott.”
In this scenario, both Lufthansa and Marriott are protected from chargebacks due to the flexibility of the virtual credit card, whose parameters are aligned to the cancellation and refund policy of the booking.
Using a virtual credit card, payments from the OTA to Lufthansa and Marriott can be scheduled for the exact date that the booking commences. However, if the consumer cancels the booking beforehand, the OTA can simply cancel the VCC.
“There's a contract between the airline and the OTA and between the hotel and the OTA,” said Pahuja.
“That contract will have certain terms and conditions that each party has to abide by — cancellation fees, for example — and those are written into the contract. So each card is built and designed to abide by those rules.”
Processing, issuing and funding
Both Nium and Thredd work together to equip OTAs with virtual credit cards in their desired markets and to program the cards to their required specifications.
Thredd is certified by Visa and Mastercard to process credit, debit and prepaid card transactions globally.
By partnering with Thredd, Nium is able to increase acceptance rates and guarantee card scheme protection for its OTA customers.
By integrating Thredd APIs, Nium has been able speed up transactions to 200 milliseconds when issuing and loading virtual cards in nearly 30 countries.
OTAs also benefit from reduced foreign exchange fees, due to Nium’s local card issuing and funding capabilities.
In October 2023, Nium announced plans to roll out a combination of local issuing and funding in Singapore, Hong Kong, Australia and Japan.
Local issuing has already gone live in Singapore, while further expansion in APAC will add to the more than 20 currencies that Nium’s virtual cards already support in Europe and North America.
In the 12 months prior to October 2023, Nium said it had seen a 75 percent increase in virtual card transaction volumes.
As covered by Vixio, Nium attributes its rapid expansion in the travel sector to a combination of being “hyper licensed” and working closely with local regulators.
The company currently holds licences in more than 40 countries, and plans to keep building its licence portfolio in other regions in future.
